Hecla Mining Co (HL) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Hecla Mining earnings conference call. My name is Annie, and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Ms. Vickie Veltkamp, Vice President of Investor Relations. Please proceed, ma'am.

Thank you all for joining us today. As the operator said, I'm Vickie Veltkamp, Vice President of Investor Relations for Hecla Mining Company. We're very pleased to be conducting our fourth quarter and year-end 2006 conference call. Our call is being webcast live today at www.hecla-mining.com and on our website you can find the financial results and today's news release. And in the news release we have reconciled to GAAP the cash cost per ounce calculations. Today's presentation will be made by Phil Baker, Hecla's President and CEO. He will be joined by Lew Walde, our Chief Financial Officer, Ron Clayton, our Senior Vice President of Operations, Mike Callahan, who is our President of Venezuelan Operations, and Dean McDonald our Vice President of Exploration. And following their presentation we'll have a question and answer period.

But before we start I need to let you know that any forward-looking statements made today by our management comes under the Private Securities Litigation Reform Act. It involves a number of risks that could cause actual results to differ from projections. And in addition, in our filings with the SEC, we are allowed to disclose mineral deposits that we can economically and legally extract or produce and investors are cautioned about our use of such terms as measured, indicated and inferred resources and we urge you to consider those disclosures in our SEC filings, which are also available on our website. And now, I'm very happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vickie. Let me add my welcome to Vickie's on today's conference call. I think we had a pretty comprehensive news release and my colleagues have some interesting color to add, so I just am going to focus quickly on just a few things. This has been a great quarter for us and a great year. In fact the best in our history both financially and exploration wise. I knew we were having a great year but was quite surprised to find it was the best in our 100 year history across so many different categories, most revenue, most net income, cash flow, lowest silver cash costs. They are all even better than in 1980 when the silver price was almost twice what it is today. And the exploration resulted in real growth, fundamental Company changing growth, a 25% increase in the silver resources for a Company that has never had that before from its exploration. And don't forget the base metals increases as well. This has been a year of real value generation, but that's actually the past and what I want to focus on is Hecla's future. So that's my comments are going to primarily be on that.

When it comes to the future and what's changing the Company, there's nothing that's been more significant than the resource growth we're having with Lucky Friday. And what it's done is it's caused us to commission a scoping study that considered doubling the tonnage at that mine. This is a mine whose last major capital influx was in 1982 when the mile deep silver shaft was built. Since then, the Lucky Friday has operated in what I would call a depression for the silver price for the last 20 years. Only minimal capital investment was made in the mine. Now, we are talking about what can this mine do if we make $150 to $200 million capital investment? And what the study has told us is that without finding another ounce, we can increase production, increase conversion of resource to reserve and actually extend mine life. Now, this is all based upon a scoping study and we have a lot of work to do, but there's potential for the transformation of this mine and Ron will talk more about this. In some ways, the same way the Lucky Friday has been under capitalized, our whole Silver Valley land package, which by the way is among the largest if not the largest in the Valley, has been under explored and we're changing that.

First, we're starting from underground at the Lucky Friday and then we're going to go to the Star and the rest of the 40 square mile land package. Most investors don't realize the history and the potential of this land package. Unrealized potential because Hecla didn't have the financial capacity to move on it. Now, we do. Dean's going to talk more about what we're going to do with this land package. While challenged by the exploration success that we're seeing at the Lucky Friday and Greens Creek, San Sebastian continues to be our most exciting exploration project, if for no other reason because of the size of the land package. It's 340 square miles. The multiple targets that it has and the potential scale for what we can find there. And with the Hugh zone, we have a million ton, 30 million equivalent silver ounce ore body to start with and the drilling on any one of our targets could add to that very quickly. At La Camorra in Venezuela, this has been a great unit for Hecla, which creates more opportunity for the future and why do I say that? Because we know how to operate in Venezuela.

The government knows us, they want us there, and we recognize the perception of political risk. So our strategy continues to be to build our business there without making substantial new investments. We want to be there for the long haul. We see the geology is too great and we have too strong of a land, too strong of a position in terms of our land package, our people, the government relations not to stay in the game. And Mike Callahan, who runs our Company down there, will talk more about this. We also announced today the sale of Hollister. We're doing this because this 50/50 joint venture with its royalty provisions really couldn't do much for us as investing and directing our people to the Lucky Friday and San Sebastian. That property just couldn't have the Company changing impact and so the proceeds and the capital we would have spent on Hollister are now going to be available for these projects and for acquisitions. And speaking of acquisitions, we've opened a corporate office in Vancouver. Dean and a corporate development VP are located there.

We picked Vancouver for this office because of the majority of the properties we are interested in that we think we can add value to are owned by companies headquartered there. We think our assets will deliver growth but we want to accelerate that growth by adding additional assets that we can add value to. So we've had a great quarter, a great year. We've proven that our assets are capable of what they're capable of doing operationally and exploration-wise and we see 2007 as being a year where we can do more of that. With that let me turn it to Lew for a few comments on the financials.

Good morning, everybody. Again, this is Lew Walde, I'm the Chief Financial Officer of the Company. As the press release states, during the fourth quarter we realized net income of more than $20 million or roughly $0.17 per share. But rather than talking about the obvious points in the press release, I want to expand on a couple of the unusual items that were included. First, we recognized the U.S. deferred tax benefit and associated tax asset of $11.8 million during the quarter. The Company currently has approximately $250 million of tax net operating loss carryforwards in the United States that are available to offset future taxable income. And during the quarter, just a small part of this potential asset was recognized. At current prices, we can project future taxable income and utilization of more the NOL's, however, we only recognized one year of future tax benefit in part due to the Company's history of, limited history of taxable income. So as we move forward, it is possible that more of this asset will be recognized. However at this point in time, evaluation allowance is maintained for the majority of the asset.

We will continue to update our analysis of the taxes on a quarterly basis, but the question is whether or not adjustments will be made is still open for debate, depending on our outcome on research on accounting rules. So anyway, in summary on the taxes, and given today's current price environment, I view this as a potential off balance sheet asset of roughly $80 to $90 million for the Company. In addition to the tax benefit, we also had a charge of $2.8 million for costs associated with the shaft at La Camorra, as the Company and the contractor reached a final settlement on the final cost of construction. The Company also recognized additional compensation expense associated with our deferred compensation plan. We've elected now to pay this obligation out of cash rather than dilution and there will be a mark-to-market adjustment to this liability on a quarterly basis. In Venezuela, we repatriated funds during the fourth quarter and in doing so we recognized a loss of about $2.2 million associated with this conversion. Periodically, we may elect to repatriate more funds from Venezuela, which could potentially cause us to have additional losses in the future.

We've talked a lot about the Venezuela currency restrictions over the past couple of years and one of the issues that we're currently looking at is whether to change our functional currency use for accounting purposes for our Venezuela operations. To date, we have considered the United States dollars the functional currency. However with changing circumstances, we may end up changing that functional currency to the Venezuela Bolivar. Now, if this occurs, the local financial statements will be converted at current exchange rates rather than historical rates and any exchange gains or losses resulting from translating the financial statements would be deferred in the equity section of the balance sheet. Now I want to shift over to the annual results. Included in our 2006 income, in addition to the tax benefit that I previously discussed, was a $36 million gain on a sale of investment in the first quarter. So for this year, our cash generation was over $60 million from cash flow from operations, which is a record in the Company's 116 year history.

So, as a result of this excellent cash flow and the sale of an investment early in 2006, Hecla's cash position has increased dramatically this year and at the end of the year we have more than $101 million of cash and short-term investments on our balance sheet. This balance combined with our undrawn credit facility continues to position us very well to make the investments into our future plans for longer term growth. Now, shifting to 2007 for a second, we currently anticipate that we'll make capital expenditures in the neighborhood of about $40 million and we have budgeted $22 million for exploration and pre-development expenditures. But it is very likely that these costs may increase as we continue to make progress on the projects that we're discussing here today. On the production side, as stated in the release, we'll produce around 140,000 ounces of gold at a cost of between $390 and $440 per ounce and silver production should be around 6 million ounces at a cash cost of less than $1 per ounce.

One final note on our financials, new pension accounting rules became effective for Hecla at the end of 2006 and I'm very pleased to let you know that Hecla increased its non-current assets by approximately $4 million to fully recognize the overfunded status of Hecla's pension funds. Note that this adjustment did not affect earnings as it was a balance sheet adjustment only. And at the end of 2006, Hecla's pension funds have assets of over $80 million and benefit obligations of approximately 55 million. This represents an over funded position of approximately $25 million or approximately 43% of the benefit obligation. Now, for some more focus on the operations and capital program, I'd like to turn it over to Ron Clayton.

Thanks, Lew, and good afternoon. I'm Ron Clayton, Senior Vice President of Operations. I'd like to start by talking a little bit about the Lucky Friday, where we completed an extremely successful year in 2006. We were able to take advantage of a couple of new opportunities and, most importantly, we positioned the operation for significant improvements in the future. Regarding 2006, the 5900 level project was completed and reached full production in the second half of the year. We successfully operated four intermediate vein stopes during the course of the year. This was a resource area that we were not even considering for production two years ago. And we completed a major project to increase the grinding circuit throughput and improved the mill zinc circuit performance. We also purchased land that will provide tails capacity for the foreseeable future and we made large strides in the mill maintenance area. The growth in the resources and the improvements made in the mining processing plant has positioned the operation to begin to investigate a significant increase in the production rate, as Phil mentioned.

As you read in the press release, we've completed a scoping level study, economic study that indicates positive increases in production, costs, mine life and could be very economically viable. The study used a $8 silver price, $0.42 lead and $0.67 zinc. At these prices, and the higher production rate, the study generated 20% plus sort of returns and cash costs similar to the current performance. While the study is very preliminary and the estimates of production and costs are order of magnitude estimates, the robust economics support conducting a pre-feasibility study. We're currently developing scope of work for that study and expect to commit the resources and commence the work in the next 30 to 45 days. We currently expect the study to be completed by year-end and I fully expect that we'll begin a full feasibility study early next year. In addition some elements of this expansion are likely to be fast tracked. For example, justification of shaft access to the lower levels of the mine is relatively clear without expansion above the current production rate. We suspect as we get into the pre-feasibility study other aspects will become candidates for similar treatment.

Not too long ago the Lucky Friday was kind of considered a tired out old mine. I'm quite proud of the work our people have done to position this mine to be a key asset now and well into the future. The Lucky Friday is going to be an exciting place to be over the next several years. The fourth quarter marked a significant improvement in production performance at Greens Creek. The extraordinary rehabilitation program that hampered production during the bulk of 2006 was completed and a more normal maintenance program has been implemented. In addition, a contractor was engaged during 2006 to assist in getting development further ahead of mining. This will help us to improve our planning and our operational flexibility. This effort was extremely successful and resulted in 24% higher tons and 12.5% higher ounces produced in the fourth quarter 2006 versus fourth quarter 2005.

Greens Creek is on track to deliver at least 2.5 million ounces in 2007 and management has a number of capital projects slated for 2007 that are targeted to provide a modest 5% to 10% increase over the next couple of years. We continue to make good progress on the Hugh zone pre- feasibility study. The Hugh zone is the latest new discovery at our San Sebastian property in Mexico, where we have identified approximately 9 million ounces of silver and 250 million pounds of base metal. During the fourth quarter, we completed an updated resource estimate and the hydrologic and geotechnical fieldwork to support shaft and ramp development analysis. We are updating the metallurgical analysis to include the 2006 results. We expect to integrate this work into the development and mining plans, update the capital and operating cost estimates and prepare a revised economic estimate around mid year. We're also evaluating a potential for additional growth with ore grade intercepts discovered in 2006 in adjacent targets. Further success in identifying additional resources may have an impact on the project design and timing.

Production from our Venezuelan operations improved in almost every category in 2006 over 2005. Tons processed were up 23% for the year and gold ounces produced were up 58%. Cash costs per ounce was only slightly higher in 2006 despite the pressures of the supply cost increases that have hit the whole industry. The successful ramp up to full production of Mina Isidora is the primary reason for the improvements. While the mining method at Isidora is more costly, it is more selective and the grade at Isidora is higher over wider west. Our people did a wonderful job of developing Isidora and we're looking forward to another good year from the mine. Overall production will be lower in Venezuela as a result of lower tons in grade from La Camorra mine as the mine nears the end of its the current reserves and resources. With that I'll turn it over to Mike Callahan for further discussions on Venezuela.

Thanks, Ron. I'd just like to reiterate Ron's comments about the improvement in the performance at the Venezuelan operation. Both our fourth quarter production and our 2006 production represents the second highest production levels in our history in Venezuela and additionally, with the record cash flow that we saw from the Venezuelan operations in 2006. These achievements really demonstrate the quality of our assets in Venezuela and why we remain poised to take advantage of this great geologic district. On the political side, we, as you read all the interesting media coming out of Venezuela, President Chavez was reelected in December with a 63% approval rating, which was the highest approval rating of a President since 1948. In January, as most of you are aware, Chavez announced his intent to take control of CANTV, the private electrical distribution companies and some oil projects where the government still had a minority interest. This had an immediate negative impact on the markets for those companies.

But however, when you look at what happened afterwards, once it was made clear that the minority shareholders could keep their shares and that the majority shareholder would receive close to the market value for their interest or maybe even greater, the markets for these companies recovered to where their levels were prior. I've personally been involved with Venezuela since the initial due diligence trip in 1999 and throughout the past seven years there have always been what seemed to be major issues to deal with. We've had coup attempts, counter coup attempts, national strikes, millions of people protesting, Presidential referendum, exchange controls, dozens of government position changes and more media propaganda and rhetoric than I can try to recall. And yet, through all of this, we just had a record year for generating cash flow and we had our second highest production year since arriving. The issues that we're facing today are just those, today's issues.

Yesterday's issues are gone and tomorrow's will come in time. But I have to say our employees and our advisors have done an outstanding job of sorting through and managing the issues while allowing the operations to run efficiently. Chavez has been very clear for a long time. He wants a more socialist society. But he has also admitted he's not sure what form that's going to take so I'm certain there's going to be new challenges going forward but I know that we're going to apply the same process that's worked for us since arriving. And a critical part of that process is that we continue to maintain a good relationship with the government and the people of Venezuela. We've had several meetings recently with the government officials and the message has been quite consistent. And that message is that they want to continue to provide an environment in the mining sector for companies like Hecla to operate in the future. They recognize the value that companies like Hecla provide to the communities and to the country as a whole.

In fact, Hecla has been singled out recently as an example of a company for others to follow and our reputation for how we conduct our activities and our business in Venezuela is highly regarded with the government. So as Phil mentioned, our strategy is to position ourself to be in Venezuela for the long haul and we are going to continue to do that by maintaining an open dialogue with the government, supporting the communities that we operate and being a good citizen and a partner for Venezuela. And with that I'm going to turn it over to Dean to talk about exploration.

Thank you, Mike. Good morning. I'm Dean McDonald, Vice President of Exploration. This has been a terrific quarter and year for Hecla in the exploration front, with substantial increases in silver and base metal resources. The Lucky Friday is often under appreciated part of Hecla's story, but with recent discovery it now has a reserve and resource of 117 million silver ounces. There remains significant exploration potential to depth, as recent drilling intersected a series of high grade silver base metal veins at approximately 7900 foot depth. This is 1900 feet below the current resource. Drilling has begun on the unexplored 2,500 foot gap area above the current workings at the Gold Hunter ore body along the main mineralized trend. In addition, drilling from Lucky Friday will also begin vectoring towards the past producing Star Mine. This is really an excellent target because the projection of a series of previously mined structures coalesce into this unexplored area.

Drilling at depth over the next few years is likely to add between 20 to 40 million ounces of silver depending on vein continuity. But with these new areas I've described, we can anticipate significant new resources at the Lucky Friday to be added over many years. With robust commodity prices, the Silver Valley and Idaho has gained a new lease on life as a center for silver base metal exploration in the world. I was surprised when I arrived here how under explored this over billion ounce district is and Hecla intends to be a major player in its resurgence. We have three programs going simultaneously. A Lucky Friday/Gold Hunter/Star Mine program involving 3D modeling and ore zone projections, a synthesis of surface and underground exploration data on the 40 square mile land package we currently hold, and the third front is a review of the rest of the Silver Valley exploration potential, so we're ready to seize new opportunities in the valley. We expect drill targets to be generated, at least from the first two programs, this year and further announcements based on work from the latter.

Mexico is one of our primary areas for exploration. For the last few years, the folks at San Sebastian, a property of 340 square miles of contiguous concessions, was mainly drilling the Hugh zone and basic geology to develop targets on this large land package. The press release only mentions two of eight targets we are going to drill in 2007, but there are an additional 15 other prospective epithermal and brecha targets we're developing along a series of mineralized trends that transect the San Sebastian property. Hecla's recently acquired Rio Grande silver gold project located approximately 31 miles from San Sebastian is undergoing extensive sampling and drill program as we speak. Also in Mexico, an genitive exploration team has been put together whose mandate is to bring new exploration projects to Hecla. With over 5 million in exploration expenditures slated for Mexico, we intend to be aggressive on many fronts. Greens Creek is a property that's been delivering exploration results for 30 years, allowing it today to be the fifth largest primary silver producer in the world. 2006 was no exception, with exploration successes from the 5250 and Gallagher zones.

In addition, the West Gallagher area has been intersected in surface drilling and appears to have significant additional strike length. Excellent results in the northern extension of the high grade silver 5250 zone have resulted in continued focus on exploration along this high grade structure that's easily accessible from current mine workings. An active program of surface exploration at Greens Creek will also be conducted during 2007, including surface drilling along the middle upper and West Gallagher and Northwest extension near the mine. Drilling is also anticipated in the adjacent exploration block containing the [low solar] and lower zinc contact trends. While exploration has occurred at Greens Creek over the last 30 years, for the first time a major testing of service targets relating to a planned five year exploration program is well under way. Venezuela remains an under explored region and Hecla has title to two outstanding green stone packages. We continue to extend the existing ore bodies at Isidora and define new resources. Overall, during 2007, Hecla will spend approximately $22 million on exploration with $5 million designated for Mexico, $2 million for Idaho, $1.3 for our share at Greens Creek, $1.4 million on Hollister, $3 million in Venezuela and $700,000 for generative exploration.

The amount for Hollister, that's the expenditure to date.

To date, that's correct. In addition to those numbers, there is $8 million exploration that are currently unallocated and we will use that money to supplement successes with our current programs or to be used to acquire other projects in other desirable jurisdictions. We've opened the Vancouver office where I will be primarily based because I believe it's one of the main exploration centers in the world. Our strategy is to be a viable visible partner for companies that have properties needing exploration and development. We believe it is time that junior exploration companies explore their future with Hecla. With that I'll pass it back to Phil.

Annie, I think now is the time for the question and answer period, could you give the instructions for that, please?

[OPERATOR INSTRUCTIONS] And your first question come from the line of Anthony Sorrentino with Sorrentino Metals.

Hello, everyone.

Hi, Anthony.

You said that the capital expenditures in 2007 would approximate $40 million. Would you give a break down of the capital expenditures by property? Yes, we can do that.

Lew, would you provide that?

Anthony for the Lucky Friday we should spend around $17 million, up at Greens Creek it's around $11 million, and then down in Venezuela, primarily at Mina Isidora $10 million.

And Anthony, that is the numbers that we have at this point. We would anticipate that if we have positive results as we're doing the pre-feasibility study at the Lucky Friday and other things that we're looking at at Greens Creek and across the Company, that that number could increase.

Okay. And speaking about the Lucky Friday, with a capital project that large, $150 to $200 million, do you have any idea how long it would take from start to finish for such a major project?

Go ahead.

Anthony, we really got to put a lot of details to that yet, but you're talking about that project contemplates building a whole new mill and sinking two shafts, one from the surface to probably somewhere below 4,900 level and one from 49 to 8,000. I mean, those are major jobs. That's five, six year kind of projects.

But there's certain aspects of it that will happen faster than others. A mill construction would be a couple of years sort of project.

Right.

The underground shaft would be maybe a four year sort of project.

Right.

The longest one would be something going from surface to our existing workings because you're talking a about something that's almost a mile deep.

Right.

When they built the shaft in 1982, Ron, do you know how long that took?

It was about a four year project. That included some of the pre-engineering stuff but really the physical work was 3.5 to 4 years.

Okay. And would you try to -- if the time came that you went ahead with that project, would you try to do everything that you could to avoid disrupting the existing production?

Yes, absolutely. That's part of the stuff we would have to work out.

And one of the reasons why it would take as long as we're contemplating, if you shut everything down then you probably could do it significantly faster.

You could do it some faster, yes. But that would be the key deal is to avoid production interruptions as much as possible.

Okay, very good. Thank you, and congratulations on a great year.

Thank you.

Thanks.

Your next question comes from the line of Terence Ortslan with TSO & Associates.

Hi, Terry.

Hi, how are you guys?

Doing great.

Obviously, not that you are not open for business before but this Vancouver thing is quite interesting very foresighted, I must congratulate you on that. Could we talk about more on the criteria we're going to use for this in terms of it's going to be financing juniors, what level you're going to get involved in? Is it going to be just a listening process? How aggressive are you going to be being open for business and how much can you allocate the time and the budget on this?

Well, yes, there's a lot of specific things that you're asking for, so let me just talk more generally about it. What we're doing is focusing primarily on some districts that we have an interest in. You've heard about the Silver Valley. We're going to emphasize really looking at all opportunities within that valley. We are the, if not the largest land holder, close to it and we're certainly the largest Company operating in the Silver Valley , so that's at the top of our list. As well as Mexico, where we have a decade of operating experience. We have an operating team that is there and so we've focused on particular area within Mexico that we're actively evaluating, basically, any opportunities that fall within the geographic area that we're in.

Then on top of that, we're looking at just all other silver assets that meet a certain size criteria and it's a little bit of a moving target, but we are looking for silver properties that have the opportunity to have some size to them. And then finally, we're looking at gold assets that fit our niche as a narrow vein underground miner. Now, we have those four broad criteria. When you start then looking at specific assets, we'll have size requirements. We'll have return sort of requirements. We'll have cost requirements, but those things will change over time. They aren't quite as set in stone as the broad targets that we have, the broad goals that we have with the acquisition program.

So the Vancouver going to be augmenting this and it will be more like in the trenches?

Well, it will be the leadership role. We'll have Dean McDonald and another VP of Corporate Development sitting there. We're anticipating the whole management team that's here in this room spending a significant amount of their time in Vancouver because that's where these opportunities are germinating from. So it is a -- it's not a -- this Vancouver office is an extension of the Coeur d’Alene office. We're trying to integrate the two.

Okay. One thing about Venezuela, no matter how you look at it is the other asset, let's call it the other asset that exists in the country, the way it is going to be resolves, I think that's going to set the tone for the evaluation of other assets. Would you agree?

You know, Mike, you can comment on that.

I mean, I think that the way we look at Venezuela, we've had a great experience in Venezuela. We love the geology and I think regardless of what happens to some of the other assets and some of the other companies that are there, our experience has been very positive and we look forward to continuing to work down there.

But I guess in terms of the markets valuation of our assets, yes. Those are going to get set by what the government does with us and with these other assets that sit in the country. But we in no way expect an inability to do what we've done in the past and that is operate, generate cash flow, have this be a contributor to Hecla.

Yes, but I would agree that if something positive came out on one of the other assets, it would be a positive statement for mining in Venezuela. I would have to agree with that statement for sure.

Thanks, guys, and great work. Thank you.

Thanks, Terry.

Your next question comes from the line of Mike Jalonen with Merrill Lynch.

Hi, Phil.

Hi, Mike.

Just lots of good news here, good to see. Just a couple questions. I guess one for Lew there. I guess with the discussion of the tax laws carryforwards I was just maybe clarify that $80, $90 million off balance sheet asset, does that mean you wouldn't pay any taxes in the U.S. on taxable income until that's exhausted or am I looking at it the wrong way?

Yes, Mike there's about $250 million of tax net operating loss carryforwards available in the United States, which if you applied an effective tax rate would get you down to that $80 to $90 million that's available to offset future taxes.

And there might be a little bit of Alt-Min that we have to pay but it's 2%.

Yes, that's correct, we're paying about 2% under the alternative minimum tax for our taxable income in 2006 and that will continue to occur going forward.

Sounds like you guys aren't going to pay any taxes in the U.S. for a few years to come.

Well, it depends on what prices you assume, but yes, that's a fair comment. And again, it's a bit frustrating that we're not able to recognize that as an asset, but as we've gone through the rules, we're limited to looking back one year because we only have one out of the -- two out of the last three years, I guess, we had taxable income, Lew? But we haven't had two consecutive years, so we are limited to that. And that's just the way the rules have been applied.

Oh, okay. I guess just moving to the Lucky Friday pre-feasibility study you guys are doing, just at Ron. Ron, I was wondering there, to get that 20% plus return, how much reserves or resources were you assuming being mined and what kind of mine life and production rate would that tell?

That particular scoping study assumed that we would mine all of the current resources that you saw in the plan, with the exception of the Lucky Friday vein. So it's the bulk of the resources that are in --

It was 107 million ounces.

It produces 107 million ounces, I think. The mine life goes from -- the current one is 2018 and it goes out to 2026, I believe, so it adds eight years, what was your other question, Mike?

I guess what the production, 6 or 7 million ounces a year?

Yes, it gets up around 6 or a little higher than that in some of the years. We basically made the assumption we could go to 2000 tons a day to start this out and that we could come up with a mining method that would let us mine the intermediate veins at approximately the same rate that we mine the 30 vein and similar kinds of grades.

Okay.

The most important thing to draw out of this study, Mike, is not necessarily that it's 2000 tons a day or 3,000 tons a day, but that the economics are robust enough when you look at this that it makes it very, very clear that there's an opportunity here to significantly increase production, cut the costs and increase the mine life and make more money. And it will sustain -- it will support a very large capital expenditure to get there and still make a profit.

So would the mine stay at 3.5 million, 4 million ounces a year until you have this completed, I guess, five, six years out sort of thing?

Probably. I mean, we're looking for ways to make some intermediate moves too. I knew Phil was going to get all over that. [LAUGHTER] I mean, we have been working hard for the last six months to a year to try to find ways to push every infrastructure piece we've got in the mine to try to get it up a little bit above that, so part of this study is going to be looking for ways to get some incremental movement along the way to a big movement.

The good news is we're mill constrained at the moment. That's the first constraint we have, which there's ways to get around that. But then we quickly run up against ventilation constraints and we're spending time and effort trying to figure out if there's some intermediate step we can take to increase our ventilation.

You have an experienced work force getting a little older like you guys are doing a potential big expansion, how would the training go for new people?

Actually, we already have really good experience with that right now. We have quite a unique work force because about half of it is that older, more mature, very experienced work force that you're talking about. We have a tremendous number of young people, sub-35 kind of folks, the 20-35 kind of range that we've been hiring and training in the last two years.

Because remember in 2001, we were down to what? 55, 60 people?

Right. 55 or 60 people.

And now we're to --

Almost 200 people.

Yes. So and of course some of those people we added in the meantime were experienced.

Right.

But we also have added a lot of new folks. We have a training stope that we've established and it's really taking us back to the days, Ron, when you started at Lucky Friday.

Right. I mean, we have really done well being able to hire and add people and get them trained and we still have a lot of work to do in that area. That's one of the things we're doing big time in the mil right now is getting operators and mechanics trained and that kind of thing. Of course we're making changes in the mill so that complicates the whole situation, but we're in pretty good shape for people in training. We got 210 people right now.

That's good. I guess just one last question and thanks for that. You mentioned that your costs would stay similar to where they are now. I remember you saying that and I noticed the grade of the resources is well below that of the reserves, so I was just wondering, it's a big drop in grade.

Yes.

13-8 ounces.

Basically what we've done in the study is we've gone through and analyzed the operating cost on a per ton basis and recognized that we're going to get some economies of scale out of that, so your per ton costs are dropping but they're in this particular study in the results that it's almost perfectly offset by the decrease in grade. So you get the economies of scale of the double production but with the lower grade, it basically puts you at about the same cost per ounce. And remember those are significantly lower prices than what we're currently seeing. I rattled those prices off but it's $8 silver and $0.42 lead and $0.67 zinc and that's the other thing that makes this study fairly robust is those are not overly robust prices at the moment.

Oh. Okay, well, thank you very much and good luck.

Thanks, Mike.

Your next question comes from the line of Sean Cooke with CIBC World Markets.

Hi, gentlemen. Congratulations on a really good last quarter. I have just one question on the 33 million ounce, a 25% increase in reserves and resources. I take it that the majority of that does come from your success in exploration but what fraction of that can we attribute to metal price assumptions?

We've had that debate as well, as to what it is and we can't come up with an exact figure, but --

Ballpark it?

Yes, ballpark is, go ahead, Dean.

We have a number of ranges, but it probably sits around 50/50.

Okay.

Here is the thing, this is Ron. Here is the thing I think you have to understand about that is that while the price increase has had an effect on our reserve criteria, more than 50% of that is in new areas. So if you hadn't drilled the holes, doesn't matter what the price is.

Right, right.

It's kind of a chicken and egg conversation here.

Okay.

We've substantially picked up the number of tons as a result of the drilling, yes, some of those may have not made it in at a lower price. That's a better way to look at it I think.

Okay, well thank you for your candor on that and again congratulations on a good last quarter.

Thank you.

Just one further comment on that. As far as the prices that we use in calculating our reserves and resources, it's based upon a three year average price for each of these metals, historic price, is that right, Lew ?

Yes, it approximates a three year average which is sort of the criteria that the SEC suggested to mining companies.

Okay, I'm sorry, Operator?

That's fine. [OPERATOR INSTRUCTIONS] And your next question comes from the line of Jed Richardson with Sprott Securities.

Hi, there. Just wanted to go back to Terry's question on juniors.

Sure.

I was wondering what the strategy would be, are you looking to set up joint venture partners or would you take like equity interest, write-in companies and help them push projects along? Could you kind of add some details?

Yes. If you go back to when was that? 2004, Mike? When we made the Alamos -- Yes, in 2004 we made the Alamos transaction where we were prepared to make a -- take a stake in the Company. We're prepared to do those sorts of transactions in the future but we're quite selective on what we will do. It's got to be a situation that fits a number of criteria, but -- and the most important being an asset where we think we can add value to it with our operating expertise, our development expertise. So we're prepared to do that, but we're not going to do it willy-nilly. We're not just going to pick up any company out there that needs to raise equity and just take a stake and see what happens.

Okay.

We also are very interested in joint venturing on things. We're certainly talking to people about the potential of doing that.

All right can you provide any kind of color on what those criteria would be so we can all guess them?

[LAUGHTER]. First criteria is going to be the metals, it's going to be silver, it's going to be gold, it's going to be in these geographic -- in these jurisdictions that we're in. That's where we're starting. It's going to be where we're adding value, where we've got our operating expertise. Jay Layman, who is our VP of Corporate Development, if you'd like to add something to that and, Dean, I'll let you add something as well.

Yes, this is Jay Layman. I guess the biggest criteria would be the value-add. Hecla has historical underground mining expertise that's pretty special. It's one of the reasons that I came to the Company and we can apply that going forward. That plus our polymetallic expertise to silver and base metals, so we're looking at opportunities that we can add value to, whether by acquiring the asset, joint venturing on it or, as Phil mentioned before, in the right situation making a equity placement.

Just to add, this is Dean. Part of that criteria is that we're looking for long lived assets, is that we want -- there's no point in buying something that has a three or four year mine life. And so a component of that is obviously exploration potential and what those projects or companies bring. And that ties back to the Hollister transaction. We view Hollister as being a good opportunity for us when we entered into in 2002. We still think it's a good asset and interesting, but the size of it, I was looking at Great Basin's press release and they mentioned that this represented 5% of their total land package and that's absolutely right. It was relatively small compared to the overall land package, so the opportunity of that being large and being an ongoing asset was challenged in that respect. And so we're looking for assets that are similar to the Lucky Fridays, the Greens Creeks, San Sebastians, the Venezuelan land that we have, that is of size and has the capability of being long lived.

Okay, thanks.

Your next question comes from the line of Eliott Glazer with DuPasquier.

Congratulations, gentlemen, on a really fine management job.

Thanks.

My first question has to do with a situation in Venezuela. Did you state that you can absolutely take no money out of the Venezuelan gold operations and bring it home?

No. We can take money out of Venezuela and we have and in fact that's why we recognized an exchange loss of the $2.2 million. The problem is is there is a differential between the official exchange rate and the parallel rate. And whenever we take money out of the country, we are having to pay that cost that we're taking a discount, if you will.

But to be more specific, what percentage do you have to give up to take money out?

It depends. Every day, every second the exchange rates change, but on average in 2006, what was it, Lew?

The funds that were brought out in the second half of 2006 was roughly about 30%.

Okay, so if you take out 2.2 million, you got to pay about 660,000 you lose in exchange rate?

That's right.

Okay. Would you guess that situation is going to change either positively or negatively during the rest of Chavez's new term?

Anybody care to guess? [LAUGHTER].

This is Lew. I mean, Mike and I, we had a conversation about this yesterday and it's very difficult to be able to try to predict what the next events are going to be in Venezuela. The last time that they devalued the currency was March of 2005. There is certainly a possibility that there will be devaluation in 2007, but there certainly has been no official announcement of that at this point.

Okay, so those of us who are not foreign currency experts, if they devalue in 2007, does that mean you would have more money to take out or less.

It would potentially allow us to -- the majority of the costs are denominated in bolivars, which therefore on a U.S. dollar term basis would reduce the operating cost and therefore increase the margin.

Got it.

There's benefits and there's negatives to it.

Have you thought internally of negotiating it with Chavez kind of the way that, for example, had lunch with the CEO of Total Petroleum of France yesterday, they have massive operations in Venezuela. You can talk to this guy. Could you possibly sell the operation to Chavez of Venezuela and as part of the deal, get money to take out and use it to develop the underground shaft in Lucky Friday? Have you thought internally of something like that?

Let me make a couple of comments, and then I'll let Mike add to it. First of all, we're not Total. We are a small Company and in Venezuela the mining industry, and then specifically the gold mining industry, is extremely small and does not get the same attention that the petroleum industry gets.

Got it.

So, that's number one. Number two, because of that, they don't have the expertise within the country to do what we do. We are a -- we transfer technology to Venezuela and that's one of the benefits that they see in having us there. So they're not -- our sense is they would not be enthusiastic to acquire the assets and see us go away. They want us there and they want more people like us to be there, specifically in the precious metals mining sector. Mike?

Yes, I had a recent meeting with the minister that controls our industry and one of their concerns is that they want to provide an environment where there's more legitimate, serious, mining companies to operate in Venezuela, because we're the kind of Company that comes in, provides good jobs, provides support to the communities, pays our taxes, [INAUDIBLE] and that's really what they're looking for because that expertise doesn't exist in countries, as Phil said.

And you also can't buy the consultants to do the work like you can in the petroleum industry.

Yes. That's a very helpful explanation. Turning to Lucky Friday, is there any experience with any mining company in the United States in any mineral down at the 7,900 level?

I'm sure, the lucky -- Hecla has a Star Mine which is two miles away.

So you have, how deep in the history of Hecla have you mined at Star?

Star was a little below 8,000 feet deep.

Okay. That's very helpful.

And frankly, I'll just share another piece of information with you. We took a team and went to South Africa in January to take a look at what they're doing. They are really the other -- there are a couple places in Canada but really the south Africans are the experts at depth. And quite frankly, they're dealing with things at 12,000 feet depth that we've been dealing with at the Lucky Friday for the last several 1,000 in terms of heat gradients, rock mechanics, all of those kinds of issues. So I came away from that trip feeling pretty good that we were very well positioned to deal with the challenges of the kind of depths that we're talking about.

The other thing to mention is the Lucky Friday is really made up of two different ore bodies. The old Lucky Friday vein and what's known as the Gold Hunter. We typically don't use the Gold Hunter too much, that name, because it's a little confusing. But that's historically what it is called and the rocks have different rock mechanic characteristics. And what we're in now, this expansion area that's in the Gold Hunter, is much more competent rock than what we experienced in Lucky Friday.

And actually a little clearer way of explaining that is the rocks in the Lucky Friday area are hard and brittle and they tend to absorb a lot of energy and then fail fairly cataclysmically. Whereas the rocks in the Gold Hunter area, there's a whole lot more argilite in the material, so it tends to squeeze or move, which is much easier to deal with.

Are the veins any wider?

You know, really the main 30 vein in the Gold Hunter is roughly six, on average around six foot wide. That was pretty typical of the main Lucky Friday vein. The big difference is you've got all these subsidiary intermediate veins that are shorter in strike length, a little less continuous, tend to be a little higher grade, but a little narrower, so you got multiple assets, I guess.

Sounds great. Thank you, gentlemen.

Thank you.

And that this time, there are no further questions.

Thank you, everyone. That concludes Hecla's fourth quarter 2006 conference call. If anyone has any additional questions, you can call me, Vickie Veltkamp, at 208-769-4144. Thank you all for joining us, and have a great day.