Hecla Mining Co (HL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hecla Mining Company first-quarter 2011 earnings conference call. My name is Mary and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Melanie Hennessey, Vice President, Investor Relations. Please proceed.

Thank you, Mary and welcome, everyone and thank you for joining us for Hecla's first-quarter financial and operations results. Our news release, which was issued this morning before market open and presentation, are available on Hecla's website. You will note that it can be located on the Events Calendar section under Investor Relations on our website and has been uploaded a few minutes ago.

On today's call, we have Phil Baker, Hecla's President and CEO and Jim Sabala, Senior VP and Chief Financial Officer.

Before we get started, I need to remind you that any forward-looking statements made today by the management team comes under the Private Securities Litigation Reform Act and involve a number of risks that could cause results to differ from projections.

In addition to our filings at the SEC, we are allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of such terms as measured, indicated and inferred resources and we urge you to consider those disclosures that are provided in our SEC filings. With that, I have the great pleasure of introducing Phil Baker, Hecla's President and CEO. Mr. Baker?

Thanks, Melanie and thank you for joining the call. Please go to slide 3. I am going to provide a brief overview of the first-quarter results. Jim will speak about our financial results. I will close with an update on the silver market, Hecla's organic growth opportunities and open the floor for questions.

But before I speak about the quarter's financial and operating results, I want to talk about the tragic fatality of Larry Marek, a miner who was killed in a ground fall at the Lucky Friday on April 15. Larry was a 30-year veteran of the mining industry and had been with Hecla for 12 years.

For nine days, our full attention at the Lucky Friday with his rescue and recovery, I was able to see the strength of his family, a family with at least 10 miners in it. I was able to see the skill, passion and collaboration of our miners, operators and engineers. We saw the support of the industry with companies who came to our aid. There were a number of them, but I will just mention two -- Cementation, our contractor on the #4 shaft helped engineer and procure equipment and execute plans.

Stillwater, a mine not too far away from us in Montana, lent us a remote mucker with mechanics and operators. We also received the support of MSHA who gave us suggestions on how to handle different aspects of the incident.

I also received e-mails and calls of support from investors and followers of our Company and I am sure some of you are on this call. I want to thank everyone for their thoughts and prayers. It has made a difficult situation just a little bit easier.

Now we are in the investigation phase of the incident. I don't know how long it will take, but we will work to understand why it happened and how we can prevent it from ever happening again. MSHA will do the same.

We are now back in operations at the Lucky Friday as we continue to investigate both stope 15 where the incident occurred and stope 12, which has similar geometry have shut down. Fortunately, it will not impact our guidance of 9 million to 10 million ounces of silver. There will be some cost of the rescue recovery investigation efforts and maybe some impact on operating costs. How much, I don't know, but I don't expect it to be significant to the economics of the mine.

So let's talk about the quarter. See slide 4. It was a very good quarter with new records set in our 120-year history for revenue, gross profits and net income. The new record was set because silver production was at 2.5 million ounces as we expected and the other metals hit our targets. Costs were right at $1 per ounce, the lowest in North America and maybe even the world and realized silver prices averaged $36 per ounce, which is the most in our history.

Free cash flow was $38 million, which increased our cash position to $322 million. We also have advanced the settlement on nonmonetary terms for the basin litigation so that there is now an agreement by Hecla and the negotiators for the plaintiffs. The plaintiffs will now go through their approval process. I will have Jim continue with the review of our financial performance.

Thank you, Phil. Excellent metals prices across all four metals that we produce resulted in strong financial performance for our 2011 first quarter. On slide 5, we present the realized metals prices for the quarter and you can see that our realized silver price is up by 116% and realized gold price is up by 27% over the first quarter in 2010. Zinc and lead prices in the first quarter were also up by 13% and 28% respectively over the same period in 2010.

As a consequence, on slide 6, you can see we continue to see expansion in our margins that we are achieving. We continue to experience among the lowest per ounce cash cost in the industry. Our per ounce cash costs were $1.03 for the first quarter 2011. Cash costs are up quarter-over-quarter due to lower gold, zinc and lead ore grades resulting in lower byproduct credits relative to our silver production and that silver production was comparable for both quarters.

Increased mine license taxes, profit sharing due to higher metals prices and increased production costs also contributed. However, the benefits of higher metals prices far outstrip the costs associated therewith and our margin increased to $35.46 per ounce of silver produced from $24.16 per ounce in the first quarter of 2010.

Moving to slide 7, net income applicable to shareholders more than doubled to $43.2 million for the first quarter compared to $18.4 million for the same period of 2010. And net income per common share was $0.16 in the first quarter of 2011 compared to $0.08 in the same period of 2010.

On slide 8, we see the benefits of low operating costs and very strong metals prices. Hecla reported operating cash flow of $60.9 million in the first quarter of 2011, more than threefold over that reported in the first quarter of 2010, even after a $13.4 million increase in working capital, which is a result of increased accounts receivable, a product of higher prices and our shipping schedule. This has allowed us to continually accumulate funds in the treasury, which is set forth on slide 9. After an excellent quarter of cash flow generation, Hecla was able to fund all capital requirements and increase cash available in the treasury to $322 million.

The Company has no significant outstanding debt and a $60 million undrawn line of credit. Therefore, total liquidity available for investment stands at $382 million, which we expect will be more than sufficient to continue the capital projects we have on our plate, exploration expenditures and to fund the environmental settlement, which we previously discussed. With that, I would like to turn the call back over to Phil.

Thanks, Jim. I want to comment on silver given its volatility last week and I have got two comments. First, the volatility will continue to be significant because the silver market is very small. It is changing rapidly and I will talk more about that in a moment and the knowledge of investors, given the changes and given the size, is relatively low. I suspect no one has a full appreciation for the metal and its supply/demand characteristics because it has changed so dramatically over the last five years. We still have the same characteristics of silver that makes it trade with gold, but as shown on slide 10, the industrial demand is growing at a rate no one expected.

When I started working for Hecla 10 years ago, no one had appreciation of how quickly photographic demand would fall and new industrial consumer uses would more than take their place. Today, we have a similar thing occurring. The market generally does not understand how the unique characteristics of silver are allowing new demands to explode, characteristics like it being the most conductive of all metals, more than copper, more than gold, the next two most conducted metals. And when silver tarnishes, it maintains its high conductivity. Silver is also the most thermally conductive, as well as the most light-reflecting element.

We can talk about a lot of the new uses, but one that is having the biggest impact on the market is the photovoltaic or solar panels. In 2004, only 4 million ounces were consumed and that increased to 40 million ounces last year and GFMS's study says they expect it to double in the next five years time.

This means that while investors and mining companies will likely experience volatility, the long-term outlook for silver will include a far greater amount of new non-forecasted uses. The volatility shows the importance of having high-quality assets that can carry high-cost mines and can be the engine for consistent growth.

And I think you have an idea of our high-quality assets with the performance that we have had in the past quarters. So let me talk about our ability to grow the assets we have in hand. So go to slide 11. We are engineering organic growth with the current assets on hand and see tremendous potential to add value at minimal cost.

What is driving this effort by Hecla is a silver price above $20. I expect all these projects to generate substantial returns and meet other important metrics in such a price environment and all of the new projects are ones we think we can move forward relatively quickly. For projects, which we are evaluating, have been separated into three categories -- construction, scoping studies and exploration. There are a total of seven of these internal projects.

The scoping studies are broken into two types -- mine reopening and mine development. Mine reopening is of the three mines that have all operated in the last 25 years. Star and Bulldog were both shut down due to a silver price below $10. I will talk more about these in a moment. The Hugh Zone is a deeper extension of the San Sebastian project. The mine development projects are projects that can increase production from the Lucky Friday and Greens Creek. And the exploration project opens the Equity portal at San Juan. This allows us to drill underground year-round and move the projects forward faster.

Now these are all engineering projects and I am not going to go through all of them, but I will talk about the #4 Shaft, Star and the Bulldog reopening and the Lucky Friday mine optimization study to give you a flavor of what we are engineering.

Now these projects are not going to take away our focus from evaluating other assets and companies for potential mergers and acquisitions. The first project is the #4 shaft, which we have been advancing for the past year and a half. So if you'd go to slide 12. This is a project that increases production 60% at the Lucky Friday due to higher grades. It will lower cost per ounce and allow us to mine through 2030 and probably longer. So the Lucky Friday is a long-term low-cost mine that is getting better. The total project cost is going to be $200 million with a completion date in late 2014 and we have spent about $60 million so far.

Go to slide 13, you can see the status of the major milestones for this project. And we expect the Board to give final approval of the project midyear before the shaft sinking begins. And as slide 14 shows, this mine largely has the design complete, the offshaft development done and major procurements purchased. So the risk of the project at this point is quite low.

Now moving to slide 15, this is a brief table that shows all the scoping projects. The first column is the mine optimization study for the Lucky Friday. All of the work that has been done on the expansion of the Lucky Friday has been constrained by mill capacity. What this study does is it takes the mill out of the optimization and it is looking at what the limits are in the mine for ventilation, hoisting and rock mechanics. So whatever the constraints are from that study will determine how large the mill should be. It is currently projected to be at 375,000 tons a year. We are going to let the mine, the constraints of the mine determine that. I expect the mill is going to end up needing to be 10% to 25% larger than what we are currently planning.

Now the second column on this slide 15 is the study that we are doing to reopen the Star. This is a mine that operated continuously from 1891 to 1981 and again in the '90s. It was really the cornerstone mine of the Company for that period of time. Low metals prices closed the property. We haven't done much work on it up to this point other than drilling the Noonday, which is a vein adjoining the Star and we have thought of the Star as merely being a platform for exploration projects.

Well, with the change in the price environment, we will, in the coming quarter, calculate a new resource based on material that was left in the mine and we are already advancing some rehabilitation for the purpose of exploration and we are going to make sure that that rehabilitation works for production.

I am very excited about the Star not only as a source of fee, but its ability to improve the Lucky Friday since its infrastructure is less than a mile away. So there is lots of possibilities of putting the infrastructure of the two mines together.

The third column is the study on reopening the Bulldog. With a known resource of 37 million ounces, a recent mining history and strong local support, it is realistic to plan for this mine to go back into production and so we're working on that plan and hope to complete it by year-end. Now I am not going to talk specifically about the last two projects, but I will be happy to answer any questions.

So go to slide 16. Exploration expenditures during the first quarter were $3.3 million just as we had budgeted. The budget for the year though is $27 million. First quarter is always the lowest expenditures we have in exploration because we are constrained by weather from drilling from surface.

Now we have four projects that are target-rich. Greens Creek exploration program is the largest in its history with three surface drills and two underground drills and those underground drills are operating year-round. The Lucky Friday, Silver Valley has both in-mine and regional targets. The regional exploration that we are doing in the Silver Valley is the most that has ever been done.

San Juan, in addition to all the things I was talking about on the Bulldog, has very exciting exploration on the equity and in an area known as Rat Creek. The last column is San Sebastian, which has three surface drills currently operating. We have had even better results from our early drilling than expected, so we have been allocating some of our unallocated exploration funds to the property. If you go to slide 17, it shows the Andrea targets by grade times thickness over almost a mile. This is on a gold equivalent basis and as I said, these results have been better than anticipated.

Finally, slide 18 shows that we have maintained our guidance with silver production between 9 million and 10 million ounces at a total cash cost of zero for the silver produced. With that operator, I would like to open the line for questions.

(Operator Instructions). Michael Dudas, Jefferies.

Good morning, everybody. Our thoughts and prayers with the miner's family, of course.

Thank you.

$327 million on the balance sheet, the markets, they have been a bit volatile. How do you analyze and depict some of the opportunities you have been looking at over the last few months, the year on the acquisition front given such volatility we have seen in the metals price? Are you raising your long-term price to analyze your net present value of potential opportunities? Is that what we reflect here in some of the numbers you have put forth? Maybe give a little bit of help on where Hecla's thinking to put some of this cash to work and to leverage the balance sheet.

Sure, Mike. I guess two things. One is we will continue with the development of our existing assets. As I described, we actually have accelerated that activity. Use the Bulldog for example, at sub $20 silver, we would have had the view that we needed to grow the resource base to put that mine back into production in order for it to carry all the capital necessary.

At higher than $20, I think we will see the economics of that to be very, very robust and without adding additional resources. And we still think we will. We still think we will add those resources, but in the meantime, we are going to try to push that project forward. So that is the first place that we will be evaluating the opportunity to generate returns because clearly as we look at acquisition opportunities, it is going to be rare for us to find something that will generate the same returns that assets in hand will likely generate.

That is not to say we will not acquire new assets. In fact, we think we should be acquiring assets. We think we have an asset base that can afford to take on assets that maybe are not of the same quality of what we have, but will provide us with that needed growth.

So when we are looking at things and we are considering what price do we need, long-term price do we need, it depends on the nature of the asset. If it is an extraordinarily large asset with lots of capital then it probably -- it probably should be of a higher quality and therefore able to sustain itself at a lower silver price than if it is a smaller asset. And if the risk profile of the asset is high then it better be of a very high quality. And so there is kind of a sliding scale, if you will, for how we are evaluating these acquisition opportunities. Jim, do you want to add to my comments?

I think one of the key things, Mike, is when we look at all these things, you have to evaluate risk. So when we evaluate relative opportunities, we will look at net asset value, but we look at net asset value over a spectrum of prices, recognizing if you look at just the last three years, and the industry has probably been about 100% wrong and we would look at it at today's prices and look at a valuation. We would look at it at consensus prices and we would look at it at long-term prices, which are substantially lower and that is what I mean by the industry being wrong. If we would have looked at this a couple of years ago and everybody had said we would have been approaching $50 silver, I think there is no doubt we would have all been surprised by that.

And we have the view that, long term, the silver business is going to get better and better from the standpoint of the demand for the metal. But that doesn't necessarily mean prices will -- it doesn't determine where prices will be. That will be a function of where supply is at the same time. So we will be using a whole series of prices in evaluating projects. I am very optimistic for the market for silver. I am very optimistic for prices because I recognize the risk of operating properties is a lot higher than sometimes people realize and we are not going to see the production that maybe some people expect to see for the industry as a whole.

That is a very good answer. Just one follow-up and maybe along the risk theme, I am going to give you a softball here. I am guessing you believe the market is not properly reflecting in your valuation the fact that your assets are in the US and Canada.

Well, they are actually all in the US.

I'm sorry, US rather and [much of the] successful opportunities in the US and Canada, but opportunities south of the border where certainly a lot of deposit opportunities are, is that something that you are talking about when you are talking about the risk opportunities and what has been happening maybe with governments and taxes and those types of issues?

Look, we have operated internationally for a long time. I guess, gosh, it's close to 20 years. We were in Venezuela for a decade and it didn't get much tougher to operate then in Venezuela and that was a very good experience for Hecla. It was a real value driver for us for a long period of time and so we are very interested in bringing on assets outside the US and we think that there is a good mix of having the US assets, low-risk assets with assets maybe that are higher risk in other jurisdictions. And we don't think the market differentiates enough with risk. I can tell you that when we evaluate projects, we do and that is what we are spending the majority of our time is understanding the risks of these assets because we are going to be operating them for decades. But having said that, we are more than happy to take on some additional risk with assets in other parts of the world.

I appreciate it. Thank you, gentlemen.

Chris Lichtenheldt, UBS.

Good morning, thanks. Good morning, everyone. Just on the Star, maybe let's start there, can you talk a little bit about what sort of grades you are working with there and/or what sort of silver price you would be comfortable thinking about long term to work on something like that?

The Star has historically been a lower grade silver deposit, higher grade zinc. In fact, if you will note on that slide 15, we put -- it is in that second column, we have the metals and you can look at the order that we put that in -- zinc, lead, silver. It is a mine that had a grade of about 4 ounces per ton silver, combined lead/zinc of close to 10%.

In terms of putting it into production, frankly, we are in a price environment, anything above $20 I suspect is going to be one that will allow it to go back into production, but let us do our work. It is work that I would expect by the end of the year we will be able to give you with a reasonable degree of specificity as to how we will move forward on the Star.

Okay, great. And I mean, again, it may be a bit early to ask this, but would you consider, given the base metal content, ever just selling that forward to maintain the silver exposure and obviously maybe the economics would work well at this price? You would just sell that forward and lock in some cash flow, would that be something you would consider?

Well, yes. And in fact, with our hedging program, we are doing that already on existing base metals production. We have got about 50% of all of our lead and zinc production hedged for the next two years and in fact, I think a little bit going into -- well, I guess it is still two years, into 2013. So we absolutely will be willing to hedge off some of the base metals exposure.

Great, thanks. On Lucky Friday, when you talk about potentially expanding the mill beyond 375,000, when might --and I apologize if you mentioned this -- but when might we hear what the costs would be associated with that and timing and everything?

Well, the first step is going to be what is the mine capable of doing and we will be able to tell you that by the end of the year. We might -- hopefully, we'll be able to give some indication of where that is going even at the end of the third quarter, but certainly by the end of the year.

That will then lead us into a mill optimization study, what is the right size of the mill given what the mine can do. And so I think you're looking at some time in 2012, I don't know how long that will take, but in 2012, the determination of that, which will then lead into the plan for the expansion of the mill and what we would try to do is time that to coincide with the completion of the #4 shaft.

Great, okay, thanks. And then last question on Lucky Friday, given the unfortunate incident and the subsequent closures of stopes 15 and 12, has that changed your plan at all for this year or grade profile or anything that we might be thinking about?

It didn't seem to me it has. Jim, does it -- are you --?

Not significantly when you look at the global economics.

Yes, yes. Look, there is probably a couple hundred thousand ounce impact that this has on us. So no, we are not anticipating any major change.

All right, thanks a lot.

John Bridges, JPMorgan.

Good morning, everybody. Yes, our thoughts are with Larry's family and his extended family at the mine. Sorry about all that. Just wondered if there was any significant impact from these higher prices on the concentrate market. I just wondered, Jim, if you had any comments on anything notable going on there?

Yes, there is lots notable going on. As you know, all smelter contracts have price escalators in them, but putting aside price escalators, what we are seeing is the physical having more impact on the market than prices per se and they are going in different directions. For example, the zinc market is very, very active. We have seen significant improvement in zinc terms. So in terms of the zinc concentrate, we have benefited. In terms of the lead concentrate, it is just the opposite. Lead smelting, depending on the quality of your concentrate, is under more pressure and so we are seeing increased charges relative to lead concentrates.

Is there any significant accumulation of concentrates in the pipeline?

In terms of Hecla per se?

More the industry, but both.

I don't think so because what we are seeing is smelting capacity is there and so particularly in the Far East and in China in particular is bid very aggressively. If you look at the spot market for concentrates if you are not under a frame, spot markets are substantially lower than frame contract levels, which tells you to keep the smelters running. They are essentially buying that business.

Interesting. And probably sticking with you, Jim, I just wondered given the cost pressures, which particular areas are you seeing the most cost pressures in?

Well, taxes. The mine license taxes in Alaska in particular is probably one of our biggest ones. If we take a look at our cost of goods sold year-over-year, about 45% of the increase was directly price driven and a lot of that, of course, is profit-sharing. We have employees on profit sharing and incentive plans. And then also Alaska license tax is a big one for us. The good news is the prices go up more than the costs to.

It's a high-quality problem. And then finally, your decision about expanding Lucky Friday, it sounds as if the mill decision is not a discrete problem, but one related to what you decide to do with the other operations. So it sounds as if it is a different calculation.

Let me be clear. What has happened up to this point is we used the mill as the constraint of what we would do of what the production would be and what the throughput will be from the mine. So we are now turning that around and we are going to have the mine determine what size mill we should have.

Maybe it is an expansion of the existing mill, maybe it is a new mill, so that is one analysis. The work that we are doing in the Star and elsewhere in the Silver Valley could also play into what we do with the mill, but at this point, it is too early to say what that might be.

What is the probabilities?

I think very high. I think very high that we will -- I think at the very least, John, we will build -- we will expand or build the Lucky Friday mill to not only carry the feed that we can get from the Lucky Friday, but we will have some capacity beyond that to take feed from other places.

Okay, cool. Well done, guys. Great quarter. Thank you.

Anthony Sorrentino, Sorrentino Metals.

Good morning, everyone. My sympathy to the family and friends of Larry Marek.

Thank you.

Would you go a little further into the details concerning recent exploration starting with Greens Creek at the Deep [200] South area?

Sure. So what we are seeing as we are going downdip on the 200 South is a continuation of what we have seen in previous drilling. We are not seeing indications that the 200 South is finished and in fact, we have an exploration plan that extends out for a number of years continuing to drill downdip on the 200 South. Now that is one part of what we are doing.

The other part is the development necessary to do the infill drilling to move it from the resource category into reserves. And you will see that happen basically by the end of 2012 where there will be this move from resources to reserves.

Okay, then moving on to the Lucky Friday, what are you finding at below the [40/50] level?

Well, it's actually above the [40/50] level is where we are drilling. A few years ago, we drilled in the area between the [4050] and the surface and we confirmed that the mineralization that was mined in the '20s, call it the '20s, 1920s is related to and a continuation of the mineralization we are drilling at the 4900 and below.

So as a result of that, we have gone off the 4050 and have been drilling up above us and what we are finding is not the material on the 30 vein, but we are finding very good material on what we call the intermediate veins and over time, I think if the drilling continues to play out, you will see us develop mine plans around that material.

Okay. And what do you hope to find when you reopen the Equity portal at the San Juan silver joint venture?

What we are looking for there, and this is very exciting, is the ability to have platforms in order to drill year-round on the discovery that we made last year at the intersection of the Equity vein and the amethyst vein and it is very high-grade gold. I mean we have got an intercept of close to 4/10 of an ounce. This is very, very exciting material that a low tonnage could be very impactful given the sort of grade that we have and there is about a mile of ramp that Homestake had put in place and what we are looking to do this summer is to reopen that and determine the condition of that ramp, condition of the ventilation and if we can get in there then we will have the ability to drill year-round there.

Okay, very good. Thank you very much.

(Operator Instructions).

All right, operator if you don't have any other questions, do you have any more?

We do. We do have a question from [Jeffrey Thorpe], [Salman] Capital.

That's great. Thanks. Good morning, Phil and Jim. Congratulations on another good quarter. Pretty simple questions, they sort of revolve around capital allocation. The first one is it appears to me you can redeem your Series B preferred and have you thought about doing that?

The short answer is we have not spent a lot of time considering that. It is relatively small and we did a redemption of that a number of years ago and it was sort of -- that was the opportunity to do the redemption. I guess at some point, maybe we would reconsider it, but I am not envisioning it anytime soon.

Yes, I have a memory of that. Second is have you thought of returning capital to shareholders in the form of dividends or buybacks?

Jeffrey, that is an issue that we talk with the Board every time we have a Board meeting. We have had a number of things that have prevented us from doing anything there. I think once this litigation is behind us, I think it improves the opportunity to do something along those lines and we will certainly revisit it at that point.

Thank you. And then third just a little bit more clarification on conceptually your acquisition possibilities. Have you thought about or is there any idea with respect to buying companies or particular assets or are you indifferent depending on your expected evaluation of risk and return?

I think the fact is most opportunities are going to be in publicly traded or privately held companies. There is very few things I guess that are sitting in other mining companies that you could extract from those companies. But we certainly are open to both and are doing work on both.

Thanks so much.

John Tumazos.

Phil, condolences on the loss of your miner.

Thank you.

Two questions. First, could you describe the seismic detection system at the Lucky Friday? And second, if there is an engineering measure of the strength of support systems could you describe what your standard of practice was? I haven't been underground at Lucky Friday since I think maybe the '80s, but I have a vivid recollection of the core in the Galena having in that era the most extensive seismic detection system imaginable. If there was a 3 Richter event on the other side of the world, they knew it, etc. and what the state-of-the-art is in that regard.

And I guess we have been the cutting edge on that seismic technology going back to the '80s because when you went underground, you went underground on the Lucky Friday vein. That vein has much more seismic events than the Lucky Friday expansion area that we are in, which is a mile away in a different rock type.

So the system that we have has been the cutting edge in the past and we are evaluating whether there is any modifications updates to that that we think would be appropriate.

With respect to your second question, I can't give you what those standards are and of course, it will change as the mining conditions change and obviously it is part of the subject of the investigation that we are conducting. I guess what I can tell you is that we have a long history even in this expansion area -- we have been mining here since '97 and exclusively from this area since 2001. So we have lots of experience here where we can evaluate what the conditions are and the circumstances of this incident.

Thank you.

Chris Lichtenheldt, UBS.

Thanks. Sorry, just a couple quick follow-ups on the derivative contracts. The income statement loss that you reported this quarter, that would be related to do forward sales in future quarters right? They have nothing to do with this quarter, is that right?

Well let me describe our program. There is two components. The first component is protecting base metals price on shipments during a quarter, which will settle in a subsequent quarter and those gains and losses since you have a perfect hedge and that is in an economic sense, not an accounting sense is the gains and losses from changes in provisional pricing are offset by gains and losses in the hedge contract. Those are reported up in the sales number.

The number you see on the face of the income statement below represents future hedging on metals that have not shipped yet, in other words, protecting tomorrow's production and that is the derivative change that you see on the face of the P&L.

Okay, that is great. Thanks. And then just a second question on that, did any positive effects that would have occurred from positive price movements this quarter on provisionally priced metal from last quarter, did your hedge work to completely wash that out and so there was really no effect in your EPS?

Yes, it runs about 95% effectiveness over time. The difference between the two is a few hundred thousand a quarter on the type of revenue that we are seeing.

Okay, I see. So the results are great this quarter and that is because of the timing of sales and higher than average realized metal prices, but that is not because of provisional pricing, really more just timing and sales.

With one exception, Chris and it is in our press release is we do not hedge the provisional portion of precious metals and was I think an $8.4 million pickup on gold and silver that was sold.

Great. Thanks a lot.

I think we have time for one more question.

Steve Butler, Canaccord.

Good morning, guys or afternoon almost now. On slide 15, saw you outlined five of those initiatives and they have said to remained -- to leave us to ask the question if we like on San Sebastian or the Greens Creek ramp or 29 ramp. What are you thinking about in terms of Greens Creek on this 29 ramp and how much could this potentially increase production? I assume we are talking about a new or pre-existing ramp access?

It is pre-existing ramp access. This ramp we are having to evaluate do we just rehabilitate it or do we build a new ramping system. The increase in production comes because of grade being higher, not because we will increase throughput. This east orebody was the original orebody that started the mine and there is lots of high-grade material that was left behind, so we are going back in. We have a design build contract that we are negotiating as we speak and I would expect that, over the next quarter or so, will be put in place and it will probably also include -- the contractor will have the ability to do the 200 South development as well, at least that is what we were hoping we will be able to design.

And so it does two things for us. It is going to allow us to access this higher grade ore and it is going to extend mine life and you will see that reflected next year as we develop the new long-range plan.

Okay, thanks, Phil. And did you say in your address the Lucky Friday mine optimization study potentially looking at 10% to 20% higher throughput if all goes well?

Look, that is my guess, that is unengineered. But certainly when we think about the constraints of the mine, we know it is a lot more than the 375,000 tons. And the reason we know that is, in 2010, we mined 350,000 tons of ore. We mined the most waste that we have ever taken out of the mine because of the mile of the lateral development that we did for the #4 shaft and we had the most men and materials go down into the mine for the construction of that #4 shaft.

So we know that there is more hoisting capacity. We know that -- we think that the constraints are going to be ventilation and are going to be rock mechanics. Interestingly enough, if we do reopen the Star mine, there is the potential for the Star to provide some additional ventilation. And it has been an idea that we have been toying with for some time and that could be very exciting for the ultimate determination of how big this mine could be.

So I guess stay tuned for that. It is probably going to come out in phases. We will probably determine the Lucky Friday on its own and then to the extent we do something on the Star, there might be a second phase to our evaluation of what the Lucky Friday can do.

Okay, thanks, Phil.

All right, thank you very much. Unfortunately, we are going to have to stop the questions there. Melanie Hennessey is available to answer questions should you have any and I appreciate everyone being on the call.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.