Hecla Mining Co (HL) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Hecla Mining Company earnings conference call. My name is Kendall and I'll be your operator for today. At this time, all participants are in listen-only mode. Later we'll conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Ms. Melanie Hennessey, Vice President of Investor Relations. Please proceed.

Thank you, Kendall. Welcome, everyone, and thank you for joining us for Hecla's second-quarter financial and operations results. Our news release, which was issued this morning before market opened along with the release on the approval of Lucky Friday's number 4 Shaft and pre-development update issued on Monday, along with the presentation are available on Hecla's website. On today's call we have Phil Baker, Hecla's President and CEO, Jim Sabala, Senior Vice President and CFO, and Dean McDonald, Vice President Exploration.

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. They involve a number of risks that could cause results to differ from projections. In addition, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of such terms as measured, indicated and proved resources and we urge you to consider the disclosures that we make in our SEC filings. With that I have the great pleasure of introducing Phil Baker, Hecla's President and CEO. Mr. Baker?

Thanks, Melanie. Hello, everyone, and thanks for joining the call. I'm going to provide a brief overview of the second-quarter results, Jim will speak about them in a bit more detail and then I'll provide an update on the 4 Shaft of the Lucky Friday mine and Dean's going to talk about the pre-development and the exploration initiatives. After that we'll open the floor for questions.

But before I speak of the quarter's financial and operational results, I want to provide an update on the Coeur d'Alene Basin environmental litigation. We expect that the Consent Decree will be approved by the court before the end of the third quarter. The judge in fact has set a hearing for September 8, and we expect the Consent Decree to be finalized shortly after that.

The initial payment of $167 million plus $1.1 million in pre-lodging interest will be due 30 days after the entry of the Consent Decree, so we expect to make that payment in the fourth quarter. The balance of payments are in the amount of $96.4 million and will be distributed over a 3-year period.

So if you'll go to slide 4 now, I'll talk about the quarterly results. And it was a good quarter for us with solid financial and operating results, sales of $118 million and a doubling of our net income compared to the same period last year. Silver production was 2.3 million ounces, costs were $0.52 per ounce which remain among the lowest in the world, and realized silver prices averaged $35 an ounce; almost all of it is margin.

Cash flow from operations of $66 million increased our cash position to $377 million. And with that, Jim, let me ask you to continue talking about our financial results.

Thank you, Phil. Strength in the metals prices continued across all 4 metals that we produced this quarter resulting in good financial performance. On slide 5 we present realized metals prices for the quarter. You can see that our realized silver price is up by 89%, realized gold price is up by 24% over the second quarter in 2010. Zinc and lead prices in the first quarter were also up by 15% and 24% respectively over the same period in 2010.

Consequently on slide 6 you can see that we continue to experience among the lowest cash costs per ounce in the industry achieving excellent margins. Our per ounce cash costs were $0.52 for the second quarter of 2011. Cash costs are up compared to the same period last year due to higher production costs, treatment costs, mine license tax and employee profit sharing which are due to higher metals prices.

However, we're glad to see those costs go up a little bit because the benefits of these higher prices far outstrip the costs associated therewith. And our production of $35.28 per ounce of silver produced was up from $20.78 per ounce in the second quarter of 2010. Based on our current 2011 production guidance and cost estimates and assuming recent metals prices for the second half of this year, total cash cost net of byproduct credits are expected to be about $1 per ounce for the year 2011.

Moving to slide 7, net income applicable to shareholders more than doubled to $33.2 million for the second quarter of 2011 compared to $13.7 million for the same period of 2010. Net income per common basic share was $0.12 in the second quarter of 2011 compared to $0.06 in the same period of 2010.

On a per share number, there are a couple of important things to note. First, during the quarter there was a $7.8 million provisional price adjustment for the change in precious metals settlements during the quarter. And second, we had a buildup in concentrate inventory that pushed $6.5 million of sales into future periods. Together these items impacted earnings by approximately $0.03 per share.

Also impacting earnings is the tax provision of $19.6 million for the quarter and $43.1 million for the 6 months. But while this GAAP tax provision will continue at approximately a 36% rate we expect cash taxes substantially less at approximately $12 million for the full year.

On slide 8 we see the benefit of having among the lowest costs in the industry and very strong metals prices. Hecla reported operating cash flow of $66.3 million in the second quarter of 2011 representing a 16% increase over that reported in the second quarter of 2010. This 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 $377 million. The Company has no significant debt outstanding and a $60 million undrawn line of credit available. Therefore total liquidity available for investment stands at $437 million which we expect will be sufficient to continue the capital projects and pre-development initiatives that we have on our plate, exploration expenditures and to fully fund the environmental settlement previously discussed. And with that I'd like to turn the call back to Phil.

Okay, I want to comment on silver given the dramatic move that we've seen in gold. And what did gold do? If you look at slide 10, it shows gold and silver since the debt ceiling was -- I guess a day or 2 before the debt ceiling issue was resolved.

And what's happened since then? Well we saw gold has increased almost $100, or 7%; silver in fact has declined from these levels. That disconnect between the two will not continue. We've seen it occur dramatically over the 10 years where the gold and silver ratio has gone from a high of 80 to a low of 31 earlier this year. And as interest in gold increases, small investor interest in silver will increase. And basically it says at $1,700 gold, who can really afford an ounce of gold among the small investors?

So from an investment standpoint, as the price of gold goes up the gold/silver ratio over time will go down. Basically gold is a wholesale institutional and central bank sort of investment; silver is a retail investment. So if you're convinced that gold will continue to have strength, then we believe silver will follow.

And if you think that industrial metals have hit a rough spot and will strengthen, then silver will be supported by that as well. However, I think in the short term, short run as it's been for the past 2 years, price is set by investment demand with the support of industrial demand. The bottom line is that I expect the silver price to rise even more dramatically than gold in the short term.

I now would like to talk about the potential given that growth in the price of silver. I'd like to talk about the potential of our growth in silver production by 50% to 60% over the next 5 years with the 4 Shaft project, with its completion in 2014, and the new pre-development initiatives at our 4 properties. So go to slide 11.

We've made significant progress on a number of pre-development initiatives with the current assets on hand and see tremendous potential to grow silver production to 15 million ounces by 2016, adding value at minimal cost and minimal risk. The production growth initiatives are separated into 3 categories, construction, scoping studies and exploration. Obtaining production growth through construction is primarily the 4 Shaft project although there are things that we're doing at Greens Creek.

The scoping studies are broken into 2 categories, potential mine reopening and mine development. The mining reopening studies include 3 mines, the Star Mine, Bulldog and Equity, that have all operated in the last 25 years and were shut down due to a silver price below $10. The Hugh Zone is a deeper extension in the past producing Francine vein at the San Sebastian project. The mine development initiatives are projects that can increase production from the Lucky Friday and Greens Creek.

And then finally you have the exploration programs that have been expanded at all of our properties.

Now if you go to slide 12, you can see what we expect the 4 Shaft and these pre-development projects will do to our production profile over the next 5 years. We've had great growth from 2006 to 2010 primarily as a result of acquiring Greens Creek. From 2011 to 2016 we expect a plus 10% compounded annual growth rate from assets that we already have in hand. This 60% increase in production is relatively low risk on all measures, operating risk, capital risk, currency risk, political risk and tax risk.

And the first project is the 4 Shaft which we've been advancing since late 2009. And so if you look at slide 13, this is a -- gives a description of a project that is projected to increase production by 60% at the Lucky Friday due to higher grades with low cost per ounce and will allow us to mine through 2030 and probably longer. We received final Board approval for the completion of the project this quarter.

Lucky Friday started in 1942 and I'm convinced it will operate more than a century. Total project cost is estimated to be $200 million with a completion date expected in the second half of 2014. And we've spent about $70 million on this project so far.

Slide 14 shows the status of the major milestones. With the detailed design and engineering now complete, along with 78% of major procurement items ordered or installed which brings the total project to 38% complete, the riskiest part of the development of this project has been completed.

On slide 15, we've provided some key estimated production metrics, for the Lucky Friday once the 4 Shaft comes into production with a ramp-up period from 2014 to 2016. Noteworthy is the expected increase in silver grade from 10.4 to 14 ounces per ton. We remain on time and budget for the 4 Shaft.

In addition to the projected 60% production growth at the Lucky Friday mine, we've also initiated a mine optimization study to understand the limits of the mine infrastructure that we think could further increase silver production. Now that study should be finalized by year end. With that I'll turn the call over to Dean to talk about the other projects that we have.

Thank you, Phil. As outlined in slide 16, Hecla has initiated the rehabilitation of the Star 2000 Drift to access the past producing Star Morning Mine in the Silver Valley and provide a number of drill platforms to expand resource. With access from this level, studies show that dewatering the Star provides access to lower historic reserves at the Star Mine and ultimately, via a new drift, could connect to the Lucky Friday extension. This drift would be on the 4900 level at the Lucky Friday extension and would provide ventilation and an exploration platform between the 2 mines.

We can see in slide 17, drilling from multiple drill stations on the Star 2000 level would allow Hecla to re-establish and expand the upper Star Mine resources and continue to expand the Noonday resources where current drilling is defining a new silver-lead rich area above the water levels of the mine. We believe there is potential of 30 million ounces of silver resources above this water table.

Below the water table is the un-booked reserve the mine had at closure. We will be examining this opportunity as well.

At the San Juan Silver joint venture in Colorado, we have successfully reopened the portal to the Equity Mine. As you can see from the pictures in slide 18, the underground infrastructure is in excellent condition and with reestablished ventilation, air and power we can be drilling from a series of underground platforms in the fourth quarter of this year.

For the Bulldog Mine a program (technical difficulty) developed to construct surface support infrastructure to regain access to the Bulldog Mine in the fourth quarter. Once a new portal and ramp is in place, we could expand the Bulldog resource beyond the 40 million ounces of silver currently defined with additional underground drilling. Further work would establish a mine plan to convert those resources to reserves.

The plan view of the Equity Mine (technical difficulty) shows the location of the underground ramps and drifts and the proposed drilling that is scheduled to start in the fourth quarter to refine past resources and evaluate the exploration potential along both the Equity and Amethyst vein trends. Once reserves have been defined, the infrastructure is in place to re-establish production.

The cross-sectional view of the Equity Mine in slide 20 shows the 1200 vertical feet of the Equity ramp system and the drilling that could define an expanded resource along the Equity structure. Drill face from last year's high-grade surface hole WE1031 shows that there is at least 2000 feet of up-dip potential from that intersection to surface.

In Mexico as shown in slide 21, we are focusing on a revised scoping study of the Hugh Zone, which is the down-dip extension of the past producing Francine vein. Once a resource at the Andrea vein has been refined, we will incorporate those results into the Hugh Zone study by the end of the year. Concurrently, we will be completing both infill and exploration drilling of the Andrea vein that is within 6 kilometers of the Hugh Zone.

Longitudinal of the Andrea vein shown in slide 22 shows contours based on the gold equivalent by horizontal width. The diagram represent a vein that is over 1.7 kilometers long with 2 high-grade areas that can still be expanded. Drilling a long strike should establish if there are other high-grade pods along this regional constructor.

And with that, I will pass you back to Phil for further remarks.

Okay, finally slide 23 shows we have maintained our guidance with silver production between 9 million and 10 million ounces. Cash cost guidance for 2011 will be approximately $1 per ounce at current metals prices primarily as a result of the higher metals prices, those costs that Jim talked about.

We expect our capital investments to increase from $100 million to $115 million as we accelerate a number of projects at Greens Creek. In addition exploration is expected to increase from $27 million to $32 million due to the establishment of these pre-development initiatives and the expansion of the exploration programs primarily in Mexico.

And one last comment, our 2 operating mines are low cost long-lived operating assets that generate cash flow now. We think they will, along with the pre-development properties, generate 50% to 60% more production by 2016. As I said earlier that's low-risk growth over the next 5 years.

And we see these assets continuing to grow over the rest of the decade. I mean the growth is not going to stop in 2016 with these assets. When we look at our long-range plans, we see these assets growing even beyond that. So with that, operator, let me open the line for questions.

(Operator Instructions) John Bridges with JPMorgan.

Good morning, Phil, everybody.

Hi, John.

You have a high quality issue nowadays with all this money that's coming at you, and I just wondered how you've been thinking about the relative choices of expanding production, increasing dividends, buybacks, all these other different things just to come up with the right mix, what's your thought on that?

Well look, we are considering all of those things. The first thing, of course, is taking advantage of the assets that we have in Hecla and growing those assets. These are things that sat dormant for some time; and in a price environment that's higher than $20, there's no reason for the assets to sit dormant.

So we're going to move those things forward as quickly as we can because they all have, and particularly the Star and the San Juan joint venture assets, long-term potential. So you're going to see us move those as quickly as we can. But at the same time we will consider what the appropriate dividend policy and if there's any other actions that we should take to deliver value to shareholders.

We think growth, we think strong production, but we think dividends, stock buybacks all can be part of the mix of a value delivering package for shareholders. And where those are going to come out I don't know, John. We'll be sitting down with our Board over the course of the next few weeks and months and we'll make some determination.

Will the introduction of Star Morning bring down your operating costs in the Silver Valley?

It's too early to say. We're still in the early days of that. If you think about it, we just reinitiated the activities at the Star Morning in the second quarter. We're already -- I mean this has actually moved much faster at all of our properties than we were thinking a quarter ago. So we're very pleased with where they're going, but having said that we don't know what the cost structure will be for these assets when they come back into production.

Okay.

But they'll be good. Look, they'll -- you've got the -- particularly something like the Star Morning where you have all the other activities that we're already doing in the Silver Valley, this will just be additive to that, so I can't imagine it would move costs too much in any direction. But it certainly won't push our costs up in any major way.

Okay. Congratulations on the environmental litigation, that is a great step. And then I just wondered; I see silver is particularly weak this morning, I just wondered if you had any great insights as to --?

Unfortunately, I don't. We've been trying to get a sense of that. Because it's not only weak relative to gold, it's weak relative to the base metals. I guess the only thing I would say is that, over the long term, we've got to expect silver to trade with gold. So I think there's a huge opportunity for silver.

Yes. Okay, well done, guys. Good luck, thank you.

Thanks, John.

Wayne Atwell with Rodman & Renshaw.

Thank you and congratulations on a good quarter.

Hi, Wayne, long time no speak.

Yes, yes, it's been a while. You're in great shape, you have a lot on your plate, a lot to do. What's the thought internally about M&A? You're in pretty good shape compared to some of your peers, any thoughts on maybe scooping up some asset that might be undervalued?

Look, we have a very active M&A program. Don Poirier who, I think you know, heads that up; and we're looking for opportunities that are both strategic and/or opportunistic. And so we'll be looking for those things and give us a call if you see something we should be considering.

Obviously you can't give us any names, but can you sort of handicap, you're really interested, it's sort of back burner, there's something imminent, can you give us any kind of a heads-up without violating any confidences?

Yes, this is something we'll have more conversations with our Board about, but our focus is on certain countries in the Western Hemisphere. We don't think we can be everywhere. There is more countries that we're doing things on silver than on gold, but we are -- still have an interest in gold because we think we bring a unique skill set for some underground mining operations.

So we're limiting our gold evaluations primarily to underground opportunities. Silver, it's open in terms of the mining method and it's open with respect to a few countries. So, we have a focus and we think we bring a lot of value to the table with the US assets that we have that can be balanced with the assets in some other country.

So which countries, that'd be US, Mexico, Canada?

Well certainly for gold it's the US and Canada. For silver, we're still working through with the Board; but clearly the countries that produce lots of silver, Mexico, Peru, would be at the top of the list and then there's a number of others. A handful of others, I guess.

Great, thank you.

Sure, Wayne.

Anthony Sorrentino with Sorrentino Metals.

Hello, everyone.

Hi, Anthony.

Hi. You had said that, in the press release that -- well it was mentioned in the press release that you found 2 high-grade vein intercepts at the Silver Fault of the Lucky Friday Mine. Would you go into further detail as to that find and what the significance of it might be?

Yes, I'm going to let Dean take that, but just to put into context, we have been drilling and wanting to get across the Silver Fault to the west of where we have the current reserve and resource for the Lucky Friday. And so we finally have gotten some holes. We still haven't reached the target that we're trying to get to but we have finally gotten some holes across that Silver Fault and it has been some interesting results. Dean, do you want to expand on that?

Sure, Phil, I'll follow up. Anthony, as you probably know, the Silver Fault's really defined the western extent of our reserves and resources at the Lucky Friday. And so the drilling that Phil mentioned, what's it's done is it's crossed the Star Fault, and what we now know is that the Star Fault is in fact 3 different faults.

So you go through the first fault, you go through a zone of -- or a block of undeformed rock; you hit another fault, another block of rock; and then you go what we believe is to the other side of the Silver Fault. Those 2 blocks that I mentioned where we've intersected, both of those blocks between the fault splays contain what we believe are the 30 and the 50 vein. I suspect with further drilling we'll find additional veins there.

But once beyond those faults, we're now in very intense alteration west of the Silver Fault. We've seen very weak mineralization at this point but, frankly, we had to stop the program simply because the drills couldn't go any further. But we're very encouraged, both by finding mineralization and very good grade mineralization in these fault block areas.

But the indications are that we're going to see some very strong mineralization west of the Silver Fault. And so we're currently putting daughter holes off of those original holes to see if we can define both the dimensions of the blocks that I described but also to try and gain some information on the mineralization west of those Silver Fault splays.

And the dimensions are important because if they are what we think they might be then that area could be minable itself. So that is an important bit of information that we will be looking for.

All right, and continuing at Lucky Friday, would you intend to expand the capacity of the mill there?

Yes, so this mine optimization study that we're doing is being done because all of the economics, everything we've done in evaluating the 4 Shaft and making the decision to go forward with the 4 Shaft, basically did it with what we're currently producing, what we're currently able to run through the mine with just a little bit more; I think 25,000 tons a year more.

So what we have -- what we're doing with this optimization study is we're saying don't limit what the mine can do by the mill, let's look at what the limitations are. Is it ventilation, is it hoisting, is it logistics, rock mechanics, what is it that is the limit on how fast, how many tons we can mine per day, per year at the Lucky Friday?

And so, we will end of the year have that study complete, so early next year we'll be giving some guidance on where -- what sort of increase we might make in the mill. We certainly anticipate that there will be an increase, but we'll need to wait for the study to come to a conclusion.

All right.

And that, of course, will not only increase production but, because our fixed costs are such a large component of our total cost, that will drive down cash costs even more from what is going to be an attractive cash cost mine.

Right, lower the cost per unit.

Yes.

All right and you had said that you're increasing your exploration spending this year from your original expectation of $25 million to $32 million. Would you give a breakdown of that by property?

Yes, it is $27 million to $32 million is the increase, and Dean or Jim can one of you guys give the breakdown by property?

Sure.

Yes.

Whoever is ready.

I'll go ahead and do that. For the full year at the Lucky Friday if you take a look at it -- and I'll break this into 2 categories, one will be pre-development and the second one will be exploration, there's a fine line between the 2 but they'd all be expensed.

At the Lucky Friday, it'll be about $1.2 million; generative work around Silver Valley and the other property is about $5 million. At Greens Creek a total of about $9.7 million; Mexico $5.8 million; San Juan $4.8 million; and others generative work about $2.6 million. In addition, in terms of pre-development budgets now, it's primarily the Star work which is about $2.3 million, and work done in Colorado which is about $1.1 million.

All right, very good. Okay, thank you very much.

Thanks, Anthony.

You're welcome.

David Peirce with RBC Wealth Management.

Good afternoon, Phil, Dean, thanks for your thorough presentation.

Hi, David.

Hi. How -- I know that a number of firms are using on average $35 an ounce for silver in 2012. And then it seems to decline $27.50 in 2013, $25 in 2014, $22.50 in 2015 and $20 ad infinitum, it seems like, afterwards. How realistic do you feel these assumptions are and what internal estimates are you using going forward?

Well, David, I guess I'll answer the last part first, and that is we use a lot of different prices. We want to develop projects that can capture the upside, but we also want projects that we will be able to operate in the long term.

So there are possibly -- some things that we will do will be for the purpose of capturing that upside, but the bulk of our activity, the bulk of the development, the bulk of the M&A work that we do is to protect on the downside.

With respect to where -- assumptions that people make on silver, it really relates back to some comments I made in the first-quarter call, where the market does not yet understand the change, the systemic change that has happened with silver on the industrial side of things. And, yes, the price of silver is being driven in the last few years and I would expect the next few years by investment demand. In the long term, it will also have an ever-growing portion of demand coming from the industrial side of things.

And that's basically all the new uses that you see. If you think about the silver voltaic cells, the solar panel use, I think in 2004, it was about 4 million ounces of silver; in 2010, I think the consumption was 40 million ounces of silver. And it's an ever-growing amount of silver that's going into that application. And it's -- there's a whole series of new applications that didn't even exist 5, 6 years ago.

So when I look at people's long-term price assumptions, I don't think they are factoring in all of the new uses. Nor are they factoring in the fact that the consumption rates for silver in the developing world are going to increase, and they're going to approach what we are consuming in the Western world. And I don't remember off hand how much silver is consumed per annum in a developed country versus an undeveloped country, but it is substantial difference.

So I'm quite optimistic in the long term for this consumption of silver for these industrial uses.

Okay. And under what circumstances, I guess, would you -- I know that a lot of companies spent a lot of money un-hedging or de-hedging, but is there any feel for a hedge book at this point for yourself given just the sheer volatility of it and the scope and dimensions of the projects that you have to finance going forward?

Well, the way we're looking at this is doing everything we can to maintain exposure to the precious metals and riding with that volatility and hedging off base metals exposure. So we put in place, I guess about a year now, a program to hedge the base metals; and effectively what we're doing is just giving ourselves a trailing average on the metals price. So it gives us a bit of certainty on that stream of revenue which allows us to cover a large portion, if not all of our cost, operating costs and, in some cases, at least some portion of capital.

Okay, great. Thank you.

Sure.

[Greg Rybka] with [Foster and Foster].

Hi, guys, how are you doing?

Hi, Greg.

Couple quick questions, to start off could you just expatiate a little on the margin, increased margin costs for the quarter?

So our -- why our cash costs per ounce increased?

Yes, exactly.

Yes, it is a function of certain costs -- for the most part, it's certain costs that are tied directly to the price of silver. 2 biggest ones would be our treatment and refining; a portion of our silver is a -- goes to the refiner as a payment for that refining charge and so, as the silver price goes up, the cost of that refining increases accordingly.

The other -- another one that's not related to the silver price, is there was low precipitation in Southeastern Alaska --

Yes, I see that.

And so we were using diesel power rather than hydro. So those would be 2 of the bigger things.

Are you hedging any of your diesel exposure?

We're not because we -- the prediction of that is quite difficult.

Right, of course.

We just don't know when we're going to have the hydro and when we're not with any specificity.

Fair enough, well thanks a lot.

Sure thing, Greg.

Brian Quast with CIBC.

Hi, guys just a couple --

Hi, Brian,

Good to talk to you again. Just a couple of quick things, I mean it strikes me that at these silver prices, drilling for silver in the Silver Valley is somewhat akin to shooting fish in a barrel. What I'm trying to get to here is that you have some small plans to increase your tonnage at the Lucky Friday.

Could you tell us a little bit more about the infrastructure in the Valley that you control and could perhaps put back into production in terms of increasing tonnage? Because it sounds like you're going to bring the Star Mine ore back to the Lucky Friday and if you -- I mean I know you're doing the mine plan with the view of removing the mill bottleneck. But if the mill bottleneck remains, what can be done about that?

Look, it's early days, Brian, on all of that, but we do have the largest land package in the Silver Valley. We have a land package that has had a tremendous amount of production over the years. The Star Mine operated 90 years, second largest tonnage mine in the Valley. Lucky Friday is going to operate 100 years.

So what we're looking at is, is there the way to bring -- or should we have exploration success and, I'm not sure how easy it will be, but I think we'll have success over time. Can we bring feed to a centralized mill? That is the sort of long-term vision that we have for the Silver Valley.

We're not there yet in terms of other properties, but we are with respect to Lucky Friday doing this optimization study. And I would expect, by the end of the year, second quarter of next year, that we will not only have completed the optimization study but we will be starting to consider how we increase production through that mill when the shaft is completed.

And so that's really the linchpin. And then the work that we're doing, the scoping work that we're doing at the Star, will result in further exploration above the water table and then probably the dewatering of the Star. And with that will come a connecting of the Star to the Lucky Friday and a connection to our mill there.

But it's just early days, Brian. And Dean, do you want to add anything to my comments?

Just some comments in terms of the exploration potential. Certainly I've talked briefly about the Star. The Noonday structure, which is a parallel structure to the Star, we've identified certainly zinc rich mineralization, but our recent drilling's suggesting that there's a structure that is more typically high-grade lead silver.

We are working on some very preliminary work on the Morning which was a major producer and then further to the north the Standard mine and others where we'll begin surface drilling to define where that mineralization goes. So there's lots of opportunities to find additional ore in the Valley and so we're in that process now.

A centralized mill probably makes a lot of sense. But, as Phil mentioned, that's in the hands of people doing that study now.

Because like I said, I mean I could pretty much take exploration as read as having success, with the difference in silver prices and the amount of mineralization you've got down there. What I was trying to get to was what sort of timelines can we expect in terms of perhaps getting a centralized mill? Are there tailings dams that are permittable or re-permittable that can be expanded to handle extra tonnages?

That type of thing, how -- if we take the exploration success as read or however you want to put it, how can we convert that additional tonnage into revenue for you guys?

Yes, look, I think it's a 4 or 5 year process, that's why we're talking about this 50% increase, 60% increase in production by 2016. It's -- we are at the early stages of this, so, I don't want to oversell it. But we're very enthusiastic, very confident that we're going to find a way to do exactly what you're saying.

We're just not in a position yet, Brian, to lay out timelines for that. I'm hopeful that we will be, starting next year.

All right, thanks a lot, guys.

Okay, thank you, Brian.

Andrew Kaip with BMO Capital Markets.

Good morning, Phil.

Hi, Andrew.

Hi. Look, just following up on Brian's question, I mean when you're talking about a centralized mill, I guess are we talking about a new milling facility or is that something that you can potentially expand your existing?

Look, it just depends on the tonnage that we're talking about.

All right. And then you indicated that the Star was the second largest tonnage mine in the Valley. Can you give us a sense of what that throughput rate was historically?

It wasn't terribly high. Do you remember, Dean, what it was because I don't know off hand, but --?

My recollection is that it was in 600 tons a day. It was also part of the Morning complex; and probably combined you're looking at 1,000 to 1,200 tons a day from those facilities.

Okay, and then just one further question regarding the increase in costs and, particularly, your treatment charges. Can you give us a sense of what percentage of participation these smelters that you deliver to take on silver, on let's say an incremental ounce of silver?

Jim, do you have that number?

Well I can just give you a feel for where it was on a per ounce basis.

Sure.

(Multiple speakers) quarter versus last quarter and it was -- it depends on the metal that is the primary, or the product that is the primary production, zinc or lead, because they're treated a little differently. But for example, at Greens Creek on a per ounce basis it was up $4.28 from 2Q last year and at Lucky Friday it was up about $2.80.

And that's on a per ounce or a per ton?

Per ounce.

Per ounce, okay; and that was over -- can you give me the time frame that was over again?

That's Q2 of this year versus Q2 of last year. And if you want to reflect on it a bit more, I'd refer you to our '34 Act document which has a Reg G reconciliation in it. And in that it lays out treatment and refining to get to a cash cost per ounce.

All right, thanks very much.

Thank you, Andrew.

[Thomas Adams] with [International Management Advisors].

Phil, Tom Adams, I met you briefly in San Francisco when you made a speech at the Money Conference there.

Hi, Tom.

I wanted to get some specifics about this payment of the environmental litigation settlement. It looks like you're going to pay $167 million in cash initially within 30 days of the Consent Decree, and then it says some of it will be cash or Hecla stock. Can you define that and let us know how it's going to affect your excellent current cash position by the end of the year?

Yes, Tom, our plans are to make payments in cash. When we struck the deal, we did not want to be in a position where we had to make a payment and didn't have enough cash. So we do -- we have adequate resources so we will pay, make all of those payments in cash is what we're anticipating, planning to do.

So on a pro forma basis, if you look at our quarter-end cash position, if we make -- when we make that $167 million payment, it would reduce our cash position down to $210 million or so, which we will continue to put to work on the 4 Shaft and all these pre-development projects that we have. And then the remaining portion will be paid out over 3 years. So those payments we -- are to be paid in cash, the way the agreement works. Tom, are you still there?

Yes, I am. Thank you very much.

All right, thank you.

Chris Lichtenheldt with UBS Securities.

Hello, everyone.

Hi, Chris.

Just 1 more question on the Valley if you don't mind. On something like Star Morning, if you end up doing the work and it turns out that it is -- continues to be really a base metal project, would you consider looking at it as a standalone and potentially spinning it out to help fund further growth in the precious metals? Or do you do get the sense it may only work best as an integrated project, part of a centralized mill as you've discussed?

Yes, I think it's likely to be the latter. Having said that, though, we're open to whatever would make the most sense. We'll certainly consider other milling options, as well, and we're not locked in. But I will say that it's pretty compelling to apply the fixed cost that you have over the Lucky Friday -- at the lucky Friday combined with other things; makes a lot of sense to try to do that.

Right. Okay, thanks.

Thank you, Chris.

Ladies and gentlemen, that concludes our question-and-answer session of today's call. I would now like to turn the call back over to Philip Baker for closing remarks.

I appreciate everyone coming on the call. It was a good quarter for us. Obviously we're very excited about these pre-development initiatives that we started earlier this year and they're progressing very rapidly. And we'll keep you informed as we go forward with that, plus the 4 Shaft and the normal exploration and other things that we've been doing. So, thanks very much for joining us. Bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.