Hecla Mining Company (NYSE-HL)

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March 23, 2012 Issue

The Most Powerful Name In Corporate News and Information


Already the Largest Silver Producer in the United States, the Second Largest Zinc Producer and the Third Largest Lead Producer, Hecla Mining Company is Enjoying Higher Metal Prices and Having Some of the Best Years in Their 120 Year History, with More Projects Coming On Line

Company Profile:

Established in 1891 in North Idaho’s Silver Valley, Hecla Mining Company has distinguished itself as a respected precious metals producer with a rich mining history. Hecla is the largest and one the lowest cash cost, primary silver producer in the U.S., with exploration properties and operating mines in four world-class silver mining districts in the U.S. and Mexico. The company’s common stock has been traded on the New York Stock Exchange for over 40 years.

Hecla produces silver from two mines: Greens Creek in Alaska and Lucky Friday in Idaho. In addition to mine site exploration, Hecla has three major exploration projects, Silver Valley in North Idaho, San Juan Silver in Creede, Colorado, and San Sebastian in Durango, Mexico. Hecla has developed a solid asset base with long-life, low-cost mines; district-sized land positions with organic growth opportunities; and an excellent cash position with no debt.

Phillips S. Baker, Jr.

President and CEO

Phillips S. Baker, Jr., has been our Chief Executive Officer since May 2003; President since November 2001; and a director since November 2001. Prior to that, Mr. Baker was our Chief Financial Officer from May 2001 to June 2003; Chief Operating Officer from November 2001 to May 2003; and Vice President from May 2001 to November 2001. Prior to joining us, Mr. Baker served as Vice President and Chief Financial Officer of Battle Mountain Gold Company (a gold mining company) from March 1998 to January 2001. Mr. Baker served as a director of Questar Corporation (a U.S. natural gas-focused exploration and production, interstate pipeline and local distribution company) from February 2004 to June 2010, and has served as a director for QEP Resources, Inc. (a leading independent natural gas and oil exploration and production company) since May 2010.

Precious Metals Mining

Hecla Mining Company
6500 North Mineral Drive, Suite 200
Coeur d’Alene, ID 83815
Phone: 208-769-4100


Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – March 23, 2012

CEOCFO: Mr. Baker, Hecla has a long history, what is the strategy with you at the helm?

Mr. Baker: Since I have been at Hecla, which has been the last ten years and seven of those years have been dedicated to consolidating the land packages that we have. We have dominant land packages where we can not only grow our production, but grow our knowledge base and geology in those districts in order to leverage that knowledge with further discoveries and growth. You can also drive your cost down by having the dominant position of being able to leverage on that growth.

CEOCFO: How has that plan developed got Hecla?

Mr. Baker: It has gone very well. We have 4 districts that we control, and 3 of the 4 are roughly 25 square miles. The 4th one is about 300 square miles. They include Greens Creek, which is a property in Alaska right in the municipality of Juneau, and it is a mine that we acquired the portion that we did not own in 2008. We spent three quarters of a billion dollars and we should get payback on that either this year or next year. That has gone extraordinarily well, as have the other three properties we have.

CEOCFO: What are the unique features about your properties and why did you want positions in these locations?

Mr. Baker: Greens Creek has continually been one of the ten largest silver mines in the world in the last twenty years as well as the lowest cost silver mine. It is among the lowest two or three and we project that continuing for another decade or more. With this large land package that has been virtually unexplored, we see the opportunity to find another deposit like Greens Creek on the property. That has been a great transaction for us and it has been a great property. But, despite having been involved there and the mine being operated for more than 20 years, it is quite short by comparison to the Lucky Friday that started production in 1942. We have controlled the Lucky Friday and owned it since 1958. It sits in this larger land package where there has been a number of mines, probably been 7 or 8 major mines on the 27-square-mile land package that has produced in excess of 350 million ounces of silver. These deposits are very large, very continuous, very predictable once you discover them. Therefore, we are in the process of starting the first surface exploration program in the history of the district and that has been ongoing for the last few years. However, every year we are doing more in that regard and have had some significant discoveries. If you go down to Colorado, the thing that characterize the property we have there, which is in Creede, Colorado, is that it is a mining district that is the largest silver mining district for the state of Colorado and yet is was a very fragmented land package there. Through our partner, we have consolidated that and now own the remaining 30%, which controls the majority of the district and have now taken our partner on for another piece of it and further consolidated it. This is relatively high-grade silver and in some places high-grade gold and other places high-grade base metals. You put that together and you are talking about something that could be quite profitable and we are in the early stages of developing that property. The fourth one is down in Mexico, the San Sebastian property, which is in Durango right on the Zacatecas border. This property is really characterized by its size and just a whole lot of different types of mineralization. We have seen very high-grade mineralization that we actually mined for a period of five years and we have seen indications of things that could be a very large bulk tonnage deposit. Therefore, we are continuing to explore there, we have made a discovery of additional high-grade gold and silver mineralization. We are going to put that together with what we have already discovered and hopefully, bring that mine back into production.

CEOCFO: In addition to dominant position, is there a particular mix of projects that you have looked to achieve, or has it been opportunistic?

Mr. Baker: Fundamentally, it is focused on those four districts and taking what those districts have to offer and that has been the real driver. Having said that, when we look at things that other companies were looking at, we are looking at things that we think we can add value to with our expertise and mining. We are open to both these narrow vein width deposits as well as these big bulk tonnage deposits. We think we can add value to both of those types of projects. So, we are focused very much on growing the production base, because we believe over the long haul, not only will you see high silver prices now, but over the long haul I can see significant demand for silver. Therefore, we are looking for properties that can help us provide that silver that we think is going to be needed.

CEOCFO: What is the silver market today and is the demand growing?

Mr. Baker: Today, the silver market is driven by the investor, and for all the reasons people want to own gold, they also want to own silver. When you hear that we are going to be in a zero interest rate environment in the US for the next few years, it really looks like precious metals are the one few places where you can go and invest in and have it be a strong currency. I am not characterizing the metal as a currency, but it is a form of currency, and all of these other currencies that you can invest in. At the end of the day, it has become a question of government policy and the US policy certainly makes the metals very attractive. In addition to that, over the long haul we are seeing that even today this demand for silver from consumer products that we use or for applications that really improve the quality of life or lower cost of business or provides medical benefits. There are a whole slew of very unique applications that come as a result of the characteristics of the metal. These applications had grown dramatically over the last fifteen years and we see that continuing as well as increased demand from the developing world. In the short term, we think the price of silver will be very good because of its currency characteristics and in the long term, we think it is going to be very good because of its applications for the products we use.

CEOCFO: Is it that silver is a lower cost for many of the applications or is it the only thing that will work?

Mr. Baker: In many cases, it is the only thing that will work, or will work with the ability that it has. Silver is the most reflective metal and the most conductive metal. It has the lowest heat index in moving electricity around and therefore it is a unique metal. It also has these biomedical properties that other metals like copper have, but not nearly to the extent that silver does.

CEOCFO: You mentioned that your costs are low, and I know compared to others they tend to be lower; how do you account for the lower cost and how do you continue to keep the lower cost of producing the silver?

Mr. Baker: It is in part because of the low cost and part because of where the mines are located. We are in a place where you have expert miners and managers and they are in a place where they want to live, and they have lots of experience with it. When you mine a property for ten, twenty, thirty years, you have a lot of time to think about the best ways to do that, so we certainly see that. It is also just a function of the nature of the ore bodies. They are very high grade compared to other ore bodies in the world. Among the highest grade, certainly Greens Creek is probably in the top two or three highest grade silver ore bodies in the world. The Lucky Friday would certainly be in the top ten and with that higher grade, there is just less cost you have to do per ounce that you take out of the ground. That is an inherited benefit when you put those two things together; you have consistent low-cost operations.

CEOCFO: What should be done about the safety and environmental concerns that might surround your projects?

Mr. Baker: Safety is a fundamental first-level issue that you have, as is protecting the environment. Therefore, before you start to do anything, you are looking for how do we do this safely, and how do we do this in a way that protects the environment. We have over the years, had a remarkable safety record. If you look at Lucky Friday, it had been 25 years in 2011, since we had a fatality. At Greens Creek, it has never had a fatality over 22 years that it has been operating. We did have two fatalities in 2011 at the Lucky Friday. That has been an event that we have taken very seriously as to how we improve the way we operate to go another 25 years without a fatality, so we are looking at changes in procedures in the skills that we have in-house to improve things. At the end of the day, we want our workforce to go home safely with no injury whatsoever. With respect to the environment, in both operations we have consistently had very good environmental records. To the extent that there have been any issues, they have been more of a measuring issue of slight exceedences that we have quickly resolved and maintained a record that we have an environmentally safe operation. Greens Creek is a pretty unique place because we actually sit on an island that is in part a national monument for bears. We actually have brown bears all over our property, so we have to work and be aware of those bears and make sure that we do not do any harm to them. And, we have done that effectively for the last twenty two years.

CEOCFO: What is the financial picture like at Hecla today?

Mr. Baker: Hecla is enjoying these higher metals prices and as a result is having some of the best years in its 120-year history. In fact, the best years, and we do not see that changing any. Because of the growth that we see in production, we believe that can improve. We do know that 2012 will be a year where our production will decline, because of the closure that we have of our Silver Shaft at the Lucky Friday. We need to clean it down, so we are in the planning process, and we will be starting that in the next two weeks. We will not only clean the shaft down, but we are hoping we will improve the operational capabilities of the shaft, which will allow the mine to operate even better. We think that it will operate probably over the next twenty or thirty years.

CEOCFO: Are you paying a dividend?

Mr. Baker: We are! We pay a common stock dividend that is linked to the silver price. If the price of silver is above $30 then we will pay .4 cents per share per annum. If it averages that each quarter, for example, if it averages $35 then we will pay on an annualized basis of 0.08 cents. We have one of the higher dividend yields of the silver companies and even among the gold companies. We think it is important to pay this dividend as an alternative for investors to just buying the metal. Therefore, if they buy Hecla stock, they get not only the growth that we have in our production and our exploration discovering new ore, but they also get paid a dividend.

CEOCFO: What is it that people do not understand about silver and the mining process that they should understand when looking for an investment?

Mr. Baker: As I mentioned before, it is all of these new industrial uses. I joined Hecla in 2001 and when I joined the company, photographic demand had declined almost 50%. Since that time, photographic demand has declined about 80% and at that time people thought that the best days of silver were behind us, but what they did not realize were all these new uses. For example, there is something called Radio Frequency Identification Tags, which used in the inventorying process. At the moment, they are used in big pallets. They are put on a pallet, because they operate without needing a power source. They just get close enough to a reader device, probably about six feet, and they will send information to that reader without a power source. It is just a radio frequency that causes that data electron in the RFID tag to be transmitted. This RFID technology is moving into the consumer products area. Stores such as Walmart are requiring their vendors to put those tags on every product by 2014. What that is going to mean is there is the potential for every product to have it and for you to walk out of Walmart without having to scan anything. You just take your goods up to some place and move them out of your basket into a bag. You pay your money and you are out the door. It would be a huge boon for silver to see this technology utilized in that way. Whether that happens or not, clearly what is happening is these new uses are coming to the fore. I have a Tablet, which was not mainstream four years ago. It has been a brand new device and that has somewhere between a gram and quarter gram of silver. So, it is all of those new unique uses for silver that I do not think people will recognize. It will take people by surprise, the ultimate consumption of silver that we see in these products.

CEOCFO: Do you do much investor outreach; is that a focus for you as CEO?

Mr. Baker: Yes, you do as CEO, have to go talk to investors and shareholders, which we are happy to do, because we like telling people about what Hecla is doing and about silver. It is a fun part of the job frankly, because it is so exciting where the company is going, and where silver is going.

CEOCFO: Addressing potential investors; where is Hecla Mining going; where is silver going; and why pay attention now?

Mr. Baker: The case for silver is this demand for silver that you are going to continue to see for investment purposes. The ETF silver coins are a relatively new product that is demanding silver and silver coins. We have reached all-time highs over the last few years and none of that is going to abate with the economic environment that we are in. That leads into a company like Hecla in particularly Hecla whose cost is so low. Our costs over the last five years have been between $3 and $4 an ounce to as low as negative $2 to $3 an ounce. Therefore, the margins that our business generates are extraordinary. It has been roughly the price of silver. So, to the extent silver is at $30 we have $30 cash margin for every ounce of silver produced. That is a huge advantage our business has over the gold business for example. With that growth that we see in margins with higher prices, what we are doing is investing in our mines, our properties, which are going to allow production to grow. We would anticipate over the next five years to see that production grow by 50%. Therefore, you have not just great cash flow generating operations, you have growth, and you have a dividend that is able to come back to shareholders. So, we think it is a pretty attractive investment.

CEOCFO: Final thoughts, what should people remember most about Hecla Mining?

Mr. Baker: When people think about Hecla, they think about our two operating properties. They do not really think about these projects that we have that are not yet in production and those projects, the Star Mine, which is in Idaho, and the Bulldog Mine, which is in Colorado,  and then the San Sebastian in Mexico. One or more of these will be in production in the next five years and we think these are going to be similar sorts of assets to what we have today, which are the long lived, low-cost mines. In the course of the next five or ten years probably all three of these properties will be back into production. All of that will be in the US or in Mexico, which is a unique place to be. We are already the largest silver producer in the US, the second largest zinc producer and the third largest lead producer. These projects that we have coming on line will just enhance that industry leading position.


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We are already the largest silver producer in the US, the second largest zinc producer and the third largest lead producer. These projects that we have coming on line will just enhance that industry leading position. - Phillips S. Baker Jr.



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