Hecla Mining Company Dated, June 20, 2005

10-K/A 1 hecla052738_10ka-1.htm Hecla Mining Company Dated, June 20, 2005

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A-1

Annual report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

Commission file no.

1-8491

HECLA MINING COMPANY

(Exact name of registrant as specified in its charter)

Delaware		82-0126240
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6500 N. Mineral Drive, Suite 200 Coeur d’Alene, Idaho		83815-9408
(Address of principal executive offices)		(Zip Code)

		208-769-4100
		(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, par value $0.25 per share Preferred Share Purchase Rights for Series A Junior Participating Preferred Stock, par value $0.25 per share Series B Cumulative Convertible Preferred Stock, par value $0.25 per share	) ) ) ) ) ) ) ) )	Name of each exchange on which registered New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes x. No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A-1 or any amendment to this Form 10-K/A-1. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x. No o.

The aggregate market value of the Registrant’s voting Common Stock held by nonaffiliates was $670,128,486 as of June 30, 2004. There were 118,271,587 shares of the Registrant’s Common Stock outstanding as of June 30, 2004, and 118,393,842 shares as of March 10, 2005.

Documents incorporated by reference herein:

To the extent herein specifically referenced in Part III, the information contained in the Proxy Statement for the 2005 Annual Meeting of Shareholders of the Registrant, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the Registrant’s 2004 fiscal year is incorporated herein by reference. See Part III.

TABLE OF CONTENTS

Section	Page No

Special Note on Forward Looking Statements	1

Part I

Item 1. Business and Item 2. Properties	1

Products and Segments	4
Employees	5
Available Information	6
Risk Factors	6
Glossary of Certain Terms	20
Operating Properties	23
La Camorra Unit	23
-La Camorra Mine	24
-Block B	27
-Custom Milling Business	30
San Sebastian Unit	31
Greens Creek Unit	35
Lucky Friday Unit	39
Exploration	41
Hollister Development Block	42
Noche Buena	44
Discontinued Properties	44
Idle Properties	44
Grouse Creek Mine	44
Republic Mine	45

Item 3. Legal Proceedings	46

Item 4. Submission of Matters to a Vote of Security Holders	46

Part II

Item 5. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholders Matters	47

Item 6. Selected Financial Data	50

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	52

Overview	52
Results of Operations	56
2004 Compared to 2003	56
Mexico Segment	56
United States Segment	57
-Greens Creek	57
-Lucky Friday	57
Venezuelan Segment	58
Corporate Matters	61
2003 Compared to 2002	62
Mexico Segment	63
United States Segment	64
-Greens Creek	64
-Lucky Friday	64
Venezuelan Segment	65
Corporate Matters	65
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other
Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)	67
Financial Condition and Liquidity	70
Contractual Obligations and Contingent Liabilities and Commitments	70
Operating Activities	71
Investing Activities	71
Financing Activities	72
Other	72
Critical Accounting Policies	73
Revenue Recognition	73
Proven & Probable Ore Reserves	74
Depreciation & Depletion	75
Impairment of Long–Lived Assets	75
Environmental Matters	75
Foreign Exchange in Venezuela	76
Byproduct Credits at the San Sebastian Unit in Mexico	77
Value–added Taxes	77
New Accounting Pronouncements	78
Forward Looking Statements	80

Item 7A. Quantitative and Qualitative Disclosures About Market Risk	81
Interest–Rate Risk Management	81
Commodity–Price Risk Management	81

Item 8. Financial Statements and Supplementary Data	83

Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosures	83

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Item 9A. Controls and Procedures	83

Management’s Report on Internal Controls over Financial Reporting	85
Report of Independent Registered Public Accounting Firm	86

Item 9B. Other Information	88

Part III

Item 10. Directors and Executive Officers of the Registrant	89

Item 11. Executive Compensation	92

Item 12. Security Ownership of Certain Beneficial Owners and Management	92

Item 13. Certain Relationships and Related Transactions	93

Item 14. Principal Accounting Fees and Services	93

Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8K	94

Signature	95

Index to Consolidated Financial Statements	F-1

Exhibit Index	F-55

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Special Note on Forward-Looking Statements

Certain statements contained in this report (including information incorporated by reference) are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

Projections included in this Form 10-K/A-1 have been prepared based on internal budgets and assumptions, which we believe to be reasonable, but not in accordance with GAAP or any guidelines of the Securities and Exchange Commission. Actual results will vary, perhaps materially, and we undertake no obligation to update the projections at any future date. You are strongly cautioned not to place undue reliance on such projections.

These risks, uncertainties and other factors include, but are not limited to, those set forth under Item 1 - Business - Risk Factors. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I

Item 1. Business and Item 2. Properties

Introduction

Hecla Mining Company is a precious metals company originally incorporated in 1891 (in this report, “we” or “our” or “us” refers to Hecla Mining Company and/or our affiliates and subsidiaries). We are engaged in the exploration, development, mining and processing of silver, gold, lead and zinc, and own or have interests in a number of precious and nonferrous metals properties. Our business is to discover, acquire, develop, produce and market mineral resources. In doing so, we intend to:

· Manage all our business activities in a safe, environmentally responsible and cost-effective manner;

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· Give preference to projects where we will be the manager of the operation;

· Provide a work environment that promotes personal excellence and growth for all our employees; and

· Conduct our business with integrity and honesty.

Our strategy for growth is to focus our efforts and resources on expanding our precious metals reserves through exploration efforts, primarily on properties we currently own and through future acquisitions.

We are organized and managed in three segments, which represent the geographical areas in which we operate: Venezuela (the La Camorra unit and various exploration projects), Mexico (the San Sebastian unit and various exploration projects) and the United States (the Greens Creek unit, the Lucky Friday unit, and various exploration projects). The maps show the locations of our operating units and our exploration projects, the Hollister Development Block, the Noche Buena property and Block B concessions, which includes our Mina Isidora development project.

For the year ended December 31, 2004, we reported a net loss of approximately $6.1 million, compared to a net loss of approximately $6.0 million in 2003. Although the net losses for 2004 and 2003 were similar, 2004 was positively impacted by improved metals prices and lower accruals for future environmental and reclamation expenditures offset by decreased production and higher exploration and pre-development costs.

For the years ended December 31, 2004, 2003 and 2002, we recorded losses applicable to common shareholders of approximately $17.7 million ($0.15 per common share), $18.2 million ($0.16 per common share) and $14.6 million ($0.18 per common share), respectively. Included in the losses were preferred stock dividends of $11.6 million, $12.2 million and $23.3 million, respectively, which included non-cash charges of approximately $10.9 million, $9.6 million and $17.6 million, respectively, related to exchanges of preferred stock for common stock. Since the dividends are cumulative, they are reflected in our losses applicable to common shareholders. We did not declare or pay any cash dividends on our preferred stock from July 2000 through October 2004. Our board of directors approved the payment of dividends for the fourth quarter of 2004, which were paid on January 3, 2005, and for the first quarter of 2005, which will be paid on April 1, 2005, although, historical undeclared and unpaid dividends were not paid. However, there can be no assurance that either historical or future dividends will be paid in the future.

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A comprehensive discussion of losses applicable to common shareholders for the years ended December 31, 2004, 2003 and 2002, individual operating unit performances, general corporate expenses and other significant items can be found in Item 7 - Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, as well as the Consolidated Financial Statements and Notes thereto.

The table below summarizes our production and average cash operating cost, average total cash cost and average total production cost per ounce for silver and gold, as well as average metals prices for each year ended December 31:

	Year
	2004		2003		2002
Silver (ounces)		6,960,580		9,817,324		8,681,293
Gold (ounces)		189,860		204,091		239,633
Lead (tons)		19,558		21,224		18,291
Zinc (tons)		25,644		25,341		26,134

Average cost per ounce of silver produced:

Cash operating cost (1,2)	$	1.87	$	1.31	$	2.16
Total cash cost (1,2)	$	2.02	$	1.43	$	2.25
Total production cost (1,2)	$	3.57	$	2.70	$	3.68

Average cost per ounce of gold produced:

Cash operating cost (2)	$	176	$	154	$	137
Total cash cost (2)	$	180	$	154	$	137
Total production cost (2)	$	271	$	222	$	206

Average metals prices:
Silver - Handy & Harman ($/oz.)	$	6.69	$	4.91	$	4.63
Gold - Realized ($/oz.)	$	379	$	339	$	303
Gold - London Final ($/oz.)	$	409	$	364	$	310
Lead - LME Cash ($/pound)	$	0.402	$	0.233	$	0.205
Zinc - LME Cash ($/pound)	$	0.475	$	0.375	$	0.353

(1)	Includes by-product credits from gold, lead and zinc production and are calculated pursuant to standards of the Gold Institute.

(2)

Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations, which are not in accordance with GAAP. We believe cash costs per ounce of silver or gold produced provide management and investors an indication of net cash flow, after consideration of the realized price received for production sold. Management also uses this measurement for the comparative monitoring of performance of our mining operations from period-to-period from a cash flow perspective. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Item 7 — Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization.

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Products and Segments

We produce both metal concentrates, which we sell to custom smelters on contract, and unrefined gold and silver bullion bars (doré), which are further refined before sale to metals traders. Our revenue is derived from the sale of silver, gold, lead and zinc and, as a result, our earnings are directly related to the prices of these metals. Silver, gold, lead and zinc prices fluctuate widely and are affected by numerous factors beyond our control. During 2004, we have seen the prices of the metals we produce continue to rise over those within the last few years.

We are organized and managed primarily on the basis of our principal operating units, which differ primarily by geographic region in which they operate and by principal product produced by each operating unit. Our principal producing operating units during 2004 included:

the San Sebastian unit, located in the State of Durango, Mexico, which is 100% owned by us through our wholly owned subsidiary, Minera Hecla, S.A. de C.V. The San Sebastian mine is 56 miles northeast of the city of Durango on concessions acquired in 1999. During 2004, San Sebastian contributed $30.2 million, or 23.1%, to our consolidated sales. Although a strike at the mill which processes the ore mined as San Sebastian has halted such processing since October 2004, the mine is operating and ore is being stockpiled for future processing. The current mine plan estimates that mining will cease near the middle of 2005.

the La Camorra unit, located in the eastern Venezuelan State of Bolivar, has been 100% owned by us through our wholly owned subsidiary, Minera Hecla Venezolana, C.A., since June 1999. During 2004, La Camorra contributed $47.9 million, or 36.6%, to our consolidated sales;

the Greens Creek unit, a 29.73% owned joint-venture arrangement with Kennecott Greens Creek Mining Company, the manager of Greens Creek, and Kennecott Juneau Mining Company, both wholly owned subsidiaries of Kennecott Minerals. Greens Creek is located on Admiralty Island, near Juneau, Alaska, and has been in production since 1989, with a temporary shutdown from April 1993 through July 1996. During 2004, Greens Creek contributed $34.2 million, or 26.1%, to our consolidated sales; and

the Lucky Friday unit located in northern Idaho. Lucky Friday is 100% owned and has been a producing mine for us since 1958. During 2004, Lucky Friday contributed $18.5 million, or 14.2%, to our consolidated sales.

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The La Camorra unit is our sole designated gold operating property. Production from the San Sebastian unit, the Greens Creek unit and the Lucky Friday unit are considered to be silver operating properties. The percentage of sales contributed by our operating properties is reflected in the following table:

	Year
	2004			2003			2002
Silver		63.4	%		65.9	%		53.4	%
Gold		36.6	%		33.7	%		46.6	%
Other		--			0.4	%		--

For GAAP purposes and in accordance with SFAS 131 “Disclosures About Segments of an Enterprise and Related Information,” we are organized into three segments: Venezuela (the La Camorra unit and various exploration projects), Mexico (the San Sebastian unit and various exploration projects) and the United States (the Greens Creek unit and the Lucky Friday unit and various exploration projects) as of December 31, 2004. Prior to 2003, we were organized into the silver segment, the gold segment and industrial minerals segment. The majority of the industrial minerals segment was sold during 2001 and reported as a discontinued operation. In 2003, we changed our reportable segments to better reflect the economic and geographic characteristics of our operating properties, and to better reflect the manner in which we manage our business. The percentage of sales contributed by each segment is reflected in the following table:

	Year
Segment	2004			2003			2002
United States		40.3	%		35.9	%		31.1	%
Venezuela		36.6	%		33.7	%		46.6	%
Mexico		23.1	%		30.0	%		22.3	%
Other		--			0.4	%		--

For further information with respect to our business segments, our domestic and export sales and our customers, refer to Notes 12 and 17 of Notes to Consolidated Financial Statements.

Employees

As of December 31, 2004, we employed 1,417 people, including people employed by our subsidiaries. We believe our relations with our employees are generally good, however, our employees at the Velardeña mill went on strike in October 2004, as discussed under the San Sebastian unit above.

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Available Information

Hecla Mining Company is a Delaware corporation, with our principal executive offices located at 6500 N. Mineral Drive, Suite 200, Coeur d’Alene, Idaho 83815-9408. Our telephone number is (208) 769-4100. Our web site address is www.hecla-mining.com. Copies of our annual, quarterly and recent reports and amendments to these reports are available on our website free of charge. Charters of our audit, compensation and corporate governance and directors’ nominating committees, as well as our Code of Business Conduct and Ethics for Directors, Officers and Employees, are also available on the website free of charge. We will provide copies of these materials to shareholders upon request using the above-listed contact information, directed to the attention of Ms. Jeanne DuPont.

We have included the CEO and CFO certifications regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31-1 and 31.2 to this report. Additionally, we filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding our compliance with the NYSE’s Corporate Governance Listing Standards (Listing Standards) pursuant to Section 303A. 12(a) of the Listing Standards, which certification was dated June 2, 2004, and indicated that the CEO was not aware of any violations of the Listing Standards by the Company.

Risk Factors

The following risks and uncertainties, together with the other information set forth in this Form 10-K/A-1, should be carefully considered by current and future investors in our securities. Any of the following risks could materially adversely affect our business, financial condition or operating results and could negatively impact the value of our common and/or preferred stock.

Although we had gross profit in 2004, 2003 and 2002, and net income in 2002, we had a net loss in each of 2004 and 2003 and there can be no assurance that our operations will be profitable in the future.

For the years ended December 31, 2004, 2003 and 2002, we reported gross profits of $37.4 million, $35.0 million and $23.7 million, respectively, primarily due to increased production of silver and gold and higher metals prices. In 2004 and 2003, we reported net losses of $6.1 million and $6.0 million, respectively, primarily due to non-cash provisions for future environmental and reclamation costs ($9.2 million and $23.1 million, respectively) and increases in exploration ($6.4 million and $4.4 million, respectively) and increased pre-development expenditures ($2.8 million and $0.7 million, respectively). In 2002, we reported net income of $8.6 million.

Many of the factors affecting our operating results are beyond our control, including gold, silver, zinc and lead prices, expectations with respect to the rate of inflation, the relative strength of the United States dollar and certain other currencies, interest rates, global or regional political or economic policies, developments, and crises, global or regional demand, governmental regulations, smelter operations and costs, continuity of orebodies, speculation and sales by central banks and other holders and producers of gold and silver in response to these factors. We cannot foresee whether our operations will continue to generate sufficient revenue in order for us to generate net cash provided from operating activities. While silver and gold prices have improved during the last three years and the prices of lead and zinc have improved during the last two years, there can be no assurance such prices will continue at or above current levels.

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We are currently involved in ongoing litigation that may adversely affect us.

There are several ongoing lawsuits in which we are involved. If any of these cases result in a substantial monetary judgment against us, is settled on unfavorable terms, or impacts our future operations, our results of operations, financial condition and cash flows could be materially adversely affected. For example, we may ultimately incur environmental remediation costs substantially in excess of the amounts we have accrued and the plaintiffs in environmental proceedings may be awarded substantial damages (which costs and damages we may not be able to recover from our insurers). See Note 8 of Notes to Consolidated Financial Statements for a description of our more significant litigation.

Our earnings may be affected by metals price volatility.

The majority of our revenue is derived from the sale of silver, gold, lead and zinc and, as a result, our earnings are directly related to the prices of these metals. Silver, gold, lead and zinc prices fluctuate widely and are affected by numerous factors including expectations for inflation; speculative activities; relative exchange rates of the U.S. dollar; global and regional demand and production; political and economic conditions; and production costs in major producing regions. Our earnings are also affected by contract terms we established at inception of the contract with custom smelters to which we sell our product concentrates.

These factors are beyond our control and are impossible for us to predict. If the market prices for these metals fall below our cash and development costs to produce them for a sustained period of time, we will experience losses and may have to discontinue development or mining at one or more of our properties. In addition, if prices fall below our total costs, we may face asset write-downs.

In the past, we have used limited hedging techniques to reduce our exposure to price volatility, but we may not be able to do so in the future. See “Our hedging activities could expose us to losses.”

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The following table sets forth the average daily closing prices of the following metals for 1985, 1990, 1995, 2000 and each year thereafter through 2004.

	1985		1990		1995		2000		2001		2002		2003		2004
Silver (1) (per oz.)	$	6.14	$	4.82	$	5.19	$	5.00	$	4.36	$	4.63	$	4.91	$	6.69

Gold (2) (per oz.)		317.26		383.46		384.16		279.03		272.00		309.97		363.51		409.21

Lead (3) (per lb.)		0.18		0.37		0.29		0.21		0.22		0.21		0.23		0.40

Zinc (4) (per lb.)		0.36		0.69		0.47		0.51		0.40		0.35		0.38		0.48

(1)	Handy & Harman

(2)	London Final

(3)	London Metals Exchange -- Cash

(4)	London Metals Exchange -- Special High Grade - Cash

On March 11, 2005, the closing prices for silver, gold, lead and zinc were $7.42 per ounce, $443.70 per ounce, $0.46 per pound and $0.64 per pound, respectively.

Our operations may be adversely affected by risks and hazards associated with the mining industry.

Our business is subject to a number of risks and hazards including:

· environmental hazards;

· political and country risks;

· civil unrest or terrorism;

· industrial accidents;

· labor disputes;

· unusual or unexpected geologic formations;

· cave-ins;

· explosive rock failures; and

· flooding and periodic interruptions due to inclement or hazardous weather conditions.

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Such risks could result in:

· damage to or destruction of mineral properties or producing facilities;

· personal injury or fatalities;

· environmental damage;

· delays in mining;

· monetary losses; and

· legal liability.

For some of these risks, we maintain insurance to protect against these losses at levels consistent with our historical experience and industry practice. However, we may not be able to maintain this insurance, particularly if there is a significant increase in the cost of premiums. Insurance against environmental risks is generally either unavailable or too expensive for us and other companies in our industry, and, therefore, we do not maintain environmental insurance. To the extent we are subject to environmental liabilities, we would have to pay for these liabilities. Moreover, in the event that we are unable to fully pay for the cost of remedying an environmental problem, we might be required to suspend operations or enter into other interim compliance measures.

Our foreign operations, including our operations in Venezuela and Mexico, are subject to additional inherent risks.

We currently conduct significant mining operations and exploration projects in Venezuela and Mexico. We anticipate that we will continue to conduct significant operations in these and possibly other international locations in the future. Because we conduct operations internationally, we are subject to political and economic risks such as:

the effects of local political, labor and economic developments and unrest;

significant or abrupt changes in the applicable regulatory or legal climate;

exchange controls and export or sale restrictions;

currency fluctuations and repatriation restrictions;

invalidation of governmental orders, permits, or agreements;

corruption, demands for improper payments, expropriation, and uncertain legal enforcement and physical security;

fuel or other shortages;

taxation and laws or policies of foreign countries and the United States affecting trade, investment and taxation; and

civil disturbances, war, and terrorist actions.

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Consequently, our exploration, development and production activities outside of the United States may be substantially affected by factors beyond our control, any of which could materially adversely affect our financial position or results of operations.

We have recorded value added taxes paid in Venezuela and Mexico as recoverable assets because under local laws, the taxes paid are recoverable for exporters. At December 31, 2004, value added tax receivables totaled $7.4 million in Venezuela (net of a reserve for anticipated discounts totaling $1.9 million) and $2.2 million in Mexico. Management periodically evaluates the recoverability of these receivables and establishes a reserve for uncollectibility, if warranted. It is possible we will not recover the full amount owed to us by the Venezuelan and Mexican tax authorities.

In February 2005, Venezuela’s Basic Industries Minister announced that Venezuela will review all foreign investments in non-oil basic industries, including gold projects, to maximize technological and developmental benefits and align investments with the current administration’s social agenda. He indicated Venezuela is seeking transfers of new technology, technical training and assistance, job growth, greater national content, and creation of local downstream industries and that the transformation would require a fundamental change in economic relations with major multinational companies.

In February 2004, the Venezuelan National Guard impounded a shipment of approximately 5,000 ounces of gold doré produced from the La Camorra unit, which is owned and operated by our wholly owned subsidiary, Minera Hecla Venezolana, C.A. (“MHV”). The impoundment was allegedly made due to irregularities in documentation that accompanied the shipment. The shipment was stored at the Central Bank of Venezuela. In March 2004, we filed with the Superior Tax Court in Bolivar City, State of Bolivar an injunction action against the National Guard to release the impounded gold doré. In April 2004, that Court granted our request for an injunction, but conditioned release of the gold pending resolution of an unrelated matter (described in the next paragraph) involving the Venezuelan tax authority (“SENIAT”) that was proceeding in the Superior Tax Court in Caracas. In June 2004, the Superior Tax Court in Caracas ordered return of the impounded gold to Hecla. Although we encountered difficulties, delays, and costs in enforcing such order, the impounded gold was returned in July 2004 and was shipped to our refiner for further processing and sale by us. All subsequent shipments of gold doré have been exported without intervention by Venezuelan government authorities, but there can be no assurance that such impoundments may not occur in the future or, that, if such were to occur, they would be resolved in a similar manner or time frame or upon acceptable conditions or costs.

MHV is also involved in litigation in Venezuela with SENIAT concerning alleged unpaid tax liabilities that predate our purchase of La Camorra from Monarch Resources (“Monarch”) in 1999. Pursuant to our Purchase Agreement, Monarch has assumed defense of and responsibility for a pending tax case in the Superior Tax Court in Caracas. In April 2004, SENIAT filed with the Superior Tax Court in Bolivar City, State of Bolivar an embargo action against all of MHV’s assets in Venezuela to secure the alleged unpaid tax liabilities. In order to prevent the embargo, in April 2004, MHV made a cash deposit with the Court of approximately $4.3 million. In June 2004, the Superior Tax Court in Caracas ordered suspension and revocation of the embargo action filed by the SENIAT. Although we believe the cash deposit will continue to prevent any further action by SENIAT with respect to the embargo, there can be no assurance as to the outcome of this proceeding. If the Tax Court in Caracas or an appellate court were to subsequently award SENIAT its entire requested embargo, it could disrupt our operations in Venezuela and have a material adverse effect on our financial condition.

In 2004, we were notified by the SENIAT that they had completed their audit of our Venezuelan tax returns for the years ended December 31, 2000 and December 31, 2001. We believe the SENIAT has finalized its review of the tax returns for these years, although there can be no assurance that they or other Venezuelan government officials will not reassess claims or assert other adjustments for those tax years, whether or not justified.

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In February 2005, we were notified by the SENIAT, that they had completed their audit of our Venezuelan tax returns for the years ended December 31, 2002 and 2003. In the notice, the SENIAT has alleged certain expenses are not deductible for income tax purposes and that calculations of tax deductions based upon inflationary adjustments were overstated, and has issued an assessment that is equal to taxes payable of $3.8 million. We have initiated a review of the SENIAT’s findings, and believe the SENIAT’s assessments are inappropriate, and we expect to vigorously defend our position. Any resolution could involve significant delay, legal proceedings, and related costs and uncertainty. We have not accrued any amounts associated with the tax audits as of December 31, 2004. There can be no assurance that we will be successful in defending ourselves against the tax assessment, that there will not be additional assessments in the future or that SENIAT or other governmental agencies or officials may not take other actions against us, whether or not justified, that could disrupt our operations in Venezuela and have a material adverse effect on our financial condition.

Venezuela experienced political unrest that resulted in a severe economic downturn in the third quarter of 2002, followed by a contested presidential recall in 2004. The Venezuelan government has fixed the exchange rate of their currency to the U.S. dollar at 1,920 bolivares to $1, which is the exchange rate we utilized in 2004 to translate the financial statements of our Venezuelan subsidiary included in our consolidated financial statements. The Venezuelan government announced the exchange rate of their currency to the U.S. dollar changed from its current rate to 2,150 bolivares to $1 on March 3, 2005.

In February 2005, the Venezuelan government announced new regulations concerning the export of goods and services from Venezuela, which will require, effective April 1, 2005, all goods and services to be invoiced in the currency of the country of destination or in U.S. dollars. In 2004, we recognized approximately $7.9 million in reductions to cost of sales related to our ability to export production in bolivares. We are currently evaluating the impact of these new regulations, however, we may no longer be able to export our production in bolivares, which could result in an increase in our costs. In addition, the new regulations may impact our cash flows, our profitability of operations, and our production in Venezuela. There can be no assurance that further developments or interpretations of these regulations are limited to the impact we have described herein.

The Central Bank of Venezuela maintains regulations concerning the export of gold from Venezuela. Under current regulations, 15% of our gold production from Venezuela is required to be sold in Venezuela. Prior to our acquisition of the La Camorra mine, the previous owners had sold substantially all of the gold production to the Central Bank of Venezuela and built up a significant credit to cover the 15% requirement, which we assumed upon our acquisition. Since we began operating in Venezuela in 1999, all our production of gold has been exported and no sales have been made in the Venezuelan market. We currently expect that our credit for national sales will be exhausted in the middle of 2005, and we may be required to sell 15% of our future gold production to either the Central Bank of Venezuela or to other customers within Venezuela. Markets within Venezuela are limited, and historically the Central Bank of Venezuela has been the primary customer of gold. There can be no assurance that the Central Bank of Venezuela will purchase gold from us, and we may be required to sell gold into a limited market, which could result in lower sales and cash flows from gold as a result of discounts, or we may have to inventory a portion of our gold production until such time we find a suitable purchaser for our gold. These matters could have a material adverse effect on our financial results.

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Because of the exchange controls in place and their impact on local suppliers, some supplies, equipment parts and other items we previously purchased in Venezuela have been ordered from outside the country. Increased lead times in receiving orders from outside Venezuela have continued to require an increase in supply inventory, as well as prepayments to vendors, as of December 31, 2004, compared to December 31, 2003.

In addition, our operations may also be affected by the presence of small and/or illegal miners who attempt to operate on the fringes of major mining operations. Although we, in conjunction with local authorities and/or the Venezuelan National Guard, employ strategies to control the presence and/or impact of such miners, including commencing a custom milling program in 2004 for small mining cooperatives working in the area of Mina Isidora, there can be no assurance that such miners will not adversely affect our operations or that the local authorities and/or the Venezuelan National Guard will continue to assist our efforts to control their impact.

Although we believe we will be able to manage and operate the La Camorra unit and related exploration projects successfully, due to the continued uncertainty relating to political, regulatory, legal enforcement, security and economic matters, exportation and exchange controls, and the effect of all of these on our operations including, among other things, changes in policy or demands of governmental agencies or their officials, litigation, labor stoppages and the impact on our supplies of oil, gas and other supplies, there can be no assurance we will be able to operate without interruptions to our operations. Management is actively monitoring exchange controls in Venezuela, although there can be no assurance that the exchange controls will not further affect our operations in Venezuela in the future (for additional information, see Note 1B of Notes to Consolidated Financial Statements).

The volatility of metals prices may adversely affect our development and exploration efforts.

Our ability to produce silver and gold in the future is dependent upon our exploration success and our ability to develop new ore reserves. If prices for these metals decline, it may not be economically feasible for us to continue exploration or development on a project.

Our development of new orebodies and other capital costs may cost more and provide less return than we estimated.

Our ability to sustain or increase our current level of production of metals partly depends on our ability to develop new orebodies and/or expand existing mining operations. Before we can begin a development project, we must first determine whether it is economically feasible to do so. This determination is based on estimates of several factors, including:

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· reserves;

· expected recovery rates of metals from the ore;

· facility and equipment costs;

· exploration and drilling success;

· capital and operating costs of a development project;

· future metals prices;

· currency exchange and repatriation risks;

· tax rates;

· inflation rates;

· political risks and regulatory climate in the foreign countries in which we operate; and

· availability of credit.

Development projects may not have an operating history upon which to base these estimates, and these estimates are based in large part on our interpretation of geological data, a limited number of drill holes and other sampling techniques. As a result, actual cash operating costs and returns from a development project may differ substantially from our estimates as a result of which it may not be economically feasible to continue with a development project.

We have capitalized development projects that may cost more and provide less return than we estimated, including the Lucky Friday unit expansion, development of Mina Isidora and our shaft project at the La Camorra mine in Venezuela.

Our ore reserve estimates may be imprecise.

Our ore reserve figures and costs are primarily estimates and are not guarantees that we will recover the indicated quantities of these metals. Investors are strongly cautioned not to place undue reliance on estimates of reserves. Reserves are estimates made by our technical personnel and no assurance can be given that the estimated amount of metal or the indicated level of recovery of these metals will be realized. Reserve estimation is an interpretive process based upon available data and various assumptions. Our reserve estimates, particularly those for properties that have not yet started producing, may change based on actual production experience. Further, reserves are valued based on estimates of costs and metals prices. The economic value of ore reserves may be adversely affected by:

· declines in the market price of the various metals we mine;

· increased production or capital costs;

· reduction in the grade or tonnage of the deposit;

· increase in the dilution of the ore; or

· reduced recovery rates.

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Short-term operating factors relating to our ore reserves, such as the need to sequentially develop orebodies and the processing of new or different ore grades, may adversely affect our cash flow. We may use forward sales contracts and other hedging techniques to partially offset the effects of a drop in the market prices of the metals we mine. However, if the prices of metals that we produce decline substantially below the levels used to calculate reserves for an extended period, we could experience:

· delays in new project development;

· net losses;

· reduced cash flow;

· reductions in reserves; and

· possible write-down of asset values.

Our mineral exploration efforts may not be successful.

We must continually replace ore reserves depleted by production or eliminated by recalculation of reserves. Our ability to expand or replace ore reserves depends on the success of our exploration program. Mineral exploration, particularly for silver and gold, is highly speculative. It involves many risks and is often nonproductive. Even if we believe we have found a valuable mineral deposit, it may be several years before production is possible. During that time, it may become no longer feasible to produce those minerals for economic, regulatory, political, or other reasons. Establishing ore reserves requires us to make substantial capital expenditures and, in the case of new properties, to construct mining and processing facilities. As a result of these costs and uncertainties, we may not be able to expand or replace our existing ore reserves as they are depleted by current production or eliminated by recalculation of reserves.

Our joint development and operating arrangements may not be successful.

We often enter into joint venture arrangements in order to share the risks and costs of developing and operating properties. For instance, our Greens Creek unit is operated through a joint-venture arrangement. In a typical joint-venture arrangement, we own a percentage of the assets in the joint-venture. Under the agreement governing the joint-venture relationship, each party is entitled to indemnification from each other party and is only liable for the liabilities of the joint-venture in proportion to its interest in the joint-venture. However, if a party fails to perform its obligations under the joint-venture agreement, we could incur losses in excess of our pro-rata share of the joint-venture. In the event any party so defaults, the joint-venture agreement provides certain rights and remedies to the remaining participants, including the right to sell the defaulting party’s interest and use the proceeds to satisfy the defaulting party’s obligations. We currently believe that our joint-venture partners will meet their obligations.

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We face strong competition from other mining companies for the acquisition of new properties.

Mines have limited lives and as a result, we continually seek to replace and expand our reserves through the acquisition of new properties. In addition, there is a limited supply of desirable mineral lands available in the United States and other areas where we would consider conducting exploration and/or production activities. Because we face strong competition for new properties from other mining companies, some of which have greater financial resources than we do, we may be unable to acquire attractive new mining properties on terms that we consider acceptable.

The titles to some of our properties may be defective.

Unpatented mining claims constitute a significant portion of our undeveloped property holdings. The validity of these unpatented mining claims is often uncertain and may be contested. In accordance with mining industry practice, we do not generally obtain title opinions until we decide to develop a property. Therefore, while we have attempted to acquire satisfactory title to our undeveloped properties, some titles may be defective. See Note 8 of Notes to Consolidated Financial Statements.

Our ability to market our metals production may be affected by disruptions or closures of custom smelters and/or refining facilities.

We sell substantially all of our metallic concentrates to custom smelters, with our doré bars sent to refiners for further processing before being sold to metal traders. Due to the availability of alternative refiners able to supply the necessary services, we do not believe that the loss of any of our refiners would have an adverse effect on our business. However, if our ability to sell concentrates to our contracted smelters becomes unavailable to us, it is possible our operations could be adversely affected.

Britannia Zinc historically had been the largest custom smelter of Greens Creek bulk concentrate. During 2003, we were informed that our contract with Britannia Zinc would not be renewed and as a result, we began to sell our bulk concentrates to two customers, Glencore and Mitsui. In September 2003, we were informed that Glencore’s Porto Vesme Smelter would be shut down for a twelve-month period due to contractual power problems with the Italian government. This situation continued through 2004 and is expected to continue for the foreseeable future, although in 2004, the joint venture partners were successful in placing concentrates with new customers, as well as reducing the production of bulk concentrate. While this effort has been successful in mitigating the impact of this situation, it is possible our Greens Creek operations and our financial results could be affected adversely in the future.

Our operations are subject to currency fluctuations.

Because our products are sold in world markets in United States dollars, currency fluctuations may affect cash flow we realize from our operations. Exchange controls could require us to sell our products in a currency other than United States dollars, or may require us to convert United States dollars into foreign currency. Foreign exchange fluctuations may materially adversely affect our financial performance and results of operations. In addition, in order to operate in Venezuela, we purchase Venezuelan bolivares. As the availability of foreign exchange brokers that trade Venezuelan currency is limited, we may experience difficulty purchasing bolivares in the future, which would adversely affect our operations in that country. See above risk titled “Our foreign operations, including our operations in Venezuela and Mexico, are subject to additional inherent risks”.

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We are required to obtain governmental and lessor approvals and permits in order to conduct mining operations.

In the ordinary course of business, mining companies are required to seek governmental and lessor approvals and permits for expansion of existing operations or for the commencement of new operations. Obtaining the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions and often involving public hearings and costly undertakings on our part. The duration and success of our efforts to obtain permits are contingent upon many variables not within our control. Obtaining environmental protection permits, including the approval of reclamation plans, may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority. There can be no assurance that all necessary approvals and permits will be obtained and, if obtained, that the costs involved will not exceed those that we previously estimated. It is possible that the costs and delays associated with the compliance with such standards and regulations could become such that we would not proceed with the development or operation of a unit(s).

We face substantial governmental regulation and environmental risks.

Our business is subject to extensive U.S. and foreign federal, state and local laws and regulations governing development, production, labor standards, occupational health, waste disposal, use of toxic substances, environmental regulations, mine safety and other matters. We have been, and are currently involved in lawsuits in which we have been accused of causing environmental damage or otherwise violating environmental laws, and we may be subject to similar lawsuits in the future. See Note 8 of Notes to Consolidated Financial Statements. New legislation and regulations may be adopted at any time that result in additional operating expense, capital expenditures or restrictions and delays in the mining, production or development of our properties.

We maintain reserves for costs associated with mine closure, reclamation of land and other environmental matters. At December 31, 2004, our reserves for these matters totaled $75.2 million. We anticipate we will make expenditures relating to these reserves over the next 30 years. We have included in our reclamation reserves our estimate of liabilities, including an estimate for the Coeur d’Alene Basin in Idaho, which is currently in litigation. We estimate that the range of our potential liability for this site to be $23.6 million to $72.0 million. We have accrued the $23.6 million minimum of the range as we believe no amount in the range is more likely than any other number at this time. Future expenditures related to closure, reclamation and environmental expenditures are difficult to estimate due to:

· the early stage of our investigation;

· the uncertainties relating to the costs and remediation methods that will be required in specific situations;

· the possible participation of other potentially responsible parties; and

· changing environmental laws, regulations and interpretations.

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It is possible that, as new information becomes available, changes to our estimates of future closure, reclamation and environmental contingencies could materially adversely affect our future operating results.

Various laws and permits require that financial assurances be in place for certain environmental and reclamation obligations and other potential liabilities. We currently have in place such financial assurances in the form of surety bonds and cash deposits. As of December 31, 2004, restricted investments include approximately $7.3 million as collateral for the surety bonds and cash deposits for financial assurances of $8.6 million, including $7.9 million at Greens Creek as discussed below.

During the third quarter of 2003, the parties to the Greens Creek joint venture determined it would be necessary to replace existing surety requirements via the establishment of a restricted trust for reclamation funding in the future. Approximately $26.6 million was placed into restricted cash in 2004, and we have recorded our 29.73% portion of approximately $7.9 million as restricted cash on our Consolidated Balance Sheet as of December 31, 2004.

The amount of the financial assurances and the amount required to be set aside by us as collateral for these financial assurances are dependent upon a number of factors, including our financial condition, reclamation cost estimates, inflation, development of new projects and the total dollar value of financial assurances in place. There can be no assurance that we will be able to maintain or add to our current level of financial assurances.

From time to time, the U.S. Congress considers proposed amendments to the General Mining Law of 1872, as amended, which governs mining claims and related activities on federal lands. There was no significant activity with respect to mining law reform in Congress during 2004. The extent of any such future changes is not known and the potential impact on us as a result of Congressional action is difficult to predict. Although a majority of our existing U.S. mining operations occur on private or patented property, changes to the General Mining Law, if adopted, could adversely affect our ability to economically develop mineral resources on federal lands.

Management’s Report on Internal Control over Financial Reporting

Beginning in 2005, Section 404 of the Sarbanes-Oxley Act of 2002 (“the Act”) requires the Company to include an internal control report of management in its Annual Report on Form 10-K/A-1. The internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of its most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that the Company’s independent auditors have issued an attestation report on management’s assessment of internal control over financial reporting. Management acknowledges its responsibility for internal controls over financial reporting and seeks to continually improve those controls. In addition, in order to achieve compliance with Section 404 of the Act within the prescribed period, the Company has been engaged in a process to document and evaluate its internal controls over financial reporting. In this regard, management has dedicated internal resources, engaged outside consultants and adopted a work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. The Company believes its process for documenting, evaluating and monitoring its internal control over financial reporting is consistent with the objectives of Section 404 of the Act. During the second quarter of 2004, the Company commenced testing its internal controls. The Company’s documentation and testing to date have identified certain gaps in the design and effectiveness of internal controls over financial reporting that the Company is in the process of remediating. The Company’s auditors also commenced their audit of internal control procedures during the third quarter of 2004. Because of an ongoing strike at the Company’s Velardeña Mill, the Company and its auditors were unable to access such facility to test all internal controls at the Mill and, thus, the Company’s independent auditors have disclaimed any opinion on the Company’s internal controls. During its process, the Company identified three material weaknesses in internal controls over financial reporting, as described in “Management’s Report on Internal Controls over Financial Reporting,” included herein under Item 9A, Controls and Procedures. Due to the presence of material weaknesses, management has concluded that its internal control over financial reporting is ineffective as of December 31, 2004. The existence of the above factors and circumstances create a risk that such controls might have been inadequate to prevent inaccuracies in the Company’s financial statements, which could result in costs to remediate such controls or inaccuracies in the Company’s financial statements. These factors also may create a risk that the Company may have increased difficulty or expense in transactions, such as financings, involving such financial statements or a risk of adverse reaction of those who regularly review the Company’s financial statements, including customers, vendors, shareholders, analysts, regulators, and the market generally.

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Our hedging activities could expose us to losses.

From time to time, we engage in hedging activities, such as forward sales contracts and commodity put and call option contracts, to manage the metals prices received on our products and attempt to insulate our operating results from declines in those prices. While these hedging activities may protect us against low metals prices, they may also prevent us from realizing possible revenues in the event that the market price of a metal exceeds the price stated in a forward sale or call option contract. As of December 31, 2004, if we closed out our existing hedge contract positions, we would have to pay our counterparties $0.9 million. In addition, we may experience losses if a counterparty fails to purchase under a contract when the contract price exceeds the spot price of a commodity.

Our business depends on good relations with our employees.

Certain of our employees are represented by unions. At December 31, 2004, there were 120 hourly and 26 salaried employees at the Lucky Friday unit. The United Steelworkers of America is the bargaining agent for the Lucky Friday hourly employees. The current labor agreement expires on May 1, 2009, however, it can be reopened for economic considerations on May 1, 2006.

At December 31, 2004, there were 307 hourly and 58 salaried employees at San Sebastian and the Velardeña mill. The National Mine and Mill Workers Union represents process plant hourly workers, or 60 employees, at San Sebastian. Under Mexican labor law, wage adjustments are negotiated annually and other contract terms every two years. The contract at San Sebastian is due for wage negotiation and other terms in July 2005.

In October 2004, the employees at the Velardeña mill in Mexico initiated a strike in an attempt to unionize the employees at the San Sebastian mine. The mine employees have informed us, the union and the Ministry of Labor that they do not want to be organized. Although we are meeting regularly with government and union officials to resolve the issue, there can be no assurance as to the outcome or length of the strike. The strike impacted our production of silver and gold during the fourth quarter of 2004 and has continued to impact production into 2005. During the fourth quarter of 2004 and continuing into 2005, the mine is operating at a normal rate, stockpiling ore in preparation for future processing. We are also considering contract custom milling facilities that can process our stockpiled ore.

At December 31, 2004, there were 435 hourly and 48 salaried employees at the La Camorra mine. The hourly employees are represented by a collective bargaining agreement. The contract with respect to La Camorra will expire in October 2006.

As of December 31, 2004, there were approximately 192 hourly employees and 48 salaried employees employed in the development of Mina Isidora and exploration activities in the Block B area. The hourly employees are represented by a collective bargaining agreement that will expire in August 2006.

We anticipate that we will be able to negotiate a satisfactory contract with each union, but there can be no assurance that this can be done, or that it can be done without further disruptions to production.

We are dependent on key personnel.

We are currently dependent upon the ability and experience of our executive officers and other personnel and there can be no assurance that we will be able to retain all of such officers and employees. The loss of one or more of the officers or key employees could have a material adverse effect on our operations. We also compete with other companies both within and outside the mining industry in connection with the recruiting and retention of qualified employees knowledgeable in mining operations.

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Our preferred stock has a liquidation preference of $50 per share, or $7.9 million, plus dividends in arrears of approximately $2.3 million.

This means that if Hecla Mining Company was liquidated as of January 3, 2005, holders of our preferred stock would be entitled to receive approximately $10.2 million from any liquidation proceeds before holders of our common stock would be entitled to receive any proceeds.

In February 2004, we reduced the number of shares of Series B preferred stock outstanding by 273,961 shares, or 58.9%, pursuant to an exchange offer. This exchange offer allowed participating stockholders to receive 7.94 common shares for each share of preferred stock exchanged, which resulted in the issuance of a total of 2,175,237 common shares. During March 2004, we entered into privately negotiated exchange agreements with holders of approximately 17% of the then outstanding preferred stock (190,816 preferred shares) to exchange such shares for shares of common stock. A total of 33,000 preferred shares were exchanged for 260,861 common shares as a result of the privately negotiated exchange agreements. As of December 31, 2004, a total of 157,816 shares of preferred stock remain issued and outstanding, with a liquidation value of $7.9 million, plus dividends in arrears of approximately $2.3 million. The annual dividend payable on the preferred stock is currently $0.6 million.

The Board of Directors declared the fourth quarter 2004 dividend on the preferred stock, which was paid in January 2005. Dividends were also approved for the first quarter, and are payable on April 1, 2005, however, there can be no assurance that we will continue to pay either historical or future dividends in the future.

We intend to consider means of retiring the remaining preferred stock outstanding, which may include redeeming any remaining shares of preferred stock according to their terms, additional tender or exchange offers, privately negotiated transactions and/or effecting a merger transaction in which the preferred stock is converted into or exchanged for other securities.

Our stockholder rights plan and provisions in our certificate of incorporation, our by-laws, and Delaware law could delay or deter tender offers or takeover attempts that may offer a premium for our common stock.

Our stockholder rights plan and provisions in our certificate of incorporation, our by-laws, and Delaware law could make it more difficult for a third party to acquire control of us, even if that transaction would be beneficial to stockholders. These impediments include:

the rights issued in connection with the stockholder rights plan that will substantially dilute the ownership of any person or group that acquires 15% or more of our outstanding common stock unless the rights are first redeemed by our board of directors, in its discretion. Furthermore, our board of directors may amend the terms of these rights, in its discretion, including an amendment to lower the acquisition threshold to any amount greater than 10% of the outstanding common stock;

the classification of our board of directors into three classes serving staggered three-year terms;

the ability of our board of directors to issue shares of preferred stock with rights as it deems appropriate without stockholder approval;

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a provision that special meetings of our board of directors may be called only by our chief executive officer or a majority of our board of directors;

a provision that special meetings of stockholders may only be called pursuant to a resolution approved by a majority of our entire board of directors;

a prohibition against action by written consent of our stockholders;

a provision that our board members may only be removed for cause and by an affirmative vote of at least 80% of the outstanding voting stock;

a provision that our stockholders comply with advance-notice provisions to bring director nominations or other matters before meetings of our stockholders;

a prohibition against certain business combinations with an acquirer of 15% or more of our common stock for three years after such acquisition unless the stock acquisition or the business combination is approved by our board prior to the acquisition of the 15% interest, or after such acquisition our board and the holders of two-thirds of the other common stock approve the business combination; and

a prohibition against our entering into certain business combinations with interested stockholders without the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of voting stock.

The existence of the stockholder rights plan and these provisions may deprive stockholders of an opportunity to sell our stock at a premium over prevailing prices. The potential inability of our stockholders to obtain a control premium could adversely affect the market price for our common stock.

Glossary of Certain Terms

Cash Operating Costs -- Includes all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense and on-site general and administrative costs, net of by-product revenues earned from all metals other than the primary metal produced at each unit.

·	*GAAP* -- United States generally accepted accounting principles.

·	*Doré* -- Unrefined gold and silver bullion bars consisting of approximately 90% precious metals, which will be further refined.

·	*Mineralized Material* -- Estimates of mineralization that have been sufficiently drilled and geologically understood to allow the assumption of continuity between samples, but for which an economically viable plan has not been formulated.

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·	*Ore* -- A mixture of valuable minerals and gangue (valueless minerals) from which at least one of the minerals or metals, combined with by-products, can be extracted at a profit.

·	*Orebody* -- A continuous, well-defined mass of material of sufficient ore content to make extraction economically feasible.

·	*Primary Development* -- The initial access to an orebody through adits, shafts, declines, ramps and winzes.

Proven and Probable Ore Reserves -- Reserves that reflect estimates of the quantities and grades of mineralized material at our mines which we believe can be recovered and sold at prices in excess of the total cash cost associated with extracting and processing the ore. The estimates are based largely on current costs and on metals prices and demand for our products. Mineral reserves are stated separately for each of our properties based upon factors relevant to each location. Reserves represent diluted in-place grades and do not reflect losses in the recovery process. Our estimates of proven and probable reserves for the Lucky Friday unit, the San Sebastian unit and the La Camorra unit are based on the following metals prices:

	December 31,
	2004		2003		2002

Silver	$	5.60	$	4.95	$	4.75
Gold	$	350	$	335	$	300
Lead	$	0.28	$	0.24	$	0.21
Zinc	$	0.42	$	0.40	$	0.44

Proven and probable ore reserves for the Lucky Friday, San Sebastian and La Camorra units are calculated and reviewed in-house and are subject to periodic audit by others, although audits are not performed on an annual basis.

Proven and probable ore reserves for the Greens Creek unit are based on estimates of reserves provided to us by the operator of Greens Creek that have been reviewed but not independently confirmed by us. Kennecott Greens Creek Mining Company’s estimates of proven and probable ore reserves for the Greens Creek unit as of December 2004, 2003 and 2002 are derived from successive generations of reserve and feasibility analyses for different areas of the mine each using a separate assessment of metals prices. The weighted average prices used were:

	December 31,
	2004		2003		2002

Silver	$	5.00	$	5.00	$	5.00
Gold	$	338	$	300	$	300
Lead	$	0.25	$	0.24	$	0.24
Zinc	$	0.46	$	0.45	$	0.46

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Changes in reserves represent general indicators of the results of efforts to develop additional reserves as existing reserves are depleted through production. Grades of ore fed to process may be different from stated reserve grades because of variation in grades in areas mined from time to time, mining dilution and other factors. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. Our proven and probable ore reserves are sensitive to price changes, although we do not believe that a 10% increase or decrease in estimated metals prices would have a significant impact on proven and probable ore reserves at our La Camorra, San Sebastian, Greens Creek and Lucky Friday units.

Probable Reserves -- A portion of a mineralized deposit that can be extracted or produced economically and legally at the time of the reserve determination. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

Proven Reserves -- A portion of a mineralized deposit that can be extracted or produced economically and legally at the time of the reserve determination. Reserves for which; (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well-defined that size, shape, depth and mineral content of reserves are well established.

Sands -- In Venezuela, the term “sands” is used in reference to the processing of waste, or tailings, from small mining and milling operations. These operations generally employ old technology and achieve relatively low gold recoveries. Minera Hecla will, from time to time, purchase these sands for further processing at our La Camorra mill.

·	*Secondary Development* -- The preparation of the orebody for production through crosscuts, raises and stope preparation.

·	*Stope* -- An underground excavation from which ore has been extracted either above or below a level in a mine. A level is the distance below the collar of the shaft where an opening is driven.

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Total Cash Costs -- Includes all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mine production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit.

·	*Total Production Costs* -- Includes total cash costs, as defined above, plus depreciation, depletion, amortization and accretion of asset retirement obligations relating to each operating unit.

·	*Total Production Costs Per Ounce* -- Calculated based upon total production costs, as defined above, net of by-product revenues earned from all metals other than the primary metal produced at each unit, divided by the total ounces of the primary metal produced.

Unpatented Mining Claim -- A parcel of property located on federal lands pursuant to the General Mining Law and the requirements of the state in which the unpatented claim is located, the paramount title of which remains with the federal government. The holder of a valid, unpatented lode-mining claim is granted certain rights including the right to explore and mine such claim under the General Mining Law.

Operating Properties

The La Camorra Unit

The La Camorra unit refers to our Venezuelan operating properties and exploration projects, which are discussed below. At the present time, the La Camorra mine is the only operating property within the La Camorra unit. Mina Isidora is located approximately 70 miles north-northwest of La Camorra and we anticipate it will begin limited production via the Pozo de Agua incline shaft before the end of 2005. At that time, ore from Mina Isidora will be shipped to the mill at the La Camorra mine for processing and Mina Isidora will be an additional operating property under the La Camorra unit.

During 2004, we started a custom-milling program for small mining cooperatives working in the area of Mina Isidora, where they can sell their ore to us for further processing. The ore is processed at our La Camorra mill and the miners are provided a transparent sampling system and improved economic terms, as well as industry standard environmental processing practices.

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The La Camorra Mine

The La Camorra mine is located approximately 180 miles southeast of Puerto Ordaz in the eastern Venezuelan State of Bolivar. The mine is accessed via a gravel road that we maintain and is six miles east of state highway 10, which is a paved two-lane road running from Upata south to the Brazilian border.

We acquired the La Camorra mine in 1999 with the acquisition of Monarch Resources Investments Limited, and it is 100% owned by us through our Venezuelan subsidiary, Minera Hecla Venezolana, C.A. The purchase agreement includes a provision to pay Monarch Resources a net smelter return (“NSR”) royalty on production exceeding a cumulative total of 600,000 ounces of gold from the properties acquired in Venezuela from Monarch Resources. The royalty is based on a sliding scale dependent on the price of gold. When the gold price is below $300 per troy ounce, there is no royalty; when the price is between $300.00 and $399.99 per troy ounce the royalty is 1%; when the price is between $400.00 and $499.99 per troy ounce, the royalty is 2%; and when the price is $500.00 and above, the royalty is 3%. The production milestone was reached in the second quarter of 2004, and gold production since that time has been subject to the provisions of the royalty agreement.

The mine is located on an exploration concession granted by the Ministry of Energy and Mines in 1964 that has been converted to an exploitation license valid for a period of 50 years.

The La Camorra mine is a high-grade underground gold mine that exploits two shear-zone hosted quartz veins known as the Main zone and the Betzy vein. It lies in the Botanamo greenstone belt of the Precambrian Guayana Shield and is hosted by the Caballape Group of volcanoclastic rocks. The formations most likely date from Archean to Proterozoic in age and consist primarily of intermediate volcanics with subordinate metasediments. Gold mineralization at La Camorra is confined to narrow, near vertical quartz veins hosted in an east-west trending, left-lateral shear zone. Most economic mineralization in the La Camorra veins occur in distinct “ore shoots.” Gold occurs both as free particles in quartz and attached to or included in pyrite. Locally, gold is also seen on chloritic partings.

At the end of 2004, the principal working levels of the La Camorra mine lay between the elevations of 315 and 520 meters below sea level. The proven and probable reserves extend to the 610-meter elevation and exploration drill holes have intersected gold mineralization below the current reserve limits to the 869-meter elevation.

Access to the underground workings at the La Camorra mine is via a ramp from the surface excavated at a -15% grade and connecting numerous levels. The main access ramp is currently developed to a depth of approximately 543 meters below sea level. Ore is mined primarily by longhole stoping and is extracted from the stopes using rubber-tired equipment and hauled to the surface in mine haulage trucks. Sub-economic material is used to backfill and stabilize mined-out stopes. The mine is currently producing approximately 500 tons of ore per day.

At the end of 2003, the mine had been developed to the 480-meter level, which is approximately 620 meters below surface. Engineering studies undertaken in 2002 and 2003 indicated that the combination of ventilation and haulage requirements and logistics would make mining below the 500-meter level extremely difficult and marginally economic without the development of a shaft. In August 2003, the board of directors approved the development of a production shaft at the La Camorra mine, which is anticipated to cost approximately $16.5 million. The development decision was based on the long lead-time necessary to construct the shaft and to develop further reserves. The production shaft is approximately 75% complete and scheduled for commissioning during the second quarter of 2005.

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The process plant uses a conventional carbon-in-leach process. The ore is crushed with a three-stage system consisting of a primary jaw crusher with secondary and tertiary cone crusher with a multi-deck vibrating screen. The grinding circuit includes a primary and a secondary ball mill. The ground ore is mixed with a cyanide solution and clarified, followed by countercurrent carbon-in-leach gold adsorption. The carbon is then stripped and the gold recovered and poured into gold bars for shipment to a third-party refiner in Switzerland. Mill recovery averages over 95%.

All equipment, infrastructure and facilities are in good condition. The plant was constructed in 1994 and has been periodically upgraded. The plant is capable of processing approximately 700 tons per day. Site infrastructure includes a water supply system, maintenance shop, warehouse, living quarters, a dining facility, administration building and a National Guard post. We also share a housing facility located near the town of El Callao with units for approximately 50 families. Mine electric power is purchased from Eleoriente (a state-owned electric company). Diesel-powered electric generators are available on-site for operation of critical equipment during power outages. At December 31, 2004, the net book value of the La Camorra mine property and its associated plant and equipment was approximately $27.2 million.

Our reclamation plan has been approved by the Ministry of Environment and Natural Resources. Planned activities include regrading and revegetation of disturbed areas. The reclamation and closure accrual as of December 31, 2004, was $1.3 million.

At December 31, 2004, there were 435 hourly and 48 salaried employees associated with the La Camorra mine. The hourly employees are covered by a collective bargaining agreement. The contract with respect to La Camorra will expire in October 2006. In addition, there were 73 employees contracted to fill-in for vacation and absentee purposes, and 43 employees at the administrative office in Puerto Ordaz as of December 31, 2004.

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Information with respect to the La Camorra mine’s production, average costs per ounce of gold produced and proven and probable ore reserves is set forth in the table below.

	Years Ended December 31,
Production	2004			2003			2002

Ore processed (tons)		199,453 (1	)		197,591 (1	)		194,960
Gold (ounces)		130,436 (1	)		126,567 (1	)		167,386

Average Cost per Ounce of Gold Produced (2)

Cash operating costs	$	176	$	154	$	137
Total cash costs	$	180	$	154	$	137
Total production costs	$	271	$	222	$	206

Proven and Probable Ore Reserves (3,4,5,6,7)	12/31/04		12/31/03		12/31/02

Total tons		356,192		318,644		453,224
Gold (ounces per ton)		0.60		0.69		0.91
Contained gold (ounces)		213,244		220,552		412,332

(1)

During 2004, 24,264 tons milled and 4,789 gold ounces produced included in the production figures were generated from Hecla’s custom milling business and other purchases of ore from third-parties. During 2003, 15,155 tons milled and 3,049 gold ounces produced included in the production figures listed above were generated from tailings from outside small third-party milling operations in the local area and other gold-bearing quartz material not mined at La Camorra.

(2)

Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Item 7 - Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization.

(3)	For proven and probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Terms.

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(4)

The 2004 year-end reserves show an increase in tonnage and decrease in grade resulting in a decrease in ounces when compared to the 2003 year-end reserves. The changes are a result of a combination of new drill data and underground sampling information, a revision of ore shoot limits and the increase in mine dilution being applied to the Betzy vein material together with a depletion of reserves by mining.

(5)

The decrease in tons of proven and probable ore reserves in 2003 compared to 2002 is primarily due to the depletion of reserves by mining and other factors, including a reinterpretation of the La Camorra mine ore shoot geometry and a revised mine plan. Mining in the Betzy vein encountered changes in orebody geometry and more extensive waste zones than expected.

(6)

Proven and probable ore reserves at the La Camorra mine are based on drill spacing of 30 to 50 meters and closely spaced chip sample information. Cutoff grade assumptions are developed based on reserve prices, anticipated mill recoveries and cash operating costs. The cutoff grade at La Camorra is 8 grams of gold per tonne.

(7)	An independent audit of the 2001 year end reserves at La Camorra mine was completed in 2002.

In addition, we have the exploration rights to approximately 9,500 hectares (36 square miles) adjacent to the La Camorra mine. This property is controlled through eight different contracts with the Venezuelan state-owned development company, Corporacion Venezolana de Guayana (“CVG”), as well as five different concessions with the Ministry of Basic Industries and Mines (formerly the Ministry of Energy and Mines). The contracts and concessions were granted at various times with expiration dates between 2011 and 2020, and most are renewable for a period of 10 to 20 years.

Exploration work surrounding the La Camorra mine in 2004 included geologic mapping, geochemical sampling and geophysical survey programs, as well as diamond drilling. Several targets have been selected for follow-up work in 2005. A small ore shoot was developed on the Isbelia vein located 700 meters north of the La Camorra Main zone through a cooperative effort with an association of third-party miners and the ore is being processed at the La Camorra mill.

The Block B Concessions

In March 2002, we acquired the Block B exploration and mining lease near El Callao in the Venezuelan State of Bolivar from CVG-Minerven, a Venezuelan government-owned gold mining company. The lease runs through March 2023. Block B is a seven-square-mile property position in the prolific El Callao gold mining district. The area’s mining history dates back to the 1800s and the lease contains many historic mines including the Chile, Laguna and Panama mines, which collectively produced over 1.6 million ounces of gold between 1921 and 1946.

Pursuant to the lease agreement, we paid CVG-Minerven $2.8 million in a series of payments. We will also pay CVG-Minerven a royalty of 2% to 3% on production from Block B. The royalty terms are: (i) 2% if the price of gold is below $290 per ounce of refined gold during the month preceding payment; (ii) 2.5% if the price of gold is equal or greater than $290 and equal to or below $310 per ounce of refined gold during the month preceding payment; and (iii) 3% if the price of gold is greater than $310 per ounce of refined gold during the month preceding payment. No production occurred from Block B in 2004, 2003 or 2002; therefore, no royalties have been paid to CVG-Minerven. Until commercial production begins, we are obligated to make a quarterly lease payment of $5,000. This payment shall increase by 50% each subsequent year to a maximum of five years. In the event we do not commence commercial production in the five years, we will continue paying a fixed quarterly lease payment of $25,313 for the duration of the lease.

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The El Callao area is accessed on a maintained, asphalt highway that runs from Puerto Ordaz, on the south side of the River Orinoco, through to Santa Elena on the Brazilian border. Overall good infrastructure exists and an 115kw electricity power line supplies the area predominantly populated by miners operating underground small-scale mines. The population of El Callao is approximately 25,000 people.

Geologically, the gold is found in shear-zone hosted quartz veins and stockworks in Proterozoic greenstone volcanics, primarily andesitic to basaltic lavas and pyroclastics. Gold occurs as free gold in quartz and is also commonly associated with coarse-grained pyrite.

Upon acquisition, exploration began on the Chile vein system, which we believed to host high-grade gold mineralization. The Chile mine itself was an important gold producer that produced more than 550,000 ounces of gold at an average grade of over one ounce per ton. Since the mine shut down in the 1940s, two phases of exploration drilling were undertaken prior to our work in the Block B lease area, one in the 1960s and more recent drill testing in the 1980s that encountered high grades west of the old mine.

We completed a detailed exploration drilling campaign including 163 drill holes and 40,000 meters of drilling resulting in the discovery of what we refer to as Mina Isidora (formerly the Chile mine). In May 2004, our board of directors approved expenditures of $31.0 million for the development of Mina Isidora, which will be accessed by both a ramp and an inclined shaft (see further discussion below). The development project is approximately 35% complete and the mine is scheduled to reach full production in 2006. Ore from Mina Isidora will be shipped to the mill at the La Camorra mine for processing and the mine will be included as a property under our La Camorra unit for reporting purposes. At December 31, 2004, the net book value of the Block B area, including development activities associated with Mina Isidora, totaled $18.0 million. In addition, we have established an accrual for future reclamation and closure costs of $0.2 million as of December 31, 2004.

At December 31, 2004, there were 48 salaried and 192 hourly employees associated with Block B.

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Information with respect to Mina Isidora’s proven and probable ore reserves is set forth in the table below.

Proven and Probable Ore Reserves (1,2,3,4)	12/31/04		12/31/03

Total tons		338,965		500,011
Gold (ounces per ton)		1.03		0.66
Contained gold (ounces)		350,547		327,303

(1)	For proven and probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Terms.

(2)	Proven and probable ore reserves at Mina Isidora are based on diamond drilling spaced at approximately 30 meters, geostatistical modeling and a feasibility study. Cutoff grade assumptions are developed based on reserve prices, anticipated mill recoveries and cash operating costs.

(3)

The changes to the Mina Isidora ore reserves in 2004 compared to 2003 can be attributed to additional drill data, changes in resource modeling techniques and changes in mining assumptions. Many of the modeling changes are the direct result of the independent audit of the 2003 reserves that we commissioned.

(4)	An independent audit of the 2003 year end reserves for the Mina Isidora property was completed in 2004.

In October 2003, we completed an acquisition of a pre-existing lease of property within the Block B area for $750,000 in cash plus the assumption of $1.3 million in debt, which we paid. The property is adjacent to Mina Isidora and has been developed to provide us with access to the Mina Isidora orebody. The acquisition eliminated the need for us to leave a barrier of unmined ore between Mina Isidora and the adjacent lease, which included a small historic shaft and mine workings that will be integrated into the development of the Mina Isidora orebody. We will start limited production from test stopes at the Mina Isidora orebody through this shaft in 2005.

Outside the Mina Isidora area, other exploration work on the Block B concessions included geologic mapping, geophysical surveying, geochemical sampling and 20,000 meters of exploration diamond drilling. This work has lead to the discovery of two new mineralized zones, the Twin and Conductora mineralized zones located approximately one-kilometer northeast of the Mina Isidora orebody.

The Twin structure is a newly identified shear zone within our Block B exploration property, which was discovered by drilling in the second quarter of 2004. The Twin structure is host to a large mineralized zone known as the Twin mineralized zone. The mineralized zone has a minimum strike length of 750 meters and a minimum vertical extent of 350 meters and is still open down dip and along strike. Mineralization is somewhat erratic with values ranging from 3 grams per tonne to over 18 grams per tonne and widths from 1 meter to over 20 meters. The gold mineralization is associated with disseminated pyrite in a moderate-to-strongly schistose shear zone with moderate-to-intense ankerite/sericite alteration and minor quartz veining. Additional drilling is planned for 2005.

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The Conductora structure, which is a possible extension to the northeast of the Twin structure, is a second shear zone that has been traced over a strike length of about 700 meters and is still open in both directions along strike and also down dip. The structure is host to the Conductora mineralized zone, which has erratic gold values associated with sulphides in narrow, quartz veins and/or wide zones of quartz veinlets in moderate-to-intensely schistose rocks with strong ankerite/sericite alteration.

Geological interpretation is continuing determine the relationship between the Twin and Conductora structures and mineralized zones.

The significance of the Twin/Conductora discovery is that it outlines a previously unidentified shear structure and a new style of mineralization on the Block B concession that opens up other poorly explored areas for this style of mineralization.

Custom Milling Business

Also during 2004, we completed construction of a small scale crushing and sampling plant on the Block B property, that allows Hecla to acquire ore from small underground mines in the area, providing the miners with a transparent sampling system and improved economic terms, as well as industry standard environmental processing practices. Ores purchased from the small mines are initially crushed, sampled and assayed at the sampling plant, and then trucked to the mill at the La Camorra mine for further processing. As a part of this program, we provide small miners with financing and technical assistance, including technical advice on mining techniques, grade controls, and safety standards. The small miner activity in Venezuela is a significant part of the mining industry in Venezuela, and we believe working with the miners provides goodwill with the miners as well as assistance to the communities that are impacted by our operations. Hecla has received a positive response from local and national politicians and residents for our efforts in helping the small miners to improve their practices, and for assisting in providing a stimulus to the local economy. We also believe the program helps develop positive relationships with local mining groups and makes a significant contribution to the local economy. The plant was in start up mode during the second half of 2004, and we expect the custom milling business will be a long-term venture in Venezuela for the Company.

Our custom milling facilities are located near El Callao, in the Venezuelan State of Bolivar, and on our Block B property. The crushing and sampling plant was constructed in 2003 and 2004, with start up operations commencing in the second half of 2004. The plant is designed to be able to process up to 400 tons of purchased ore per day. The plant also includes an assay lab, operated by an outside analytical assay firm, where ore samples are ground and assayed. Ore is received from small mining groups, crushed, sampled and assayed, and then payment for the ore is calculated and made to the miners generally within three days of receipt of the ore. Ore is then trucked approximately 70 miles to the mill at the La Camorra mine where it is further processed.

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As part of the custom milling business, we enter into contracts with the small miner groups and advance funds in the form of equipment and working capital, and collect such advances from ore delivered to the sampling and crushing plant. As of December 31, 2004, we had a receivable from small miners totaling $2.3 million.

During the second half of 2004, a total of 20,870 tons of ore and sands were purchased and processed, which resulted in production of 3,748 ounces of gold. The Company believes that the custom milling business has the potential to expand to approximately 50,000 tons of ore per year, with potential annual production in the range of 10,000 to 20,000 gold ounces, although there can be no assurance that the Company will be able to reach such estimates.

At December 31, 2004, the net book value of the custom milling business properties, plants and equipment totaled $2.9 million.

Other

In January 2005, we signed a letter of intent to acquire the Guariche gold project in Venezuela, which would more than double our land position in that country. Completion of the acquisition is subject to a number of conditions, and as such, there can be no assurance that the acquisition will be completed. For additional information, see Note 4 of Notes to Consolidated Financial Statements.

The San Sebastian Unit

The San Sebastian unit is located in the State of Durango, Mexico, and is 100% owned by us through our subsidiary, Minera Hecla, S.A. de C.V. The San Sebastian mine is located approximately 56 miles northeast of the city of Durango on concessions acquired through our acquisition of Monarch Resources Investments Limited (“Monarch”) in 1999. Access to San Sebastian is via Mexico highway 40, approximately 12 kilometers east of Guadalupe Victoria, and then approximately 23 kilometers of paved rural road through the towns of Ignacio Allende and Emiliano Zapata. The processing plant (the Velardeña mill) is located near Velardeña, Durango, Mexico, and was acquired in April 2001.

Our concession holdings cover approximately 200-square miles, including the Francine vein, the Don Sergio vein and multiple outlying active exploration areas. Production from the Francine vein is from a high-grade silver vein with significant gold credits. Production from the Don Sergio vein is from a high-grade gold vein with some silver credits. Mineral concession titles are obtained and held under the laws of Mexico. Exploration titles are valid for six years, at which time they may be converted to exploitation titles that can be held for up to 50 years. There are work assessment and tax requirements that are variable and increase with the time that the concession is held.

There are several epithermal veins within the Saladillo Valley, which include the Francine, Profesor, Middle and North vein systems that are proximal to each other and hosted within a series of shales with interbedded fine-grained sandstones interpreted to belong to the Cretaceous Caracol Formation. The Don Sergio, Jessica, Andrea and Antonella veins located in the Cerro Pedernalillo area, about six kilometers from Francine, are hosted by the same formation with the addition of dioritic intrusive rocks.

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Ore production during 2001 consisted of surface mining and bulk sampling from four vein systems and underground development along the Francine vein. Underground development started in May 2001 and surface mining ceased during the fourth quarter of 2001. Limited underground ore production from development started in September and increased gradually as stopes were developed during the remainder of 2001. Underground mine production reached the design rate, approximately 450 tons per day, during the second quarter of 2002. A successful conversion from contractor mining to owner mining was completed during the first quarter of 2003.

The Francine vein strikes northwest and dips southwest and is located on the southwestern limb of a doubly plunging anticline. The vein ranges in true thickness from more than four meters to less than half a meter and consists of several episodes of banded quartz, silica-healed breccias and minor amounts of calcite. The vein is oxidized to a depth of approximately 100 vertical meters and the wall rocks contain an alteration halo of less than two meters next to the vein. Mineralization within the oxidized portion of the vein contains limonite, hematite, silver halides and various copper carbonates. Higher-grade gold and silver mineralization is associated with disseminated hematite and limonite after pyrite and chalcopyrite, copper carbonates including malachite and azurite and hydrous copper silicates including chrysocolla. Native gold occurs associated with hematite and limonite. Mineralization in the sulfide portion of the Francine vein contains pyrite, chalcopyrite, sphalerite, galena, native silver, argentite and trace amounts of aguilarite.

Construction of surface facilities and underground ramp development for the Don Sergio vein started in May 2003, with the first ore mined in August 2003. Design production rates were achieved during December 2003. The Don Sergio vein strikes northwest, dips steeply to the northeast and averages 1.6 meters wide. Significant mineralization occurs along a strike length of 200 meters. Gold mineralization occurs in multi-stage chalcedonic quartz veins. The vein is partially oxidized to a depth of approximately 50 vertical meters and the wall rocks contain an alteration halo of five meters next to the vein. High grades appear to be associated with narrow and discontinuous, dark silver sulfide (acanthite) and visible gold-bearing bands near vein margins. The vein is typical of low sulfidation precious metal hot spring systems associated with volcanic activity with economic mineralization occurring in distinct areas or shoots.

The current combined production from the Francine and Don Sergio veins is approximately 450 tons of ore per day. By the end of 2004, essentially all proven and probable ore reserves have been exhausted. Current mine plan estimates mining activity at the San Sebastian unit will cease in the third quarter of 2005. Exploration is active on the Francine, Don Sergio, Andrea and other nearby vein systems to expand ore reserves.

Access to both underground workings is through ramps from the surface connecting one or more levels, excavated at a -15% grade. Ore is mined by the cut-and-fill stoping method and is extracted from the stopes using rubber-tired equipment and hauled to the surface in trucks. Sub-economic material is used to backfill and stabilize mined-out stopes. Electric power is purchased from Comisión Federal de Electricidad (a Mexican federal electric company). Water is supplied from mine dewatering or hauled from a local reservoir.

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Run of mine ore is hauled in trucks by contractors to our processing facility near Velardeña. The mill is a conventional leach, counter-current decantation and Merrill Crowe precipitation circuit. The ore is crushed in a two-staged crushing plant consisting of a primary jaw, a secondary cone crusher and a double-deck vibrating screen. The grinding circuit includes a primary ball mill and cyclone classifiers. The ground ore is thickened followed by agitated leaching and four stages of counter-current decantation to wash solubilized silver and gold from the pulp. The solution bearing silver and gold is then clarified, deaerated and zinc dust added to precipitate silver and gold that is recovered in plate and frame filters. The precious metal precipitate is smelted and refined into doré and shipped to a third-party refiner, currently Met-Mex Peñoles, S.A. de C.V., in Torreón, Mexico.

At December 31, 2004, the net book value of the San Sebastian unit property and its associated plant and equipment was $6.4 million. The mill was constructed in 1994 and is capable of processing approximately 550 tons per day. Site infrastructure includes a water supply system, maintenance shop, warehouse, laboratory, tailings impoundment, and various offices. All equipment and facilities, including the mill, are in good condition and supported by ongoing diagnostic and preventative maintenance programs. Capital improvements in 2004 were approximately $1.0 million and included mining equipment.

For a description of a legal claim relating to our Velardeña mill, see Note 8 of Notes to Consolidated Financial Statements.

As of December 31, 2004, $1.9 million has been accrued for reclamation and closure costs.

At December 31, 2004, there were 307 hourly and 58 salaried employees at San Sebastian and the Velardeña mill. The National Mine and Mill Workers Union represents process plant hourly workers, or 60 employees, at the Velardeña mill. Under Mexican labor law, wage adjustments are negotiated annually and other contract terms every two years. The contract is due for wage negotiation and other terms in July 2005.

In October 2004, the employees at the Velardeña mill in Mexico initiated a strike, in an attempt to unionize the employees at the San Sebastian mine. The mine employees have informed us, the union and the Ministry of Labor that they do not want to be organized. Although we are meeting regularly with government and union officials to resolve the issue, there can be no assurance as to the outcome or length of the strike. The strike impacted our production of silver and gold during the fourth quarter of 2004, and has continued to impact production into 2005. During the fourth quarter of 2004 and continuing into 2005, the mine is operating at a normal rate, stockpiling ore in preparation for future processing. At December 31, 2004, approximately 30,000 tons of ore-grade material had been stockpiled, containing an estimated 350,000 ounces of silver and 12,000 ounces of gold. We are also considering contract custom milling facilities that can process our stockpiled ore.

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Production is currently subject to a 2.5% net smelter return royalty that escalates to 3% after the first 500,000 troy ounces of gold equivalent shipped. As of December 31, 2004, we have shipped approximately 290,000 troy ounces of gold equivalent. We make royalty payments to Monarch Resources U.S.A. and La Cuesta International. The royalties originated from our acquisition of the concessions from Monarch and pre-existing prospecting agreements between Monarch and La Cuesta.

Information with respect to the San Sebastian unit’s production, average cost per ounce of silver produced and proven and probable ore reserves are set forth in the table below.

	Years Ended December 31,
Production	2004		2003		2002

Ore milled (tons)		128,711		150,717		156,532
Silver (ounces)		2,042,173		4,085,038		3,432,394
Gold (ounces)		33,563		47,721		41,510

Average Cost per Ounce of Silver Produced (1,2)

Cash operating costs	$	(0.10	)	$	(0.46	)	$	0.91
Total cash costs	$	0.21		$	(0.25	)	$	1.09
Total production costs	$	2.11		$	0.71		$	2.06

Proven and Probable Ore Reserves (3,4,5,6,7)	12/31/04		12/31/03		12/31/02

Total tons		30,300		170,711		369,556
Silver (ounces per ton)		15.4		22.3		23.7
Gold (ounces per ton)		0.29		0.26		0.24
Contained silver (ounces)		465,400		3,812,503		8,761,109
Contained gold (ounces)		8,600		43,731		88,269

(1)

The continued low costs per silver ounce during 2004 and 2003, compared to 2002, are due in part to significant by-product credits from gold production and a higher average gold price. Costs per ounce amounts are calculated pursuant to standards of the Gold Institute. For the years ended December 31, 2004, 2003 and 2002, gold by-product credits were approximately $6.61, $4.25 and $3.76 per silver ounce, respectively. By-product credits are deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy was changed to treat gold production as a co-product, the following total cash costs per ounce would be reported:

	2004		2003		2002

Silver	$	3.42	$	2.14	$	2.67
Gold	$	208	$	160	$	181

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