Aug 9, 2011
Operator
Good day ladies and gentlemen, and welcome to the second quarter 2011 Hecla Mining Company earnings conference call. My name is Kendal, and I will be your operator for today.
At this time, all participants are in listen only mode. Later we’ll conduct a question and answer session.
(Operator Instructions). I would now like to turn the conference over to, Ms.
Melanie Hennessey, Vice President, Investor Relations, please proceed.
Melanie Hennessey
Thank you, Kendal, and welcome everyone, and thank you everyone for joining us for Hecla’s second quarter financial and operations results. Our news release, which was issued this morning before market opened, along with the release on the approval of Lucky Friday’s ##4 Shaft and predevelopment update issued on Monday, along with the presentation are available on Hecla’s website.
On today’s call we have Phil Baker, Hecla’s President and CEO, Jim Sabala Senior VP and CFO, and Dean McDonald, Vice President, Exploration. Before we get started I need to remind you that any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act.
They involve a number of risks that could cause results to differ from projections. In addition to our filings with the SEC we are only allowed to disclose mineral deposits that we can economically and legally extract or produce.
Investors are cautioned about our use of such terms as measured indicated and inferred resources and we urge you to consider the disclosures that we make in our SEC filings. With that I have the great pleasure of introducing Phil Baker, Hecla’s President and CEO, Mr.
Baker?
Phillip S. Baker
Thanks, Melanie. Hello everyone and thanks for joining the call.
I’m going to provide a brief overview of the second quarter results, Jim will speak about them in a bit more detail, and then I’ll provide an update on the ##4 Shaft at the Lucky Friday mine, and Dean’s going to talk about the pre-development and exploration initiatives. After that, we’ll open the floor for questions.
But before I speak of the quarter’s financial and operational results, I want to provide a update on the Coeur d'Alene Basin Environmental litigation. We expect that the Consent Decree will be approved by the court before the end of the third quarter.
The judge, in fact, had set a hearing for September 8, and we expect the Consent Decree be finalized shortly after that. The initial payment of 167 million plus 1.1 million in pre-lodging interest will be due 30 days after the entry of the Consent Decree.
So we expect to make that payment in the fourth quarter. The balance of payments are in the amount of 96.4 million and will be distributed over a three year period.
So if you’ll go to Slide 4 now, I’ll talk about the quarterly results, and it was a good quarter for us with solid financial operating results. Sales of $118 million and a doubling of our net income compared to the same period last year.
Silver production was 2.3 million ounces, cost were $0.52 per ounce which remained among the lowest in the world. And realized silver prices average $35 an ounce.
Almost all of it is margin. Cash flow from operations is 66 million increased our cash position to 377 million.
And with that Jim, let me ask you to continue talking about our financial results.
James Sabala
Thank you, Phil. Strength in the metals prices continued over all four metals that we produced this quarter, resulting in good financial performance.
On Slide 5, we present realized metals prices for the quarter. You can see that our realized silver price is up by 89%, realized gold price is up by 24% over the second quarter in 2010.
Zinc and lead prices in the first quarter were also up by 15%, and 24% respectively over the same period in 2010. Consequently on Slide 6, you can see that we continue to experience among the lowest cash cost per ounce in the industry, achieving excellent margins.
Our per ounce cash cost were $0.52 for the second quarter, 2011. Cash cost were up compared to the same period last year, due to higher production cost, treatment cost, mine license tax, and employee profit sharing, which are due to higher metals prices.
However, we’re glad to see those cost go up a little bit because the benefit of these higher prices far out strip the cost associated therewith. And our production of $35.28 per ounce of sliver produced was up from $20.78 per ounce in the second quarter of 2010.
Based on our current 2011 production guidance and cost estimates, and assuming recent metals prices for the second half of this year. Total cash cost net of by-product credits are expected to be about $1 per ounce for the year 2011.
Moving to Slide 7, net income applicable to shareholders more than doubled to 33.2 million for the second quarter of 2011, compared to 13.7 million for the same period of 2010. Net income per common basic share was $0.12 in the second quarter 2011, compared to $0.06 in the same period of 2010.
On a per share number, there are a couple of important things to note. First, during the quarter there was a $7.8 million provisional price adjustment for the change in precious metals settlements during the quarter.
And second, we had a buildup in concentrate inventory that pushed 6.5 million of sales into future periods. Together these items impacted earnings by approximately $0.03 per share.
Also impacting earnings is the tax provision of 19.6 million for the quarter, and 43.1 million for the six month. But while this GAAP tax provision will continue at approximately a 36% rate, we expect the cash taxes substantially less at approximately $12 million for the full-year.
On slide 8, we see the benefit of having among the lowest cost in the industry and very strong metals prices. Hecla reported operating cash flow of 66.3 million in the second quarter 2011, representing a 16% increase over that reported in the second quarter of 2010.
This allowed us to continually accumulating funds in the treasury, which is set forth on slide 9. After an excellent quarter of cash flow generation, Hecla was able to find all capital requirements and increase cash available in the treasury to $377 million.
The company has no significant debt outstanding and a $60 million undrawn line of credit available, therefore a total liquidity available for investments stands at $437 million, which we expect will be sufficient to continue the capital projects and redevelop initiatives that we have on our plate, exploration expenditures, and to fully fund the environmental settlement previously discussed. And with that, I’d like to turn the call back to Phil.
Phillip Baker
Okay, I want to comment on Silver given the dramatic move that we’ve seen in gold, and what in gold. If you look at Slide 10, it shows gold and silver since the debt ceiling was – I guess a day or two before the debt ceiling issue was resolved.
And what’s happen since then, well, we saw gold is increased almost $100 or 7% silver, in fact has declined from these levels. That disconnect between the two and will not continue.
We’ve seen it occur dramatically over the ten years where the gold and silver ratio has gone from a high of 80 to a low of 31 earlier this year. And as interest in gold increases, small investor interest in silver will increase.
Basically, it’s $1700 gold, who can really afford an ounce of gold among the small investors. So from the investment standpoint as the price of gold goes up, the gold silver ratio over time will go down.
Basically, gold is a wholesale institutional and central bank sort of investment. Silver is a retail investment.
So if you’re convinced that gold will continue to have strength, then we believe silver will follow. And if you think that industrial metals have hit a rough spot and will strengthen, then silver will be supported by that as well.
However, I think then in the short term – short run, as it’s been for the past two years, price is set by investment demand with the support of industrial demand. The bottom line is that I expect the silver price to rise even more dramatically than gold in the short term.
I now would like to talk about the potential, given that growth and the price of silver. I’d like to talk about the potential of our growth in silver production by 50 to 60% over the next five years with the ##4 Shaft project, with the completion in 2014.
And the new predevelopment initiatives at our four properties. So go to Slide 11.
We’ve made significant progress on a number of predevelopment initiatives with the current assets on hand and see tremendous potential to grow silver production to 15 million ounces by 2016, adding value at minimal cost and minimal risk. The production growth initiatives are separated into three categories, construction, scoping studies, and exploration.
Obtaining production growth through construction is primarily the ##4 Shaft project. Although, there are things that we’re doing at Greens Creek.
The scooping studies are broken into two categories, potential mine re-opening and mine development. The mine re-opening studies include three mines.
The Star mine, Bulldog, and Equity that have all operated in the last 25 years and were shut down due to a silver price below $10. The Huge Zone is a deeper extension of the past producing Francine vein at the San Sebastian project.
The mine development initiatives are projects that can increase production from the Lucky Friday and Greens Creek. And then finally, you have the exploration programs that have been expanded at all of our properties.
Now if you go to Slide 12, you can see what we expect the #4 Shaft and these pre-development projects will do to our production profile over the next five years. We’ve had great growth from 2006 to 2010, primarily as a result of acquiring Greens Creek.
From 2011 to 2016, we expect a plus 10% compounded annual growth rate from assets that we already have in hand. This 56 to 60% increase in production is relatively low risk on all measures, operating risk, capital risk, currency risk, [inaudible] risk, and tax risk.
And the first project is the #4 Shaft which we’ve been advancing since late 2009. So if you look at slide 13, this is a – gives a description of a project that is projected to increase production by 60% at the Lucky Friday due to higher grade with low cost per ounce, and will allow us to mine through 2030 and probably longer.
We receive final board approval for the completion of the project this quarter. Lucky Friday started in 1942, and I’m convinced it will operate more than a century.
Total project cost is estimated to be $200 million with a completion date expected in the second half of 2014. And we’ve spent about 70 million on this project so far.
Slide 14, shows the status of the major milestones with the detailed designing engineering now complete, along with 78% of major procurement items, ordered or installed, which brings the total project to 38% complete. The riskiest part of the development of this project has been completed.
On slide 15, we’ve provided some key estimated metrics, production metrics for the Lucky Friday, once the #4 Shaft comes into production with a ramp up period from 2014 to 2016. Noteworthy is the expected increase in silver grade from 10.4 to 14 ounces per ton.
We remain on time in budget for the #4 Shaft, in addition to the projected 60% production growth at the Lucky Friday mine. We’ve also initiated a mine optimization study to understand the limits of the mine infrastructure that we think could further increase silver production.
Now, that study should be finalized by year-end. With that, I’ll turn the call over to Dean, to talk about the other projects that we have.
Dean McDonald
Thank you, Phil. As outlined in slide 16, Hecla’s initiated the rehabilitation of the Star 2000 drift to access the past producing Star Morning mine silver valley, and provide a number of drill path platforms to expand resource.
With access from this level, studies show that the watering the Star, provides access to lower historic reserves at the Star mine, and ultimately, via a new drift could connect to the Lucky Friday extension. This drift would be on the 4900 level at the Lucky Friday extension, and would provide ventilation and an exploration platform between the two mines.
We can see in Slide 17, drilling from multiple drill stations on the Star 2000 level would allow Hecla to establish and expand the upper Star mine resources and continue to expand the noon day resources where current drilling is to finding a new silver lead rich area above the water levels of the mine. We believe there is potential of 30 million ounces of silver resources above this water table.
Below the water table is the unbooked reserve the mine had at closure. We will be examining this opportunity as well.
At the San Juan silver joint venture in Colorado, we have successfully reopened the portal to the equity mine. And as you can see from the pictures in slide 18, the underground infrastructure is in excellent condition and with reestablished ventilation, air and power, we can be drilling from a series of underground platforms in the fourth quarter of this year.
For the Bulldog mine, a program developed to construct surface support infrastructure to regain access to the Bulldog mine in the fourth quarter. Once a new portal and ramp is in place, we could expand Bulldog resource beyond the 40 million ounces of silver, currently defined with additional underground drilling.
Further work would establish a mine plant to convert those resources to reserves. A planned view of the Equity mine in slide 18 shows the location of the underground ramps and drifts, and the proposed drilling that is scheduled to start in the fourth quarter to refine past resources and evaluate the exploration potential along both the Equity and Amethyst vein trends.
Once reserves have been defined, the infrastructure is in place to reestablish production. The cross sectional view of the Equity mine in slide 20 shows the 1200 vertical feet of the Equity ramp system and the drilling that could define in expanded resource along the Equity structure.
Drill trace from last year’s high-grade surface hold, WE1031 shows that there is at least 2000 feet of up depth dip potential from that intersection to surface. In Mexico, as shown in Slide 21, we’re focusing on a revised scoping study of the Huge Zone, which is the down dip extension of the past producing Francine vein.
Once a resource at the Andrea vein has been refined, we will incorporate those results into the Huge Zone study by the end of the year. Concurrently we will be completing both infill and exploration drilling of the Andrea vein that is within 6 kilometers of the Huge Zone.
Longitudinal of the Andrea vein shown in slide 22, shows contours based on the gold equivalent by horizontal width. The diagram represent a vein that is over 1.7 kilometers long with two high-grade areas that can still be expanded.
Drilling a long [inaudible] to establish if there are other high-grade pods along this regional infrastructure. And with that, I will pass you back to Phil, for further remarks.
Phillip Baker
Okay, finally Slide 23 shows we’ve maintained our guidance with silver production between 9 and 10 million ounces. Cash cost guidance for 2011 will be approximately $1 per ounce at current metals prices, primarily as a results of the higher metals prices, those cost that Jim talked about.
We expect our capital investments to increase from 100 million to 115 million as we accelerate a number of projects at Greens Creek. In addition, exploration is expected to increase from 27 million to 32 million due to the establishment of these pre-development initiatives and the expansion of the exploration programs, primarily in Mexico.
And one last comment, our two operating mines are low cost, long lived operating assets that generate cash flow now. We think they will along with the pre-development properties, generate 50 to 60% more production by 2016.
That’s – as I said earlier, that’s low risk growth over the next five years. And we see these assets continuing to grow over the rest of the decade.
I mean, growth is not going to stop in 2016 with these assets. When we look at our long range plans, we see these assets growing even beyond that.
So with that, operator, let me open the line for questions.
Operator
(Operator instructions). Your first question comes from the line of John Bridges with JP Morgan.
Please proceed.
John Bridges
Good morning, Phil, everybody.
Phillip Baker
Hi, John.
John Bridges
You have a high-quality issue nowadays with all this money that’s coming at you. And I just wondered how you’ve been thinking about relative choices of expanding production, increasing dividends, buybacks, all these other different things, you know, just to come up with the right mix?
What’s your thought on that?
Phillip Baker
Well, look, we are considering all of those things. The first thing, of course, is taking advantage of the assets that we have in Hecla and growing those assets.
You know, these are things that have sat dormant for some time and in a price environment that’s higher than $20, there’s no reason for the assets to sit dormant. So we’re going to move those things forward as quickly as we can because they have – they all have, and particularly the Star and the San Juan Joint Venture assets, long-term potential.
So you can see us move those as quickly as we can. But at the same time, we will consider what the appropriate dividend policy and if there’s any other actions that we should take to deliver value to the shareholders.
We think growth, we think strong production, but we think, you know, dividends, stock buybacks all can be part of the mix of a value delivering package for shareholders. And where those are going to come out, I don’t know, John.
We’ll be sitting down with our Board over the course of the next few weeks and months and you’ll make some determination.
John Bridges
Will the introduction of Star Morning bring down your operating costs in the Silver Valley?
Phillip Baker
It’s too early to say. We’re still in the early days of that.
You know, if you think about it, we just re-initiated the activities at the Star Morning in the second quarter. We’re already, I mean, this has actually moved much faster at all of our properties than we were thinking a quarter ago.
So we’re very pleased with where they’re going. But having said that, we don’t know what the cost structure will be for these assets when they come back into production.
John Bridges
Okay.
Phillip Baker
But they’ll be good. You know, you’ve got the – particularly something like the Star Morning where you have the – all the other activities that we’re already doing in Silver Valley, this will just be added to that.
So I can’t imagine it would move costs, and you know, too much in any direction, but it certainly won’t push our costs up in any major way.
John Bridges
Okay. Congratulations on the environment litigation, that’s a great step.
And then I just wondered, I see silver is particularly weak this morning. I just wondered if you had any great insights as to…
Phillip Baker
Unfortunately, I don’t. We’ve been trying to get a sense of that, you know, because it’s not only weak relative to gold, it’s weak relative to the base metals.
I guess the only thing I would say is that over the long term, you’ve got to expect silver to trade with gold. So I think there’s a huge opportunity for silver.
John Bridges
Yep, yep. Okay.
Well done, guys. Good luck.
Thank you.
Phillip Baker
Thanks, John.
Operator
Your next question comes from the line of Wayne Atwell with Rodman and Renshaw. Please proceed.
Wayne Atwell
Thank you, and congratulations on a good quarter.
Phillip Baker
Hi, Wayne. Long time, no speak.
Wayne Atwell
Yeah. Yeah, it’s been a while.
You know, you’re in great shape. You have a lot on your plate, a lot to do.
What’s the thought internally about M&A? You’re in pretty good shape compared to some of your peers, any thoughts on maybe scoping up some asset that might be undervalued?
Phillip Baker
Yeah, look, we have a very active M&A program. [Inaudible], who I think you know heads that up and we’re looking for opportunities that are both strategic and are opportunistic.
And so we’re looking for those things. You know, give us a call if you see something we should be considering.
Wayne Atwell
But obviously, you can’t give us any names, but could you sort of handicap, you’re really interested, it’s sort of back burner, there’s something imminent? Can you give us any kind of a heads up without violating any confidences?
Phillip Baker
Yeah. This is something we’ll have more conversations with our Board about, but our focus is on certain countries and the Western hemisphere.
We don’t think we can be everywhere. There’s more countries that we’re doing things on silver than on gold, but we are still – still have an interest in gold because we think we being a unique skill set for some underground mining operation.
So we’re limiting our gold evaluations primarily to underground opportunities. Silver, it’s open in terms of the mining method and it’s open with respect to a few countries.
So we have a focused and we think we bring a lot of value to the table with the U.S. assets that we have that can be balanced with the assets in some other country.
Wayne Atwell
So which country is that; the U.S., Mexico, Canada?
Phillip Baker
Well, certainly for gold, it’s the U.S. and Canada.
For silver we’re still working through with the board, but clearly the countries that produce lots of silver, you know, Mexico, Peru would be at the top of the list, and then there’s a number of others, a handful of other I guess.
Wayne Atwell
Thank you.
Phillip Baker
Sure, Wayne.
Operator
Your next question comes from the line of Anthony Sorrentino with Sorrentino Metal. Please proceed.
Anthony Sorrentino
Hello, everyone.
Phillip Baker
Hi, Anthony.
Anthony Sorrentino
Hi. You had said that in the press release that – well, it was mentioned in the press release that you found two high-grade vein intercepts at the Silver Falls at the Lucky Friday mine.
Would you go into further detail as to that find and what the significance of it might be?
Phillip Baker
Yeah, I'm going to let Dean take that, but just to put into context, we have been drilling and wanting to get across the Silver fault to the west of the – of where we had the current reserve and resource for the Lucky Friday. And so we finally have gotten some holes.
We still haven’t reached the target that we’re trying to get to, but we have finally gotten some holes across that, that Silver Falls. It’s been some interesting results.
Dean, do you want to…
Dean McDonald
Sure. Sure, Phil, I’ll follow up.
Anthony, as you probably know, the Silver fault really defined the Western extent of our reserves and recourses at the Lucky Friday. And so the drilling that Phil mentioned, what it’s done is it’s crossed our fault and what we now know is that the Star Fault if now three different faults.
So you go through the first fault, you go through a zone of – or a block of undeformed rock. You hit another fault, another block of rock and then you go, what we believe, is to the other side of the silver fault.
Those two blocks that I mentioned, where we’ve intersected, both of those blocks between the fault [inaudible], contain what we believe are 30 and the 50 vein. I supposed with further drilling we’ll find additional veins there.
But once beyond those faults, we’re now in very intense alteration west of the sliver fault. We’ve seen very weak mineralization at this point, but frankly, we had to stop the program simply because the drills couldn’t go any further.
But we’re very encouraged both by finding mineralization and very good grade mineralization in these fault block areas. But the indications are that we’re going to see some very strong mineralization west of the silver fault.
And so we’re currently putting dotter holes off of those original holes to see if we can define both the dimensions of the blocks that I described but also to try and gain some information on the mineralization west of those silver faults.
Philip Baker
And the dimensions are important because if they’re – if they are what we think they might be, then that area could be minable itself. So that’s an important bit of information that we’ll be looking for.
Anthony Sorrentino
All right. And continuing at Lucky Friday, would you intend to expand the capacity of the mill there?
Phillip Baker
Yeah, so this mine optimization study that we’re doing is being done because all of the economics, everything we’ve done in evaluating the ##4 Shaft and making the decision to go forward with ##4 Shaft, basically did it with what we’re currently producing, what we’re currently able to run through the mine with just a little bit more, I think 25,000 tons a year more. So what we have – what we’re doing with this optimization phase is we’re saying, don’t limit what the mind can do by the mill, let’s look at what the limitations are.
Is it ventilation, is it’ [inaudible], is it logistics, rock mechanics? What is it that is the limit on how fast, how many tons we can mine per day, per year at the Lucky Friday.
And so we will –end of the year, have that study complete, so early next year we’ll be giving some guidance on where – what sort of increase we might make in the mill. We certainly anticipate that there will be an increase, but we’ll need to wait for the study to come to a conclusion.
All right. And that, of course, will not only increase production but because our fixed costs are such a large component of our total costs, that will drive down cash costs even more from what’s going to be an attractive cash cost mine.
Anthony Sorrentino
Right. Lower the costs per unit?
Phillip Baker
Yeah.
Anthony Sorrentino
All right. And you had said that you’re increasing your exploration spending this year from your original expectation of $25 million to $32 million.
Would you give a breakdown of that by property?
Phillip Baker
Yeah, no, it’s 27 to 32 is the increase. And Dean, or Jim, can you – can one of you guys give the breakdown by property?
James Sabala
I’ll go ahead and do that. For the full year at the Lucky Friday, if you would take a look at it, and I’ll break this into two categories.
One will be predevelopment and the second one will be exploration. There’s a fine line between the two, but they’d all be expensed.
At the Lucky Friday, it will be about 1.2 million. Generative work around Silver Valley and on the other properties about 5 million.
On Greens Creek, a total of about 9.7 million, Mexico, 5.8, San Juan 4.8 million, and others generative work about 2.6 million. In addition, in terms of predevelopment budgets now, it’s primarily the Star work, which is about 2.3 million, and work done in Colorado, which is about 1.1.
Anthony Sorrentino
All right, very good. Okay, thank you very much.
Phillip Baker
Thanks, Anthony.
Anthony Sorrentino
You’re welcome.
Operator
Your next question comes from the line of David Peirce with RBC Wealth Management. Please proceed.
David Peirce
Good afternoon, Phil, Dean. Thanks for your thorough presentation.
Phillip Baker
Hi, David.
David Peirce
Hi. I know that a number of firms are using on average $35 an ounce for silver in 2012.
And then it seems to decline, 27.50 in ’13, 25 in ’14, 22.50 in ’15 and 20 at [inaudible] item it seems like afterwards. How realistic do you feel these assumptions are and what internal estimates are you using going forward?
Phillip Baker
Well, David, I guess I’ll answer the last part first, and that is, we use a lot of different prices. We want to develop projects that can capture the upside, but we also want projects that we’ll be able to operate in the long term.
So there are possibly some things that we will do, will be for the purpose to capturing that upside, and – but the bulk of our activities, the bulk of the development, the build of the M&A work that we do is to protect it on the down side. With respect to where assumptions that people make on silver, it really relates back to some comments I made at the – in the first quarter call where the market does not yet understand the change, the systemic change that has happened with silver on the industrial side of things.
And yes, the price of silver is being driving in the last few years, and I would expect the next few years by investment demand. In the long term, it will also have an ever growing push in the demand coming from the industrial side of things.
And that’s basically all the new uses that you see. If you think about the silver [inaudible] cells, the solar panel use, I think in 2004, it was about 4 million ounces of silver and in 2010, I think the consumption was 40 million ounces of silver.
And it’s an every-growing amount of silver that’s going into that application. And it’s – there’s a whole series of new applications that didn’t even exist five, six years ago.
So when I look at people’s long-term price assumptions, I don’t think they are factoring all of the new uses, nor are they factoring I the fact that the consumption rates for silver in the developing world are going to increase and they’re going to approach what we’re consuming in the Western world. And I don’t remember off hand how much silver is consumed in a developed country versus an undeveloped country, but it’s a substantial difference.
So I feel quite optimistic in the long term for the – this consumption of silver for these industrial uses.
David Peirce
Okay. And under what circumstances, I guess, would you – I know that a lot of companies spend a lot of money on hedging, or dehedging, but is there any feel for a hedge book at this point for yourself given just the sheer volitility of it and the scope and dimensions of the projects that you have to finance going forward?
Phillip Baker
Well, the way we’re looking at this is doing everything we can to maintain exposure to the precious metals and riding with that volitility, and hedging off base metals exposure. So we put in place, I guess about a year now, a program to hedge the base metals and effectively what we’re doing is just giving ourselves a trailing average on the metals price.
So it gives us a bit of certainty on that stream of revenue which allows us to cover a large portion, if not all of our costs, operating costs in some cases, you know, at least some portion of capital.
David Peirce
Okay, great. Thank you.
Phillip Baker
Sure.
Operator
Your next question comes from the line of Greg Ripko with Foster and Foster. Please proceed.
Greg Ripko
Hi, guys, how you doing?
Phillip Baker
Hi, Greg
Greg Ripko
A couple quick questions. To start off, can you just [inaudible] a little bit on the margin – increased margin costs for the quarter?
Phillip Baker
Why are cash counts grants increased?
Greg Ripko
Yeah. Exactly.
Phillip Baker
Look, it is a function of certain – for the most part, it is certain costs that are tied directly to the price of silver. The two biggest ones would be our treatment and refining a portion of our silver is – goes to the refiner as a payment for that refining charge and so as the silver prices goes up, the cost of that refining increases accordingly.
The other, another one that’s not related to the silver price is if there was low precipitation in Southeastern Alaska and so we were using diesel power rather than hydro. So those have to do with the bigger thing.
Greg Ripko
Are you hedging any of your diesel exposure?
Phillip Baker
We’re not because we – the prediction of that is quite difficult. We just don’t know when we’re going to have the hydro and when we’re not, you know, with any specificity.
Greg Ripko
Fair enough. Thanks a lot.
Phillip Baker
Sure thing, Greg.
Operator
Your next question comes from the line of Brian Quast with CIBC. Please proceed.
Brian Quast
Hi, guys.
Phillip Baker
Hi, Brian.
Brian Quast
Good to talk to you again. Just a couple of quick things.
I mean, it strikes me that at these sliver prices, drilling for silver in the Silver Valley is somewhat akin to shooting fish in a barrel. What I’m trying to get to here is that you have some small plans to increase your ties at the Lucky Friday.
Could you tell us a little bit more about the infrastructure in the valley that you control and could perhaps put back into production in terms of increasing tonnage because it sounds like you’re going to bring the [inaudible] ore back to the Lucky Friday and if you – I mean, I know you’re doing the mine plan with the view of removing the mill bottleneck, but if the mill bottleneck remains what can be done about that?
Phillip Baker
Look, it’s early days, Brian, on all of that. But we do have the largest land package in the Silver Valley.
We have a land package that has had a tremendous amount of production over the years, you know, the [inaudible] mine operated 90 years. The second largest tonnage mine in the valley.
Lucky Friday is going to operate 100 years. So what we’re looking at is, is there a way to bring –should we have explorations success, and I’m not sure how easy it will be, but I think we’ll have success over time.
Can we bring feed to a centralized mill? What’s the – sort of the long-term vision that we have for the silver valley.
We’re not there yet in terms of other properties, but we are with respect to Lucky Friday, doing this optimization study and I would expect by the end of the year, second quarter of next year that we will not only have completed the optimization study, but we will be starting to consider how we increase product through that mill when the shaft is completed. So that’s really the lynch pin.
And then the work that we’re doing with the scoping work that we’re doing at the Star will result in further exploration above the water table and then probably the dewatering of the Star. And with that will come a connecting of the Star to the Lucky Friday and a connection to our metals there.
But it’s just early days, Brian. Dean, do you want to add anything to my comments?
Dean McDonald
Just some comments in terms of the exploration potential. Certainly I’ve talked briefly about the Star, the Noonday structure, which is a parallel structure to the start.
You know, we’ve identified certainly zinc-rich mineralization but our recent drillings are suggesting that there’s a structure that’s more typically high-grade lead silver. We’re working on some very preliminary work on the Morning, which was a major producer.
And then further to the north, the Standard Mine and others where we’ll begin surface drilling to define where that mineralization goes. So you know, there’s lot of opportunities to find additional work in the valley.
And so we’re in that process now. A centralized mill probably makes a lot of sense, but as Phil mentioned, you know, that’s in the hands of people doing that study now.
Brian Quast
Like I said, I mean, I could pretty much take exploration as read as having success with the difference in silver prices and the amount of mineralization you’ve book. What I was trying to get to was what sort of timelines do you expect in terms of perhaps getting a centralized mill?
Are there tailing stems that are premittable or repermittable that can be expanded to handle extra tonnages? You know, that type of thing.
How – if we take the exploration success as read, or however you want to put it, how can we convert that additional tonnage into revenue for you guys?
Phillip Baker
Yeah, look, I think it’s a four-to-five year process. That’s why we’re talking about this 50% increase, 60% increase in production by 2016.
You know it’s – we’re at the early stages of this, you know, so I don’t want to over sell it, but we’re very enthusiastic, very confident that we’re going to find a way to do exactly what you’re saying. We’re just not in a position yet, Brian, to lay out timelines for that.
I’m hopeful that we will be starting next year.
Brian Quast
All right. Thanks a lot, guys.
Phillip Baker
Okay, thank you, Brian.
Operator
Your next question comes from the line of Andrew Kaip with BMO Capital Markets. Please proceed.
Andrew Kaip
Good morning, Phil.
Phillip Baker
Hi, Andrew.
Andrew Kaip
Hi. Look, I’m just following up on Brian’s question.
I mean, when you’re talking about a centralized mill, I guess, are we talking about a new milling facility or is that something that you can potentially expand your existing?
Phillip Baker
You know, look, it just depends on the tonnage that we’re talking about.
Andrew Kaip
All right, and then you indicated that the Star was the second largest tonnage mine in the valley. Can you give us a sense of what that throughput rate of historically?
Phillip Baker
I wasn’t here, but do you remember, Dean, what it was? I don’t know off hand.
Dean McDonald
My recollection is that it as in 600 tons a day. It was also part of the Morning complex and probably combined, you were looking at 10 to 1,2000 tons a day from those facilities.
Andrew Kaip
Okay. And then just one further question regarding the increase in costs.
And particularly your treatment charges. Can you give us a sense of what percentage of participation the smelters that you deliver to take on content silver, on incremental allowance on silver?
Phillip Baker
Jim, do you have that number?
James Sabala
Well, I can just give you a feel for where it was on a [inaudible] space. This quarter versus last quarter and it was – it depends on the metal that is the primary – or the product that’s the primary production, zinc or lead, because they’re treated a little differently.
But for example, At Greens Creek on a turnaround space, it was up $4.28 from 2Q last year. And at Lucky Friday it was up about $2.80.
Andrew Kaip
And that’s on a per ounce or per ton?
James Sabala
Per ounce.
Andrew Kaip
Okay. And that was over – can you give me the timeframe that was over again?
James Sabala
That’s Q2 of this year versus Q2 of last year. If you want to reflect on it a bit a more, I’d refer you to our 34 document, which has a Reg G reconciliation in it.
Andrew Kaip
Okay.
James Sabala
And I that it lays out treatment and refining to get to the cash cost per ounce.
Andrew Kaip
All right. Thanks very much.
Phillip Baker
Thank you, Andrew.
Operator
Your next question comes from the line of Thomas Adamas with International Management Advisors. Please proceed.
Thomas Adams
Phil, Tom, and Adam, I met your briefly in San Francisco when you made a speech at the Money Conference there.
Phillip Baker
Hi, Tom.
Thomas Adams
I wanted to get some specifics about this payment of the environmental litigation settlement. It looks like you’re going to pay 167 million in cash initially within 30 days of the Consent Decree and then it says some of it will be cash or [inaudible] stock.
Can you define that, let us know how it’s going to affect your excellent current cash position by the end of the year?
Phillip Baker
Yeah, Tom, our plans are to make payments in cash. When we struck the deal, we did not want to be in a position where we had to make a payment and didn’t have enough cash.
So we do – we have adequate resources, so we will pay – make all of those payments in cash is what we’re anticipating planning to do. So on a pro forma basis, if you look at our quarter end cash position, if we make – when we make that $167 million payment, it would reduce our cash position down to $210 million or so, which you know, we’ll continue to put to work on the ##4 Shaft and all these predevelopment projects that we have.
And then the remaining portion will be paid out over the – over three years so those payments we – are to be paid in cash. That’s the way the agreement works.
Tom, are you still there?
Thomas Adams
Yes, I am. Thank you very much.
Operator
Your next question comes from the line of Chris [Liskinheld] with UBS Securities. Please proceed.
Chris [Liskinheld]
Hey, everyone. Thanks for taking my calls.
Phillip Baker
Hi, Chris.
Chris [Liskinheld]
I just have a question on the value if you don’t mine. On something like Star Morning, if you end up doing the work and it turns out that it is – continues to be really a base metal project, would you consider looking at it as a standalone and potentially spitting it out to help fund further growth into precious metals, or do you get the sense that it may only work best as an integrated project, part of a centralized mill as you’ve discussed?
Phillip Baker
Yeah, I think it’s likely to be the latter. Having said that, we’re open to whatever would make the most sense.
You know, we’ll certainly consider other milling options as well and you know, we’re not locked in, but I will say that it’s pretty compelling to apply the fixed cost that you have over the Lucky Friday, at the Lucky Friday combined with other things makes a lot of sense to try to do that.
Chris [Liskinheld]
Right. Okay, thanks.
Phillip Baker
Thank you, Chris.
Operator
Ladies and gentlemen, that concludes our question and answer session of today’s call. I would now like to turn the call back over to Phillip Baker for closing remarks.
Phillip Baker
I appreciate everyone coming on the call. It was a good quarter for us.
We’re – obviously, we’re very excited about these predevelopment initiatives that we started earlier this year and they’re progressing very rapidly and we’ll keep you informed as we go forward with that plus the ##4 Shaft and the normal exploration of other things that we’ve been doing. So thanks very much for joining us.
Operator
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation.
You may now disconnect. Have a great day.