Hecla Mining Company Form 10-Q for the period ended June 30, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

Commission file number 1-8491

HECLA MINING COMPANY
(Exact Name of Registrant as Specified in Its Charter)

Delaware		82-0126240
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

6500 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)

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 whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Shares Outstanding August 4, 2006
Common stock, par value		119,474,124
$0.25 per share

Hecla Mining Company and Subsidiaries

Form 10-Q

For the Quarter Ended June 30, 2006

I N D E X*

		Page

PART I. – Financial Information

Item l –	Consolidated Financial Statements (unaudited)

–	Consolidated Balance Sheets – June 30, 2006 and December 31, 2005	3

–	Consolidated Statements of Operations and Comprehensive Income (Loss) – Three Months Ended and Six Months Ended June 30, 2006 and 2005	4

–	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2006 and 2005	5

–	Notes to Interim Consolidated Financial Statements	6

Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3 –	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4 –	Controls and Procedures	46

PART II. – Other Information

Item 1 –	Legal Proceedings	47

Item 1A –	Risk Factors	47

Item 4 –	Submission of Matters to a Vote of Security Holders	47

Item 5 –	Other Information	48

Item 6 –	Exhibits	48

Signatures		49

*Certain items are omitted as they are not applicable.

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Part I – Financial Information

Hecla Mining Company and Subsidiaries

Consolidated Balance Sheets (Unaudited)
(In thousands, except shares)

	June 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	65,567		$	6,308
Short-term investments and securities held for sale		15,200			40,862
Accounts and notes receivable:
Trade		6,293			5,479
Other		6,610			12,116
Inventories		22,368			25,466
Other current assets		5,065			3,546

Total current assets		121,103			93,777
Investments		3,567			2,233
Restricted cash and investments		20,855			20,340
Properties, plants and equipment, net		134,843			137,932
Other non-current assets		22,788			17,884


Total assets	$	303,156		$	272,166


LIABILITIES

Current liabilities:
Accounts payable and accrued liabilities	$	18,599		$	16,684
Dividends payable		138			138
Accrued payroll and related benefits		10,809			10,452
Accrued taxes		3,005			2,529
Current portion of accrued reclamation and closure costs		6,365			6,328

Total current liabilities		38,916			36,131
Long-term debt		—			3,000
Accrued reclamation and closure costs		60,928			62,914
Other non-current liabilities		8,373			8,791


Total liabilities	$	108,217		$	110,836


SHAREHOLDERS’ EQUITY

Preferred stock, $0.25 par value, authorized 5,000,000 shares;
157,816 shares issued, liquidation preference – $7,891		39			39
Common stock, $0.25 par value, authorized 400,000,000 shares;
issued 2006 – 119,525,976 shares, and
issued 2005 – 118,602,135 shares		29,881			29,651
Capital surplus		513,306			508,104
Accumulated deficit		(348,759	)		(396,092	)
Accumulated other comprehensive income		903			19,746
Less treasury stock, at cost; 2006 – 57,333 common shares, and
2005 – 8,274 common shares		(431	)		(118	)


Total shareholders’ equity		194,939			161,330


Total liabilities and shareholders’ equity	$	303,156		$	272,166

The accompanying notes are an integral part of the interim consolidated financial statements.

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Part I – Financial Information (Continued)

Hecla Mining Company and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
(Dollars and shares in thousands, except for per share amounts)

	Three Months Ended						Six Months Ended
	June 30, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Sales of products	$	56,941		$	25,255		$	96,731		$	49,689


Cost of sales and other direct production costs		30,716			17,896			50,626			33,039
Depreciation, depletion and amortization		8,524			3,879			16,671			7,705

		39,240			21,775			67,297			40,744

Gross profit		17,701			3,480			29,434			8,945


Other operating expenses:
General and administrative		3,781			2,287			6,881			4,929
Exploration		5,610			4,565			8,998			7,357
Pre-development expense		1,955			2,100			3,449			4,234
Depreciation and amortization		238			138			547			283
Other operating expense		1,024			492			1,264			1,184
Gain on sale of properties, plants and equipment		(4,420	)		—			(4,420	)		—
Provision for closed operations and environmental matters		882			353			1,597			687

		9,070			9,935			18,316			18,674

Income (loss) from operations		8,631			(6,455	)		11,118			(9,729	)


Other income (expense):
Gain on sale of investments		(6	)		—			36,416			—
Interest income		1,084			386			1,691			788
Interest expense		(236	)		(3	)		(363	)		(8	)

		842			383			37,744			780


Net income (loss) from operations, before income taxes		9,473			(6,072	)		48,862			(8,949	)
Income tax provision		(258	)		(173	)		(1,253	)		(592	)


Net income (loss)		9,215			(6,245	)		47,609			(9,541	)
Preferred stock dividends		(138	)		(138	)		(276	)		(276	)


Income (loss) applicable to common shareholders	$	9,077		$	(6,383	)	$	47,333		$	(9,817	)


Comprehensive income (loss):
Net income (loss)	$	9,215		$	(6,245	)	$	47,609		$	(9,541	)
Change in derivative contracts		—			362			—			761
Reclassification of gain on sale of marketable securities
included in net income		—			—			(36,422	)		—
Unrealized holding gains (losses) on investments		(188	)		2,145			16,495			1,565


Comprehensive income (loss)	$	9,027		$	(3,738	)	$	27,682		$	(7,215	)


Basic and diluted income (loss) per common share after preferred dividends	$	0.08		$	(0.05	)	$	0.40		$	(0.08	)


Weighted average number of common shares outstanding – basic		119,266			118,429			118,999			118,396


Weighted average number of common shares outstanding – diluted		119,673			118,429			119,427			118,396

The accompanying notes are an integral part of the interim consolidated financial statements.

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Part I – Financial Information (Continued)

Hecla Mining Company and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

	Six Months Ended
	June 30, 2006			June 30, 2005
Operating activities:
Net income (loss)	$	47,609		$	(9,541	)
Non-cash elements included in net income (loss):
Depreciation, depletion and amortization		17,218			7,988
Gain on sale of investments		(36,416	)		—
Gain on disposition of properties, plants and equipment		(4,420	)		(20	)
Gain on sale of royalty interests		(341	)		(550	)
Provision for reclamation and closure costs		198			335
Stock compensation		1,767			832
Other non-cash charges, net		186			—
Change in assets and liabilities:
Accounts and notes receivable		1,277			1,310
Inventories		3,098			(5,931	)
Other current and non-current assets		(3,171	)		1,823
Accounts payable and accrued expenses		1,915			211
Accrued payroll and related benefits		446			(844	)
Accrued taxes		476			208
Accrued reclamation and closure costs and other non-current liabilities		(1,233	)		(1,845	)


Net cash provided by (used in) operating activities		28,609			(6,024	)


Investing activities:
Additions to properties, plants and equipment		(14,186	)		(23,994	)
Proceeds from sale of investments		57,441			—
Proceeds from disposition of properties, plants and equipment		4,368			18
Increase in restricted investments		(515	)		(257	)
Purchase of short-term investments and other securities held for sale		(37,210	)		(56,694	)
Maturities of short-term investments and other securities held for sale		22,010			70,826


Net cash provided by (used in) investing activities		31,908			(10,101	)


Financing activities:
Common stock issued under stock option plans		2,331			256
Dividends paid to preferred shareholders		(276	)		(276	)
Purchase of treasury shares		(313	)		—
Borrowings on debt		4,060			—
Repayments on debt		(7,060	)		—


Net cash used in financing activities		(1,258	)		(20	)


Net increase (decrease) in cash and cash equivalents		59,259			(16,145	)
Cash and cash equivalents at beginning of period		6,308			34,460


Cash and cash equivalents at end of period	$	65,567		$	18,315

The accompanying notes are an integral part of the interim consolidated financial statements.

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Note 1. Basis of Preparation of Financial Statements

In the opinion of management, the accompanying unaudited consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of cash flows and notes to interim consolidated financial statements contain all adjustments necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (“we” or “our” or “us”). These interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2005, as it may be amended from time to time.

The results of operations for the periods presented may not be indicative of those which may be expected for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted as permitted by GAAP.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates.

Note 2. Cash, Short-term Investments, Investments and Restricted Cash

Cash

At June 30, 2006 and December 31, 2005, we held the U.S. dollar equivalent of approximately $11.1 million and $1.1 million, respectively, denominated in Venezuelan bolivares (2,150 bolivares to $1.00). Additionally, we will convert into Venezuelan currency the proceeds of Venezuelan exports made over the past 180 days, or approximately $33.0 million, over the remainder of 2006. Exchanging our cash held in local currency into U. S. dollars can be done through specific governmental programs that have been limited and slow, or through the use of negotiable instruments on which we would likely incur foreign currency losses. Although we are currently making appropriate applications through the Venezuelan government, our cash balances denominated in the Venezuelan bolivar may continue to grow and any conversions may result in losses when and if in the future we decide to distribute money outside Venezuela.

Short-term Investments and Securities Held for Sale

Investments at June 30, 2006 and December 31, 2005 consisted of the following (in thousands)

	June 30, 2006		December 31, 2005
Adjustable rate securities	$	15,200	$	—
Marketable equity securities (cost $21,001)		—		40,862

	$	15,200	$	40,862

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Adjustable rate securities are carried at amortized cost. However, due to the short-term nature of these investments, the amortized cost approximates fair market value. Marketable equity securities are carried at fair market value.

In January 2006, we sold common stock of Alamos Gold Inc., generating a $36.4 million pre-tax gain and providing $57.4 million of cash proceeds. In late 2004 and early 2005, we acquired our interest in Alamos for approximately $21.0 million, which was recorded at fair market value on our consolidated balance sheet at December 31, 2005, under Short-term Investments. The unrealized gain on these securities at December 31, 2005 was $19.9 million and was included as a component of Shareholders’ Equity under Accumulated Other Comprehensive Income.

Non-current Investments

At June 30, 2006 and December 31, 2005, the fair market value of our non-current investments was $3.6 million and $2.2 million, respectively. The cost of these investments was approximately $1.3 million and $0.9 million, respectively.

Restricted Cash and Investments

Various laws and permits require that financial assurances be in place for certain environmental and reclamation obligations and other potential liabilities. Restricted investments primarily represent investments in money market funds and bonds of U.S. government agencies. These investments are restricted primarily for reclamation funding or surety bonds and were $20.9 million at June 30, 2006, and $20.3 million at December 31, 2005, including $8.3 million and $8.1 million, respectively, restricted for reclamation funding for the Greens Creek joint venture. We estimate increasing restricted cash and investments at Greens Creek by approximately $1.0 million during the fourth quarter of 2006.

Note 3. Income Taxes

For the three and six months ended June 30, 2006, we recorded a $0.3 million and $1.3 million tax provision, respectively, primarily for U.S. alternative minimum tax and foreign withholding taxes payable. For the three and six months ended June 30, 2005, we recorded a $0.2 million and $0.6 million tax provision, respectively, for U.S. alternative minimum tax, foreign withholding taxes payable and foreign income taxes payable.

The income tax provision for the second quarter and first six months in 2006 varies from the amount that would have resulted from applying the statutory income tax rate to our to pretax income primarily due to utilization of U.S. tax net operating loss carryforwards. The income tax provision for the same periods in 2005 varies from the amount that would have resulted from applying the statutory income tax rate to pretax income primarily due to non-utilization of foreign tax losses partially offset by utilization of U.S tax net operating loss carryforwards.

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Note 4. Inventories

Inventories consist of the following (in thousands):

	June 30, 2006		December 31, 2005
Concentrates, doré, bullion, metals in
transit and other products	$	8,308	$	10,964
Materials and supplies		14,060		14,502


	$	22,368	$	25,466

The Central Bank of Venezuela maintains regulations concerning the export of gold from Venezuela, under which we are required by current regulations to sell 15% of our production within the country. Included in sales for the second quarter and first six months of 2006 are revenues from the sale of Venezuelan production in-country, including 8,900 ounces held at December 31, 2005 (and 11,500 ounces held at March 31, 2006).

Note 5. Commitments and Contingencies

Bunker Hill Superfund Site

In 1994, we, as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), entered into a Consent Decree with the Environmental Protection Agency (“EPA”) and the State of Idaho concerning environmental remediation obligations at the Bunker Hill Superfund site, a 21-square mile site located near Kellogg, Idaho (“the Bunker Hill site”). The 1994 Consent Decree (the “Bunker Hill Decree” or “Decree”) settled our response-cost responsibility under CERCLA at the Bunker Hill site. Parties to the Decree included us, Sunshine Mining and Refining Company (“Sunshine”) and ASARCO Incorporated (“ASARCO”). Sunshine subsequently filed bankruptcy and settled all of its obligations under the Bunker Hill Decree.

In response to a request by us and ASARCO, the Federal District Court having jurisdiction over the Bunker Hill Decree issued an order in September 2001 that the Decree should be modified in light of a significant change in factual circumstances not reasonably anticipated by the mining companies at the time they signed the Decree. In its Order, the Court reserved the final ruling on the appropriate modification to the Bunker Hill Decree until after the issuance by the EPA of a Record of Decision (“ROD”) on the Coeur d’Alene River Basin (“Basin”) Remedial Investigation/Feasibility Study. The EPA issued the ROD in September 2002, proposing a $359 million Basin-wide clean up plan to be implemented over 30 years. The ROD also establishes a review process at the end of the 30-year period to determine if further remediation would be appropriate. Based on the 2001 Order issued by the Court, in April 2003, we and ASARCO requested that the Court release both parties from future work under the Bunker Hill Decree.

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In November 2003, the Federal District Court issued its order on ASARCO’s and our request for final relief on the motion to modify the Bunker Hill Decree. The Court held that we and ASARCO were entitled to a reduction of $7.0 million from the remaining work or costs under the Decree. The parties agreed to credit this $7.0 million reduction against the government’s alleged past costs under the Decree, although historically we had not recorded this credit to offset our estimated future costs. In January 2004, the United States and the State of Idaho appealed the modification to the Decree. In December 2005, the U.S. Ninth Circuit Court of Appeals reversed the Federal District Court’s order, including the $7.0 million reduction from the parties’ obligations under the Decree. Our petition for a rehearing of this matter was denied by the Ninth Circuit Court in April 2006. During July 2006, we filed a petition for a Writ of Certiorari with the U.S. Supreme Court seeking its permission to appeal the Ninth Circuit Court’s decision.

Shortly after the Ninth Circuit Court of Appeals ruling in December 2005, we received notice that the EPA allegedly incurred $14.6 million in costs relating to the Bunker Hill site from January 2002 to March 2005. The notice was provided so that we and ASARCO may have an opportunity to review and comment on the EPA’s alleged costs prior to the EPA’s submission of a formal demand for reimbursement, which has not occurred as of the date of this filing. We reviewed the costs submitted by the EPA to determine whether we have any obligation to pay any portion of the EPA’s alleged costs relating to the Bunker Hill site. We were unable to determine what costs, if any, we will be obligated to pay under the Bunker Hill Decree based on the information submitted by the EPA. We have requested that the EPA provide additional documentation relating to these costs, which has not been provided as of the date of this filing. We anticipate exercising our right under the Bunker Hill Decree to challenge reimbursement of the alleged costs. However, an unsuccessful challenge would likely require us to increase our expenditures and/or accrual relating to the Bunker Hill site, which could be materially adverse to our financial results or financial condition.

In 1994, we entered into a cost-sharing agreement with other potentially responsible parties, including ASARCO, relating to required expenditures under the Bunker Hill Decree. ASARCO is in default of its obligations under the cost-sharing agreement and consequently in August 2005, we filed a lawsuit against ASARCO in Idaho State Court seeking amounts due us for work completed under the Decree. Additionally, we have claimed certain amounts due us under a separate agreement related to expert costs incurred to defend both parties with respect to the Basin litigation in Federal District Court, discussed further below. After we filed suit, ASARCO filed for Chapter 11 bankruptcy protection in United States Bankruptcy Court in Texas in August 2005. As a result of this filing, an automatic stay is in effect for our claims against ASARCO. We are unable to proceed with the Idaho State Court litigation against ASARCO because of the stay, and will assert our claims in the context of the bankruptcy proceeding.

The accrued liability balance at June 30, 2006 relating to the Bunker Hill site was $1.9 million, which is anticipated to be spent over the next two through thirty years. The liability balance represents our portion of the remaining remediation activities associated with the site, as well as our estimated portion of a long-term institutional controls program required by the Bunker Hill Decree. We have not included any amount in the accrual for government claims for past costs because, in accordance with GAAP, we are currently unable to estimate our liability for these claims. We believe ASARCO’s remaining share of its future obligations will be paid through proceeds from an ASARCO trust created in 2003 for the purpose of funding certain of ASARCO’s environmental obligations, as well as distributions to be determined by the Bankruptcy Court. In the event we are not successful in collecting what is due us from the ASARCO trust or through the bankruptcy proceedings, because the Bunker Hill Decree holds us jointly and severally liable, it is possible our liability balance for the remedial activity at the Bunker Hill site could be $6.4 million, the amount we currently estimate to complete the total remaining obligation under the Decree. In addition, we may be liable for government past costs allegedly incurred by the government at the Bunker Hill site, as discussed above.

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Coeur d’Alene River Basin Environmental Claims

Coeur d’Alene Indian Tribe Claims

In July 1991, the Coeur d’Alene Indian Tribe (“Tribe”) brought a lawsuit, under CERCLA, in Federal District Court in Idaho against us, ASARCO and a number of other mining companies asserting claims for damages to natural resources downstream from the Bunker Hill site over which the Tribe alleges some ownership or control. The Tribe’s natural resource damage litigation has been consolidated with the United States’ litigation described below. Because of various bankruptcies and settlements of other defendants, we are the only remaining defendant in the Tribe’s Natural Resource Damages case.

U.S. Government Claims

In March 1996, the United States filed a lawsuit in Federal District Court in Idaho against certain mining companies, including us, that conducted historic mining operations in the Silver Valley of northern Idaho. The lawsuit asserts claims under CERCLA and the Clean Water Act, and seeks recovery for alleged damages to, or loss of, natural resources located in the Coeur d’Alene River Basin (“Basin”) in northern Idaho for which the United States asserts it is the trustee under CERCLA. The lawsuit claims that the defendants’ historic mining activity resulted in releases of hazardous substances and damaged natural resources within the Basin. The suit also seeks declaratory relief that we and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Basin outside the Bunker Hill site. We have asserted a number of defenses to the United States’ claims.

As discussed above, in May 1998, the EPA announced that it had commenced a Remedial Investigation/Feasibility Study under CERCLA for the entire Basin, including Lake Coeur d’Alene, as well as the Bunker Hill site, in support of its response cost claims asserted in its March 1996 lawsuit. In October 2001, the EPA issued its proposed clean-up plan for the Basin. The EPA issued the ROD on the Basin in September 2002, proposing a $359 million Basin-wide clean up plan to be implemented over 30 years and establishing a review process at the end of the 30-year period to determine if further remediation would be appropriate.

During 2000 and 2001, we were involved in settlement negotiations with representatives of the United States, the State of Idaho and the Tribe. These settlement efforts were unsuccessful. However, we may participate in similar settlement negotiations in the future.

Phase I of the trial commenced on the consolidated Tribe’s and the United States’ claims in January 2001, and was concluded in July 2001. Phase I addressed the extent of liability, if any, of the defendants and the allocation of liability among the defendants and others, including the United States. In September 2003, the Court issued its Phase I ruling, holding that we have some liability for Basin environmental conditions. The Court refused to hold the defendants jointly and severally liable for historic tailings releases and instead allocated a 31% share of liability to us for impacts resulting from these releases. The portion of damages, past costs and clean-up costs to which this 31% applies, other cost allocations applicable to us and the Court’s determination of an appropriate clean-up plan is to be addressed in Phase II of the litigation. The Court also left issues on the deference, if any, to be afforded the United States’ clean-up plan, for Phase II.

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The Court found that while certain Basin natural resources had been injured, “there has been an exaggerated overstatement” by the plaintiffs of Basin environmental conditions and the mining impact. The Court significantly limited the scope of the trustee plaintiffs’ resource trusteeship and will require proof in Phase II of the litigation of the trustees’ percentage of trusteeship in co-managed resources. The United States and the Tribe are re-evaluating their claims for natural resource damages for Phase II. We believe we have limited liability for natural resource damages because of the actions of the Court described above; however, such claims may be in the range of $2.0 billion to $3.4 billion. Because of a number of factors relating to the quality and uncertainty of the United States and Tribe’s natural resources damage claims, we are currently unable to estimate what, if any, liability or range of liability we may have for these claims.

In expert reports exchanged with the defendants in August and September 2004, the United States claimed to have incurred approximately $87 million for past environmental study, remediation and legal costs associated with the Basin for which it is alleging it is entitled to reimbursement in Phase II. A portion of these costs is also included in the work to be done under the ROD. With respect to the United States’ past cost claims, we have determined a potential range of liability to be $5.6 million to $13.6 million, with no amount in the range being more likely than any other amount.

Two of the defendant mining companies, Coeur d’Alene Mines Corporation and Sunshine Mining and Refining Company, settled their liabilities under the litigation during 2001. We and ASARCO (which, as discussed above, filed for bankruptcy in August 2005) are the only defendants remaining in the United States’ litigation. Phase II of the trial was scheduled to commence in January 2006. As a result of ASARCO’s bankruptcy filing as discussed above, the Idaho Federal Court vacated the January 2006 trial date. We anticipate the Court will schedule a status conference to address rescheduling the Phase II trial date once the Bankruptcy Court rules on a motion brought by the United States to declare the bankruptcy stay inapplicable to the Idaho Court proceedings. The ruling from the Bankruptcy Court is expected in 2006.

Although the United States has previously issued its ROD proposing a clean-up plan totaling approximately $359 million and its past cost claim is $87 million, based upon the Court’s prior orders, including its September 2003 order and other factors and issues to be addressed by the Court in Phase II of the trial, we currently estimate the range of our potential liability for both past costs and remediation (but not natural resource damages as discussed above) in the Basin to be $23.6 million to $72.0 million (including the potential range of liability of $5.6 million to $13.6 million for the United States’ past cost claims as discussed above), with no amount in the range being more likely than any other number at this time. Based upon GAAP, we have accrued the minimum liability within this range, which at June 30, 2006, was $23.6 million. It is possible that our ability to estimate what, if any, additional liability we may have relating to the Basin may change in the future depending on a number of factors, including information obtained or developed by us prior to Phase II of the trial and its outcome, and, any interim court determinations.

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Insurance Coverage Litigation

In 1991, we initiated litigation in the Idaho District Court, County of Kootenai, against a number of insurance companies that provided comprehensive general liability insurance coverage to us and our predecessors. We believe the insurance companies have a duty to defend and indemnify us under their policies of insurance for all liabilities and claims asserted against us by the EPA and the Tribe under CERCLA related to the Bunker Hill site and the Basin. In 1992, the Idaho State District Court ruled that the primary insurance companies had a duty to defend us in the Tribe’s lawsuit. During 1995 and 1996, we entered into settlement agreements with a number of the insurance carriers named in the litigation. We have received a total of approximately $7.2 million under the terms of the settlement agreements. Thirty percent of these settlements were paid to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill Decree. Litigation is still pending against one insurer with trial suspended until the underlying environmental claims against us are resolved or settled. The remaining insurer in the litigation, along with a second insurer not named in the litigation, is providing us with a partial defense in all Basin environmental litigation. As of June 30, 2006, we have not recorded a receivable or reduced our accrual for reclamation and closure costs to reflect the receipt of any potential insurance proceeds.

Independence Lead Mines Litigation

In March 2002, Independence Lead Mines Company (“Independence”) notified us of certain alleged defaults by us under a 1968 lease agreement relating to the Gold Hunter area (also known as the DIA properties) of our Lucky Friday unit. Independence alleged that we violated the “prudent operator obligations” implied under the lease by undertaking the Gold Hunter project and violated certain other provisions of the Agreement with respect to milling equipment and calculating net profits and losses. Under the lease agreement, we have the exclusive right to manage, control and operate the DIA properties. Independence holds an 18.52% net profits interest under the lease agreement that is payable after we recoup our investments in the DIA properties.

In June 2002, Independence filed a lawsuit in Idaho State District Court seeking termination of the lease agreement and requesting unspecified damages. Trial of the case occurred in late March 2004. In July 2004, the Court issued a decision that found in our favor on all issues and subsequently awarded us approximately $0.1 million in attorney fees and certain costs, which Independence has paid. In August 2004, Independence filed its Notice of Appeal with the Idaho Supreme Court. Oral arguments were heard by the Idaho Supreme Court in February 2006. In April 2006, the Idaho Supreme Court ruled in our favor on all of Independence’s claims. During May 2006, Independence filed a motion for reconsideration with the Idaho Supreme Court, which was denied in June 2006. We believe that Independence has exhausted the appeals process and that the matter has concluded.

Nevada Litigation – Hollister Development Project

We and our wholly owned subsidiary, Hecla Ventures Corporation, filed a lawsuit in Elko County, Nevada in April 2005 against our co-participants, Great Basin Gold Ltd. and Rodeo Creek Gold Inc., to resolve contractual disagreements involving our Earn-In Agreement entered into in August 2002 for the Hollister Development Project located in northern Nevada. In March 2006, the parties agreed to modify the Earn-In Agreement to reflect changing conditions at the project, revise certain deadlines and dismiss all litigation. Although there can be no assurance that other disagreements will not arise between the parties, we believe that they will not likely affect progress on the project.

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Creede, Colorado, Litigation

In May 2005, the Wason Ranch Corporation filed a complaint in Federal District Court in Denver, Colorado, against us, Barrick Goldstrike Mines Inc., Chevron USA Inc. and Chevron Resources Company (collectively the “defendants”) for alleged violations of the Resource Conservation and Recovery Act (“RCRA”) and the Clean Water Act (“CWA”). During June 2006, Wason Ranch voluntarily dismissed the lawsuit without prejudice. The complaint alleged that the defendants are past and present owners and operators of mines and associated facilities located in Mineral County near Creede, Colorado, and such operations have released pollutants into the environment in violation of the RCRA and CWA. The lawsuit sought injunctive relief to abate the alleged harm and an unspecified amount of civil penalties for the alleged violations. Although Wason Ranch voluntarily dismissed the lawsuit during the second quarter of 2006, there can be no assurance that it will not re-file its alleged claims.

Venezuela Litigation

Our wholly owned subsidiary, Minera Hecla Venezolana, C.A. (“MHV”) is involved in litigation in Venezuela with SENIAT, the Venezuelan tax authority, concerning alleged unpaid tax liabilities that predate our purchase of the La Camorra mine from Monarch Resources Investments Limited (“Monarch”) in 1999. Pursuant to our Purchase Agreement, Monarch has assumed defense of and responsibility for the pending tax case in the Superior Tax Court in Caracas. In April 2004, SENIAT filed with the Third 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 for the dollar equivalent of approximately $4.3 million, at exchange rates in effect at that time. In June 2004, the Superior Tax Court in Caracas ordered suspension and revocation of the embargo action filed by SENIAT, although the Court has retained the $4.3 million until such tax liabilities are settled.

In October 2005, MHV, Monarch and SENIAT reached a mutual agreement to settle the case, which is awaiting approval by the court. The terms of the agreement provide that MHV will pay approximately $0.8 million in exchange for release of the alleged tax liabilities. In a separate agreement, Monarch will reimburse MHV for all amounts expended in settling the case, including response costs, through a reduction in MHV’s royalty obligations to Monarch. Although we believe the cash deposit will continue to prevent any further action by SENIAT with respect to the embargo, and that MHV’s settlement efforts will be successful, there can be no assurances as to the outcome of this proceeding until a final settlement is approved by the court. 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 results or condition.

In a separate matter, in February 2005 we were notified by SENIAT that it had completed its audit of our Venezuelan tax returns for the years ended December 31, 2003 and 2002. In the notice, SENIAT alleged that 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 reviewed SENIAT’s findings and submitted an appeal. In March 2006, the appeal was resolved in our favor and we were found not liable for the $3.8 million assessment. However, there can be no assurance that there will not be additional assessments in the future, or that SENIAT or other governmental agencies or officials will not take other actions against us, whether or not justified, which, in each case, could materially disrupt our operations in Venezuela and have a material adverse effect on our financial results or condition.

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La Camorra Shaft Construction Arbitration

We are disputing some of the shaft construction costs relating to the production shaft commissioned at our La Camorra mine during 2005. Pursuant to the construction agreement, we submitted the matter to the American Arbitration Association for arbitration in November 2005. We have also agreed to participate in non-binding mediation. The contractor asserts $7.2 million of construction costs that we dispute. We claim approximately $6.1 million in damages against the contractor for various claims and back charges related to the construction of the shaft. There can be no assurance that any mediation of the matter will be successful, or that the matter will be arbitrated in our favor.

Other Contingencies

We are subject to other legal proceedings and claims not disclosed above which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these other matters, we believe the outcome of these other proceedings will not have a material adverse effect on our financial results or condition.

Note 6. Income (Loss) per Common Share

We are authorized to issue 400.0 million shares of common stock, $0.25 par value per share, of which 119,525,976 shares were issued at June 30, 2006. In May 2006, shareholders approved an amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock from 200.0 million to 400.0 million.

The following tables present reconciliations of the numerators and denominators used in the basic and diluted income (loss) per common share computations. Also shown is the effect that has been given to preferred dividends in arriving at the income (losses) applicable to common shareholders for the three and six months ended June 30, 2006 and 2005, in computing basic and diluted income (loss) per common share (dollars and shares in thousands, except per-share amounts).

	Three Months Ended June 30,
	2006							2005
	Net Income			Weighted Average Shares		Per-Share Amount		Net Loss			Weighted Average Shares		Per-Share Amount
Income (loss) before preferred stock dividends	$	9,215						$	(6,245	)
Less: Preferred stock dividends		(138	)						(138	)

Basic income (loss) applicable to common shareholders	$	9,077			119,266	$	0.08	$	(6,383	)		118,429	$	(0.05	)
Effect of dilutive securities		—			407		—		—			—		—

Diluted income (loss) per common share	$	9,077			119,673	$	0.08	$	(6,383	)		118,429	$	(0.05	)

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	Six Months Ended June 30,
	2006							2005
	Net Income			Weighted Average Shares		Per-Share Amount		Net Loss			Weighted Average Shares		Per-Share Amount
Income (loss) before preferred stock dividends	$	47,609							(9,541	)
Less: Preferred stock dividends		(276	)						(276	)

Basic income (loss) applicable to common shareholders	$	47,333			118,999	$	0.40	$	(9,817	)		118,396	$	(0.08	)
Effect of dilutive securities		—			428		—		—			—		—

Diluted income (loss) per common share	$	47,333			119,427	$	0.40	$	(9,817	)		118,396	$	(0.08	)

These calculations of diluted income (loss) per share for the three and six months ended June 30, 2006 and 2005, exclude the effects of convertible preferred stock (liquidation preference of $7.9 million in 2006 and 2005), as their conversion and exercise would be antidilutive. Restricted stock units outstanding during the 2005 periods, as well as common stock issuable upon the exercise of certain stock options, have also been excluded as their conversion and exercise would be antidilutive as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
1987 and 1995 Stock Incentive Plan
Stock options		1,386,500		3,105,820		1,525,500		3,105,820
2002 Key Employee Deferred Compensation Plan
Stock options		276,620		902,892		298,927		902,892
Stock units		—		79,996		—		79,996
Restricted stock units		—		322,100		—		322,100

Note 7. Business Segments

We are organized and managed by four segments, which represent our operating units and various exploration targets: the La Camorra unit and various exploration activities in Venezuela, the San Sebastian unit and various exploration activities in Mexico, the Greens Creek unit and the Lucky Friday unit. Prior to 2005, we were organized according to the geographical areas in which we operated, Venezuela (the La Camorra unit), Mexico (the San Sebastian unit) and the United States (the Greens Creek unit and the Lucky Friday unit).

At December 31, 2005, we changed our reportable segments to better reflect the economic characteristics of our operating properties and have restated the corresponding information for the second quarter and first six months of 2005 to be comparable to the current presentation. General corporate activities not associated with operating units and their various exploration activities, as well as idle properties, are presented as “other.” We consider interest expense, interest income and income taxes general corporate items and are not allocated to our segments.

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The following tables present information about reportable segments for the three and six months ended June 30, 2006 and 2005 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Sales to unaffiliated customers:
La Camorra	$	31,065		$	9,657		$	46,641		$	19,347
Greens Creek		14,125			10,392			27,910			20,540
Lucky Friday		11,704			5,209			21,225			9,649
San Sebastian		47			(3	)		955			153


	$	56,941		$	25,255		$	96,731		$	49,689


Income (loss) from operations:
La Camorra	$	4,050		$	(1,276	)	$	4,265		$	(922	)
Greens Creek		6,818			2,258			13,556			5,483
Lucky Friday		4,353			609			7,325			1,007
San Sebastian		(1,865	)		(2,263	)		(3,612	)		(4,525	)
Other		(4,725	)		(5,783	)		(10,416	)		(10,772	)


	$	8,631		$	(6,455	)	$	11,118		$	(9,729	)

The following table presents identifiable assets by reportable segment as of June 30, 2006 and December 31, 2005 (in thousands):

	June 30, 2006		December 31, 2005
Identifiable assets:
La Camorra	$	106,591	$	104,491
Greens Creek		67,271		64,235
Lucky Friday		27,160		21,457
San Sebastian		4,334		7,208
Other		97,800		74,775


	$	303,156	$	272,166

Note 8. Employee Benefit Plans

We sponsor defined benefit pension plans covering substantially all U.S. employees. Net periodic pension cost (income) for the plans consisted of the following for the three and six months ended June 30, 2006 and 2005 (in thousands):

	Three Months Ended June 30,
	Pension Benefits						Other Benefits
	2006			2005			2006			2005
Service cost	$	187		$	177		$	5		$	1
Interest cost		756			803			45			19
Expected return on plan assets		(1,334	)		(1,398	)		—			—
Amortization of prior service cost		91			98			(2	)		19
Amortization of net (gain) loss		11			(19	)		(13	)		(5	)
Amortization of transition obligation		—			1			—			—

Net periodic benefit cost (income)	$	(289	)	$	(338	)	$	35		$	34

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	Six Months Ended June 30,
	Pension Benefits						Other Benefits
	2006			2005			2006			2005
Service cost	$	373		$	353		$	9		$	3
Interest cost		1,513			1,606			90			38
Expected return on plan assets		(2,668	)		(2,797	)		—			—
Amortization of prior service cost		183			195			(3	)		38
Amortization of net (gain) loss		22			(39	)		(26	)		(10	)
Amortization of transition obligation		—			2			—			—

Net periodic benefit cost (income)	$	(577	)	$	(680	)	$	70		$	69

Note 9. Stock-Based Compensation Plans

At June 30, 2006 and 2005, executives, key employees and non-employee directors had been granted options to purchase our common shares or were credited with common shares under the various stock-based compensation plans described below. The following table presents our various outstanding options and units as of June 30, 2006 and 2005:


1995 Stock Incentive Plan
Stock options	2,279,570	3,105,820
Deferred Compensation Plan
Stock options	958,060	902,892
Stock units	9,113	79,996
Restricted stock units	137,600	322,100

In June 2006, 78,704 common stock units that had previously been held under the terms of the deferred compensation plan as compensation for the Chairman of the board of directors were distributed upon the Chairman’s retirement.

1995 Stock Incentive Plan

Our 1995 Stock Incentive Plan, as amended in 2004, authorizes the issuance of up to 11.0 million shares of our common stock pursuant to the grant or exercise of awards under the plan. The board of directors committee that administers the 1995 plan has broad authority to fix the terms and conditions of individual agreements with participants, including the duration of the award and any vesting requirements. The 1995 plan will terminate 15 years after the effective date of the plan.

Deferred Compensation Plan

We maintain a deferred compensation plan that allows eligible officers and employees to defer a portion or all of their compensation. A total of 6.0 million shares of common stock are authorized under this plan. Deferred amounts may be allocated to either an investment account or a stock account. The investment account is similar to a cash account and bears interest at the prime rate. In the stock account, quarterly deferred amounts and a 10% matching amount are converted into stock units equal to the average closing price of our common stock over a quarterly period. At the end of each quarterly period, participants are eligible to elect to convert a portion of their investment account into the stock account, with no matching contribution, or participants may utilize the investment account to purchase discounted stock options. Stock options and units vest and are distributable based upon predetermined dates as elected by the participants, or upon a distributable event, such as (1) separation from service; (2) death; (3) unforeseeable emergency; or (4) change-in-control.

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Directors’ Stock Plan

In 1995, we adopted the Hecla Mining Company Stock Plan for Nonemployee Directors (the “Directors’ Stock Plan”), which may be terminated by our board of directors at any time. A total of 1.0 million shares of common stock are authorized under this plan. On May 30 of each year, each nonemployee director is credited that number of shares determined by dividing $24,000 by the average closing price for our common stock on the New York Stock Exchange for the prior calendar year. All credited shares are held in trust for the benefit of each director until delivery, which occurs upon the earliest of: (1) death or disability; (2) retirement; (3) a cessation of the director’s service for any other reason; (4) a change in control; or (5) at anytime upon the election of a director provided that the delivery under such election shall be limited to that portion of the stock credited to each director for at least 24 months prior to delivery. Further, the shares of our common stock credited to nonemployee directors pursuant to the directors’ stock plan may not be sold until at least six months following the date they are delivered.

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires the measurement of the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Under SFAS No. 123(R), we have chosen to use the modified prospective transition method and our interim consolidated financial statements as of and for the six months ended June 30, 2006, reflect its impact. Under this method, compensation cost is recognized for awards granted and for awards modified, repurchased or cancelled in the period after adoption. Compensation cost is also recognized for the unvested portion of awards granted prior to adoption.

In accordance with the modified prospective transition method, our interim consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No. 123(R) for the three and six months ended June 30, 2006, was approximately $1.7 million and $1.8 million, respectively, was recorded as general and administrative expenses and cost of sales and other direct production costs. Over the next twelve months, we expect to recognize approximately $0.7 million in additional compensation expense as the remaining options and units vest, as required by SFAS No. 123(R).

Stock Options

Prior to our adoption of SFAS No. 123(R), we measured compensation cost for stock option plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). In addition, we disclosed compensation expense for our stock-based plans based on the fair value at grant dates consistent with the provisions of SFAS No. 123. Our loss and per share loss applicable to common shareholders under the requirements of SFAS No. 123 indicated below (in thousands, except per share amounts):

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	Three and Six Months Ended June 30,
	2005			2005
Loss applicable to common shareholders
As reported	$	(6,383	)	$	(9,817	)
Stock-based employee compensation expense
included in reported loss		670			832
Total stock-based employee compensation
expense determined under fair value
based methods for all awards		(2,269	)		(2,478	)


Pro-forma loss applicable to common shareholders	$	(7,982	)	$	(11,463	)


Loss applicable to common shareholders per share:
As reported	$	(0.05	)	$	(0.08	)
Pro forma	$	(0.07	)	$	(0.10	)

During the second quarter and first six months of 2005, we recognized credits of $0.7 million and $0.8 million, respectively, for variable plan accounting and accruals under our employee stock option plans, which are no longer required under the provisions of SFAS No. 123(R).

The fair value of the options granted during the second quarters of 2006 and 2005 were estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions given below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Weighted average fair value of options granted	$	2.05		$	1.57		$	2.01		$	1.57
Expected stock price volatility		54.51	%		54.30	%		54.43	%		54.36	%
Estimated forfeiture		4.54	%		2.92	%		4.30	%		2.92	%
Risk-free interest rate		4.93	%		3.57	%		4.90	%		3.57	%
Expected life of options		2.2	years		2.8	years		2.2	years		2.8	years

We estimate forfeiture and expected volatility using historical information over the expected life of the option. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent life of the option. The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms and vesting schedules. The Black-Scholes option-pricing model requires the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility.

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Transactions concerning stock options pursuant to our stock option plans are summarized as follows:

			Weighted Average Exercise Price per Share
Outstanding, December 31, 2005	3,876,225		$	5.08
Granted	673,646			6.27
Exercised	(628,538	)		3.77
Expired	(683,703	)		6.37

Outstanding, June 30, 2006	3,237,630		$	5.31

The aggregate intrinsic value of options exercised during the second quarters of 2006 and 2005, before applicable income taxes, was approximately $0.3 million and $35,000, respectively, and $1.5 million and $0.2 million during the first six months of 2006 and 2005, respectively. Additionally, we received cash proceeds of $0.5 million and $0.1 million during the second quarter of 2006 and 2005, respectively, and $2.3 million and $0.2 million during the first six months of 2006 and 2005.

The following table presents information about the stock options outstanding and exercisable as of June 30, 2006:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
$ 2.94 — $ 3.72		558,385		1.0	$	3.52		558,385	$	3.52
4.06 — 4.92		890,831		3.2		4.72		858,685		4.72
5.04 — 5.09		55,614		3.9		5.06		15,614		5.09
5.63 — 6.00		884,000		2.5		5.91		884,000		5.91
6.16 — 6.54		848,800		3.7		6.51		848,800		6.51

$ 2.94 — $ 6.54		3,237,630		2.8	$	5.31		3,165,484	$	5.32

As of June 30, 2006, most options outstanding were fully vested and the 72,146 unvested options will vest within twelve months. The aggregate intrinsic value of options outstanding and exercisable as of June 30, 2006, before applicable income taxes, was $0.7 million, based on our closing stock price of $5.25 per common share as of June 30, 2006.

Restricted Stock Units

Unvested restricted stock units, which were either granted to employees by the board of directors or accumulated through compensation deferrals under the deferred compensation plan discussed above, are summarized as follows:

			Weighted Average Grant Date Fair Value
Unvested, January 1, 2006	144,000		$	4.66
Granted	141,575		$	6.22
Distributed	(144,000	)	$	4.66
Expired	—		$	—


Unvested, June 30, 2006	141,575		$	6.22

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From the outstanding balance as of June 30, 2006, the units will vest within the next twelve months and will be distributable based upon predetermined dates as elected by the participants. We have recognized approximately $0.2 million in compensation expense since grant date, and will record an additional $0.7 million in compensation expense over the remaining vesting period related to these units.

Approximately 144,000 stock units vested during May 2006 and were distributed as elected by the recipients under the provisions of the deferred compensation plan. We recognized approximately $0.7 million in compensation expense related to these units. Under the terms of the plan and upon vesting, management authorized a net settlement of distributable shares to employees after consideration of individual employee’s tax withholding obligations, at the election of each employee. In May 2006, we repurchased 49,059 shares for $0.3 million, or approximately $6.39 per share.

Note 10. Long-term Debt and Credit Agreement

In September 2005, we entered into a $30.0 million revolving credit agreement for an initial two-year term, with the right to extend the facility for two additional one-year periods, on terms acceptable to us and the lender. Amounts borrowed under the credit agreement are available for general corporate purposes. We have pledged our interest in the Greens Creek Joint Venture, which is held by Hecla Alaska LLC, our wholly owned subsidiary, as collateral under the credit agreement. The interest rate on the agreement is either 2.25% above the London InterBank Offered Rate or an alternate base rate plus 1.25%, and includes various covenants and other limitations related to our indebtedness and investments, as well as other information and reporting requirements. We make quarterly commitment fee payments equal to 0.75% per annum on the sum of the average unused portion of the credit agreement. At June 30, 2006, we did not have an outstanding balance under the credit agreement, and were in compliance with our covenants.

Note 11. New Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No. D1 “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and permits:

	•		Fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
	•		Clarifies which interest-only strips are not subject to the requirements of SFAS 133;
	•		Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
	•		Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
	•		Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

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FAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Currently, the adoption of SFAS No. 155 is not expected to have a material effect on our consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”) “Accounting for Uncertainty in Income Taxes,” which will become effective for us beginning January 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109 “Accounting for Income Taxes,” prescribing a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. Currently, the adoption of FIN No. 48 is not expected to have a material effect on our consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk 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, results of litigation, prospects and opportunities. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “feel,” “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.

These risks, uncertainties and other factors include, but are not limited to, those set forth under Part II, Item 1A - “Risk Factors” in this Report and Item 1 - “Business” and Item 1A - “Risk Factors” in our annual report filed on Form 10-K for the year ended December 31, 2005. 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.

Hecla Mining Company

We are a precious metals company originally incorporated in 1891. Our business is to discover, acquire, develop, produce and market mineral resources. In doing so, we intend to manage our business activities in a safe, environmentally responsible and cost-effective manner, with the goal of creating value for our shareholders.

We are engaged in the exploration and development of mineral properties and the mining and processing of silver, gold, lead and zinc. We produce both metal concentrates, which we sell to custom smelters on contract, and unrefined gold bullion bars (doré), which may be sold as doré or further refined before sale to metals traders. We are organized and managed into four segments that represent our operating units and various exploration locations: the La Camorra unit and various exploration activities in Venezuela; the San Sebastian unit and various exploration activities in Mexico; the Greens Creek unit and the Lucky Friday unit. The maps below show the locations of our operating units and our exploration projects, as well as the Hollister Development Block and our corporate office located in Coeur d’Alene, Idaho.

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Overview

Our current business strategy is to focus our financial and human resources on silver and gold production and expanding our proven and probable reserves and mineralized and other material. Expansion of production will result through a combination of exploration efforts and acquisitions. Currently our exploration and development activities are all on or near existing operating or former operating properties. During 2006, we anticipate production of approximately 6.0 million ounces of silver and 150,000 ounces of gold.

We are actively seeking to expand our mineral reserves by acquiring other mining companies or properties. Financially, we believe we can acquire other mining companies or properties because of the following:

	•		Cash balance of $65.6 million and short-term securities of $15.2 million at June 30, 2006;
	•		Two effective shelf registration statements with the Securities and Exchange Commission. One allows us to sell up to $275.0 million in common stock, preferred stock, warrants and debt securities in order to raise capital for potential acquisitions and for general corporate purposes. The other allows us to issue up to $175.0 million in common stock and warrants in connection with business combination transactions; and
	•		A $30.0 million revolving credit agreement, with no amount outstanding at June 30, 2006.

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Results of Operations

For the second quarter and first six months of 2006, we recorded income applicable to common shareholders of $9.1 million and $47.3 million ($0.08 and $0.40 per common share, respectively), compared to losses applicable to common shareholders of $6.4 million and $9.8 million ($0.05 and $0.08 per common share) during the same periods in 2005, respectively. The improved 2006 results over the comparable periods in 2005 were primarily the result of:

	•		The sale of our investment in Alamos Gold, Inc. in January 2006, for $57.4 million in cash proceeds, generating a pre-tax gain of $36.4 million.
	•		Increased gross profit at our Lucky Friday, Greens Creek and La Camorra units (see the Lucky Friday Segment, Greens Creek Segment and La Camorra Segment sections below for further discussion of operating results);
	•		The sale of our Noche Buena gold exploration property in Mexico during April 2006, generating a $4.4 million gain; and
	•		Increased average prices for all metals produced at our operations, illustrated by the following table comparing the average prices for the three and six months ended June 30, 2006 and 2005:

	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
Silver – London PM Fix ($/ounce)	$	12.28	$	7.15	$	10.99	$	7.06
Gold – Realized ($/ounce)	$	613	$	432	$	592	$	430
Gold – London PM Fix ($/ounce)	$	627	$	427	$	591	$	427
Lead – LME Final Cash Buyer ($/pound)	$	0.50	$	0.45	$	0.53	$	0.45
Zinc – LME Final Cash Buyer ($/pound)	$	1.49	$	0.58	$	1.26	$	0.59

Our results of operations during 2006 have also been impacted by the adoption of SFAS No. 123(R) “Share-Based Payment” in January. SFAS No. 123(R) requires us to record an expense for the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. We are using the modified prospective transition method, which has been reflected in our interim consolidated financial statements as of and for the second quarter and first six months ended June 30, 2006.

In accordance with the modified prospective transition method, our interim consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). The fair value of the options granted during the second quarter and first six months of 2006 were estimated on the date of grant using the Black-Scholes option-pricing model, utilizing the same methodologies in assumptions as we have historically under APB No. 25, as discussed below. As of June 30, 2006, the majority of options outstanding were fully vested, and we recognized stock-based compensation expense under SFAS No. 123(R) of approximately $1.8 million during the first six months of 2006, which was recorded to general and administrative expenses and cost of sales and other direct production costs. Over the next twelve months, we expect to recognize an additional $0.7 million in compensation expense for unvested awards as required by SFAS No. 123(R).

Prior to our adoption of SFAS No. 123(R), we measured compensation cost for stock option plans using the intrinsic value method of accounting prescribed by APB No. 25 “Accounting for Stock Issued to Employees.” Had compensation expense for our stock-based plans been determined based on market value at grant dates consistent with the provisions of SFAS No. 123(R), our loss and per share loss applicable to common shareholders would have been increased to the pro-forma amounts provided in Note 9 of Notes to Interim Consolidated Financial Statements.

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The La Camorra Segment

The following is a comparison of the operating results and key production statistics of our Venezuelan operations, which include the La Camorra mine, a custom milling business and Mina Isidora, which commenced limited production in mid-2005 (dollars are in thousands, except per ton and per ounce amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Sales	$	31,065		$	9,657		$	46,641		$	19,347
Cost of sales and other direct production costs		(19,274	)		(6,888	)		(27,572	)		(12,948	)
Depreciation, depletion and amortization		(5,925	)		(1,449	)		(11,456	)		(2,777	)

Gross profit	$	5,866		$	1,320		$	7,613		$	3,622


Tons of ore processed		60,832			49,269			115,379			99,601
Gold ounces produced		38,399			27,020			76,019			48,881
Gold ounces per ton		0.699			0.581			0.700			0.514
Total cash cost per gold ounce ⁽¹⁾	$	340		$	317		$	348		$	307

(1)

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 below in Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

Sales for the La Camorra unit increased due to higher average gold prices, improved ore grades and increased ore volume from Mina Isidora. Additionally, the 11,500 ounces of gold held in inventory at the end of March 2006 (8,900 ounces at December 31, 2005) were sold within Venezuela during the second quarter of 2006 ($7.3 million). Local regulation requires that 15% of all production be sold in-country and although we have been successful with the sale of gold within Venezuela, there can be no assurance that local markets will continue to absorb our production in the future or will do so without requiring a substantial discount.

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However, operating income for the second quarter and first six months of 2006, compared to the same periods in 2005, have been negatively impacted by the following:

	•		Increased cost of sales due to increased ore volume, rising costs of production from deeper faces in the La Camorra mine and increased labor, commodity and transportation costs, which requires haulage of ore to our milling facility located approximately 110 km from the mine;
	•		Elimination of foreign exchange gains that decreased cost of sales in 2005 due to changes in currency regulations in Venezuela. In the first six months of 2005, we recognized foreign exchange gains which reduced our cost of sales by $2.3 million. We have recognized no such gains in 2006;
	•		During the first six months of 2006, we have recorded a reserve for materials inventory obsolescence at the La Camorra mine that also negatively affected cost of sales;
	•		Increased depreciation expense as a result of the commissioning of the shaft at the La Camorra mine in 2005, discussed in more detail below; and
	•		Reduced production from the La Camorra mine due to mining at greater depths and lower productivity.

In order to mine more efficiently at the greater depths of the La Camorra mine and potentially develop further proven and probable reserves, in 2003 we made the decision to construct a production shaft based on the long lead-time necessary for its construction. We completed the shaft and placed it into service during the third quarter of 2005. In 2005, proven and probable ore reserves decreased from those reported at the end of 2004, as the mine exhibited lower ore grades and no significant results were returned from drilling on the La Camorra veins. We expect depreciation expense related to the shaft to continue to negatively affect operating income for the La Camorra unit over the next year. Declining proven and probable ore reserves and lower ore grades will have an impact on any decisions for longer-term plans at the La Camorra mine, and we will continue to assess whether remaining ounces can be economically extracted from the mine.

The construction of the production shaft was more costly than originally anticipated and we are disputing some of the shaft construction costs submitted by the contractor. Pursuant to the construction agreement, we submitted the matter to arbitration in November 2005. We have also agreed to participate in non-binding mediation. The contractor has asserted $7.2 million in construction costs that we dispute. We claim approximately $6.1 million in damages against the contractor for various claims and back charges related to the construction of the shaft. There can be no assurance that any mediation of the matter will be successful, or that the matter will be arbitrated in our favor.

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Business Risks in Venezuela

Currency and Related Risks

In February 2003, the Venezuelan government imposed foreign exchange and price controls in response to adverse economic conditions, and has put into place rules that restrict access of companies and individuals to foreign exchange. Since that time, the fixed rate has increased from Bolivares (“Bs.”) 1,600 to $1.00 to Bs. 2,150 to $1.00 at June 30, 2006, which is the rate we have used to translate the financial statements for our activities in Venezuela recorded in Bs. to U.S. dollars included in our Consolidated Financial Statements. We cannot predict the extent to which we may be affected by future changes in exchange rates and exchange controls in Venezuela, although future devaluations of the bolivar and/or the implementation of more stringent exchange control restrictions in that country could have a material adverse effect on our financial results or condition.

In October 2005, the Venezuelan government enacted the Criminal Exchange Law that imposes strict sanctions, criminal and economic, for the exchange of Venezuelan currency with other foreign currency through other than officially designated methods, or for obtaining foreign currency under false pretenses. Approvals for foreign currency exchange are limited and we are evaluating opportunities to minimize our exposure to devaluation. As a consequence, our cash balances denominated in bolivares that are maintained in Venezuela have increased from a U.S. dollar equivalent of approximately $1.1 million at December 31, 2005, to $11.1 million at June 30, 2006. Additionally, we will convert into Venezuelan currency the proceeds of Venezuelan exports made over the past 180 days, or approximately $33.0 million, over the remainder of 2006. Although we are making appropriate applications through the Venezuelan government, our cash balances denominated in the Venezuelan bolivar may continue to grow and any conversion may result in losses when and if in the future we decide to distribute money outside Venezuela.

Prior to the enactment of the Criminal Exchange Law, we recognized foreign exchange gains of approximately $2.3 million in the first six months of 2005, as markets outside of Venezuela have reflected a devaluation of the Venezuelan currency from the fixed rate. During the second quarter and first six months of 2006, the Criminal Exchange Law has impacted our costs and Venezuelan cash flows. We cannot predict the extent to which we may be affected by future changes in exchange rates and exchange controls in Venezuela, although the Venezuelan exchange control regulations have limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. We believe this will continue into the future, and will continue to impact our profitability of operations compared to previous periods.

SENIAT Litigation

Our wholly owned subsidiary, Minera Hecla Venezolana, C.A. (“MHV”), which owns and operates our La Camorra mine, is involved in litigation with the Venezuelan tax authority (“SENIAT”) concerning alleged unpaid tax liabilities that predate our purchase of La Camorra from Monarch Resources Investments Limited (“Monarch”) in 1999. Pursuant to our purchase agreement, Monarch has assumed defense of and responsibility for the 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, at exchange rates in effect at that time. In June 2004, the Superior Tax Court in Caracas ordered suspension and revocation of the embargo action filed by SENIAT, although the Court has maintained the $4.3 million until such tax liabilities are settled.

In October 2005, MHV and SENIAT reached a mutual agreement to settle the case, which is awaiting approval by the court. The terms of the agreement provide that MHV pay approximately $0.8 million in exchange for a release of the alleged tax liabilities and release of the cash deposit. In a separate agreement, Monarch will reimburse MHV for all amounts in settling the case, including defense costs, through a reduction in MHV’s royalty obligations to them. Although we believe the cash deposit will continue to prevent any further action by SENIAT with respect to the embargo related with this case and that MHV’s settlement efforts will be successful, there can be no assurance as to the outcome of this proceeding until a final settlement is executed and entered by the court. If the tax court in Caracas or an appellate court were to subsequently award SENIAT the previously requested embargo, it could disrupt our Venezuela operations and have a material adverse effect on our financial results or condition.

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In a separate matter, in February 2005 we were notified by SENIAT that it had completed its audit of our Venezuelan tax returns for the years ended December 31, 2003 and 2002. In the notice, SENIAT alleged that certain expenses are not deductible for income tax purposes and that calculations of tax deductions based upon inflationary adjustments were overstated, and issued an assessment equal to taxes payable of $3.8 million. We reviewed SENIAT’s findings and submitted an appeal. In March 2006, the appeal was resolved in our favor and we were found not liable for the $3.8 million assessment. However, there can be no assurance that there will not be additional assessments in the future, or that SENIAT or other governmental agencies or officials will not take other actions against us, whether or not justified, which, in each case, could materially disrupt our operations in Venezuela.

Other

Although we believe we will be able to manage and operate the La Camorra unit and related exploration projects successfully, there is a continued uncertainty in Venezuela relating to political, regulatory, legal enforcement, security and economic matters, as well as export and exchange controls. This uncertain state of affairs could affect our operations, including changes in policy or demands of governmental agencies or their officials, litigation, labor stoppages, seizures of assets, relationships with small mining groups in the vicinity of our mining operations, and impacting our supplies of oil, gas and other goods. As a result, there can be no assurance we will be able to operate without interruptions to our operations, and any such occurrences could have a material adverse effect on our financial results or condition.

The Greens Creek Segment

The following is a comparison of the operating results and key production statistics of our Greens Creek segment (dollars are in thousands, except for per ton and per ounce amounts, and reflect our 29.73% share):

	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
Sales	$	14,125		$	10,392		$	27,910		$	20,540
Cost of sales and other direct production costs		(5,234	)		(5,794	)		(10,255	)		(10,466	)
Depreciation, depletion and amortization		(1,779	)		(1,806	)		(3,722	)		(3,828	)

Gross profit	$	7,112		$	2,792		$	13,933		$	6,246


Tons of ore milled		51,505			58,442			103,394			113,488
Silver ounces produced		520,750			760,193			1,134,844			1,657,064
Gold ounces produced		3,750			5,950			8,478			12,150
Zinc tons produced		3,689			5,377			8,226			10,499
Lead tons produced		1,196			1,828			2,811			3,675
Silver ounces per ton		13.73			17.74			14.63			19.53
Gold ounces per ton		0.116			0.152			0.124			0.156
Zinc percent		8.37			10.52			9.18			10.66
Lead percent		3.11			4.11			3.55			4.20
Total cash cost per silver ounce ⁽¹⁾	$	(2.28	)	$	1.11		$	(1.74	)	$	1.07
By-product credits		11,017			7,945			21,343			15,930
By-product credit per silver ounce	$	21.16		$	10.45		$	18.81		$	9.61

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The increases in income from operations during the second quarter and first six months of 2006, compared to the same 2005 periods, were primarily the result of higher average metal prices, partially offset by lower ore grades, the effects of continued mine rehabilitation and development, and higher diesel prices.

Ground falls in various areas of the mine in the third quarter of 2005 resulted in the allocation of resources to rehabilitation work during the second half of 2005. During the first six months of 2006, Greens Creek has continued to focus manpower and equipment on mine rehabilitation work relating to ground support reinforcement in the main haulage ways. A mining contract company was engaged during the first half of 2006 to help maintain production and reduce the effects of the rehabilitation work. However, the underground congestion caused by alternative haulage truck routing, and the lack of available mine ore faces – both results of the focus on rehabilitation work – decreased production in the second quarter and first six months of 2006, as tons of ore milled were 12% and 9% lower than the first quarter and first six months of 2005, respectively. Completion of the rehabilitation work is expected in the second half of 2006.

The Greens Creek operation is currently powered by diesel generators and production costs have been significantly affected by increasing fuel prices. Infrastructure has been installed that will allow hydroelectric power to be supplied to Greens Creek by Alaska Electric Light and Power Company (“AEL&P”), via a submarine cable from North Douglas Island, near Juneau, to Admiralty Island, where Greens Creek is located. All infrastructure is in place, and testing and final programming of the system was completed in July, with use of the system expected to begin during the second half of 2006. AEL&P has agreed to supply its excess power to Greens Creek, which will replace an estimated 23% to 35% of the diesel-generated power through 2008. Completion of a new hydroelectric plant by AEL&P is anticipated by 2009, at which time it is estimated they will supply 95% of Greens Creek power. This project is anticipated to reduce production costs at Greens Creek in the future.

The Greens Creek joint venture maintains a restricted trust for future reclamation funding. The balance of the restricted cash account was $ 27.9 million at June 30, 2006, of which our 29.73% portion was $ 8.3 million, and $27.3 million at December 31, 2005, of which our 29.73% portion was $ 8.1 million. During the second half of 2006, the joint venture anticipates increasing this trust, our portion of which we estimate to be $1.0 million.

The 305% and 263% improvements in total cash cost per ounce for the second quarter and first six months of 2006, respectively, compared to 2005, are attributable to increased by-product credits, as 2006 zinc, lead and gold prices have continued to exceed prices during the same 2005 period, partially offset by lower silver production and higher production costs. While value from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product is appropriate because:

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	•		We have historically presented Greens Creek as a producer primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;
	•		Silver has historically accounted for a higher proportion of revenue than any other metal;
	•		Metallurgical treatment maximizes silver recovery;
	•		The Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and
	•		In most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery.

We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Within our cost per ounce calculations, because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset increases in operating costs due to increased prices.

The Lucky Friday Segment

The following is a comparison of the operating results and key production statistics of our Lucky Friday segment (dollars are in thousands, except for per ounce amounts):

	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
Sales	$	11,704		$	5,209		$	21,225		$	9,649
Cost of sales and other direct production costs		(6,208	)		(4,375	)		(11,893	)		(8,227	)
Depreciation, depletion and amortization		(820	)		(89	)		(1,493	)		(178	)

Gross profit	$	4,676		$	793		$	7,839		$	1,244


Tons of ore milled		65,703			55,380			129,427			98,565
Silver ounces produced		742,125			622,866			1,368,917			1,144,258
Lead tons produced		4,092			3,756			7,686			6,805
Zinc tons produced		1,374			1,180			2,406			2,004
Silver ounces per ton		12.29			12.09			11.66			12.49
Lead percent		6.77			7.27			6.56			7.39
Zinc percent		2.89			3.05			3.14			2.76
Total cash cost per silver ounce ⁽¹⁾	$	4.97		$	4.69		$	5.13		$	4.96
By-product credits		6,370			3,433			11,371			6,704
By-product credit per silver ounce	$	8.58		$	6.04		$	8.31		$	6.17

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The $3.8 million and $6.3 million increases in operating income for the second quarter and first six months of 2006, compared to the same 2005 periods, respectively, resulted primarily from higher average metals prices and increased production, partially offset by increased costs related to an increase in production. Approximately 410,000 and 730,000 ounces of silver were mined from the 5900 level expansion area during the second quarter and first six months of 2006, respectively, with full production levels expected to be reached in the second half of 2006. The increased production from the 5900 level expansion area resulted in the 19% increase in tons of ore milled and silver ounces produced for the second quarter of 2006, compared to the same 2005 period, and the 31% increase in tons milled and 20% increase in silver ounces produced when comparing June 30, 2006 and 2005 year-to-date results.

The increase in total cash costs per silver ounce in the second quarter and first half of 2006, compared to the 2005 periods, are due to higher production costs and longer ore haulage, partially offset by improved by-product credits resulting from increasing lead and zinc prices. While value from lead and zinc is significant, we believe that identification of silver as the primary product, with zinc and lead as by-products, is appropriate because:

	•		Silver accounts for a higher proportion of revenue than any other metal and is expected to do so in the future;
	•		The Lucky Friday unit is situated in a mining district long associated with silver production; and
	•		The Lucky Friday unit utilizes selective mining methods to target silver production.

We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc and lead to be by-products of our silver production, the values of these metals have offset increases in operating costs due to the increased average prices. When production at the Lucky Friday is solely from the 5900 level later in the year, we anticipate total cash costs per ounce to improve as the new development is located in the center of identified proven and probable reserves, reducing ore haulage time.

The San Sebastian Segment

The following is a comparison of the operating results of our San Sebastian segment (dollars are in thousands):

	Three Months Ended June 30					Six Months Ended June 30
	2006		2005			2006			2005
Sales	$	47	$	(3	)	$	955		$	153
Cost of sales and other direct production costs		—		(889	)		(906	)		(1,400	)
Depreciation, depletion and amortization		—		(533	)		—			(920	)

Gross profit (loss)	$	47	$	(1,425	)	$	49		$	(2,167	)

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The National Miners Union initiated a strike at our Velardeña mill in October 2004, which prevented production at the San Sebastian unit until it was resolved in June 2005. During the strike, costs related to our mining operations were included in the valuation of our stockpile inventory, while costs related to the idle mill were expensed as incurred. Upon resolution of the strike, mining activities resumed until October 2005, at which time we reached the end of the known mine life on the Francine and Don Sergio veins.

The San Sebastian mine and Velardeña mill are currently on care-and-maintenance status as we continue exploration efforts. Sales reported for the six months ended June 30, 2006, represent final settlement payments received on prior period dorè shipments, and include revenue received from silver and gold contained in material remaining in the mill after operations ceased.

Corporate Matters

Other significant variances affecting our second quarter and first six months of 2006 results, as compared to the same periods in 2005, were as follows:

	•		Increased interest income due to higher cash balances and higher interest rates;
	•		Higher general and administrative expenses in the 2006 period, primarily the result of increased incentive compensation expenses required by the adoption of SFAS 123(R);
	•		Increase in expenditures for closed operations and environmental matters, as the San Sebastian unit has been placed on care and maintenance status;
	•		Increase in interest expense related to our $30.0 million revolving credit facility, which was entered into in September 2005 and subject to interest on outstanding balances, as well as a quarterly commitment fee on the unused portion of amount available to us for borrowing;
	•		Offsetting variances in exploration and pre-development expenses due to a shift in classification of costs incurred at the Hollister Development Block project in Nevada, where we began underground exploration drilling during the first quarter of 2006;
	•		Higher income tax provision due to the accrual of U.S. alternative minimum tax expense on the gain from the sale of our stock position in Alamos Gold, Inc.; and
	•		Increased legal fees related to the La Camorra Shaft arbitration.

Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)

The tables below present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) for our gold (the La Camorra segment only) and silver operations (the San Sebastian, Greens Creek and Lucky Friday segments), for the quarters and first six months ended June 30, 2006 and 2005 (in thousands, except costs per ounce).

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Total cash costs include 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 mining production taxes; net of by-product revenues earned from all metals other than the primary metal produced at each unit. Total cash costs 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 period-to-period from a cash flow perspective. “Total cash cost per ounce” is a measure developed by gold companies in an effort to provide a comparable standard, however, there can be no assurance that our reporting of this non-GAAP measure is similar to that reported by other mining companies.

Cost of sales and other direct production costs and depreciation, depletion and amortization, is the most comparable financial measure calculated in accordance with GAAP to total cash costs. The sum of the cost of sales and other direct production costs and depreciation, depletion and amortization for our silver and gold operating units in the tables below is presented in our Consolidated Statement of Operations and Comprehensive Income (Loss).

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	Combined Silver Properties
	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Total cash costs ⁽¹⁾	$	2,503		$	3,587		$	5,043		$	7,252
Divided by ounces produced		1,263			1,384			2,504			2,800

Total cash cost per ounce produced	$	1.98		$	2.59		$	2.01		$	2.59

Reconciliation to GAAP:
Total cash costs	$	2,503		$	3,587		$	5,043		$	7,252
Depreciation, depletion and amortization ⁽²⁾		2,599			2,430			5,215			4,928
Treatment and freight costs		(8,063	)		(5,896	)		(15,016	)		(11,907	)
By-product credits		17,387			11,862			32,714			23,118
Idle facility costs ⁽²⁾		—			865			—			1,376
Change in product inventory ⁽³⁾		(441	)		497			212			108
Reclamation and other costs		56			90			101			142

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)	$	14,041		$	13,435		$	28,269		$	25,017


	Lucky Friday Unit
	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Total cash costs ⁽¹⁾	$	3,689		$	2,663		$	7,017		$	5,389
Divided by silver ounces produced ⁽⁴⁾		742			568			1,369			1,087

Total cash cost per ounce produced	$	4.97		$	4.69		$	5.13		$	4.96

Reconciliation to GAAP:
Total cash costs	$	3,689		$	2,663		$	7,017		$	5,389
Depreciation, depletion and amortization		820			89			1,493			178
Treatment and freight costs		(3,667	)		(1,908	)		(6,278	)		(3,686	)
By-product credits		6,370			3,433			11,371			6,704
Change in product inventory		(192	)		142			(228	)		(186	)
Reclamation and other costs		8			(7	)		11			6

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)	$	7,028		$	4,412		$	13,386		$	8,405

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	Greens Creek Unit
	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Total cash costs ⁽¹⁾	$	(1,186	)	$	841		$	(1,974	)	$	1,780
Divided by silver ounces produced		521			760			1,135			1,657

Total cash cost per ounce produced	$	(2.28	)	$	1.11		$	(1.74	)	$	1.07

Reconciliation to GAAP:
Total cash costs	$	(1,186	)	$	841		$	(1,974	)	$	1,780
Depreciation, depletion and amortization		1,779			1,806			3,722			3,828
Treatment and freight costs		(4,396	)		(3,948	)		(8,738	)		(8,181	)
By-product credits		11,017			7,945			21,343			15,930
Change in product inventory		(250	)		916			(467	)		855
Reclamation and other costs		48			42			90			81

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)	$	7,012		$	7,602		$	13,976		$	14,293


	La Camorra Unit ⁽⁵⁾
	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Total cash costs ⁽¹⁾	$	12,562		$	8,234		$	25,771		$	14,416
Divided by ounces produced		37			26			74			47

Total cash cost per ounce produced	$	340		$	317		$	348		$	307

Reconciliation to GAAP:
Total cash costs	$	12,562		$	8,234		$	25,771		$	14,416
Depreciation, depletion and amortization		5,925			1,449			11,456			2,777
Treatment and freight costs		(2,088	)		(515	)		(3,682	)		(927	)
By-product credits		1,015			437			1,425			743
Change in product inventory		7,822			(1,265	)		4,111			(1,313	)
Reclamation and other costs		(37	)		—			(53	)		31

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)	$	25,199		$	8,340		$	39,028		$	15,727

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	Total, All Properties
	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Reconciliation to GAAP, All locations
Total cash costs ⁽¹⁾	$	15,065		$	11,821		$	30,814		$	21,668
Depreciation, depletion and amortization ⁽²⁾		8,524			3,879			16,671			7,705
Treatment and freight costs		(10,151	)		(6,411	)		(18,698	)		(12,834	)
By-product credits		18,402			12,299			34,139			23,861
Idle facility costs ⁽²⁾		—			865			—			1,376
Change in product inventory ⁽³⁾		7,381			(768	)		4,323			(1,205	)
Reclamation and other costs		19			90			48			173

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)	$	39,240		$	21,775		$	67,297		$	40,744

(1)

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 mining production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit.

(2)

The mill that processed San Sebastian ore in Mexico was closed for most of the first six months of 2005 (and fourth quarter of 2004) due to a strike by mill workers, making 2005 production statistics not meaningful including total cash costs per ounce produced. Mine and mill operations ceased in October 2005. During the second quarter and first six months of 2005, cost of sales and other direct production costs of $0.9 million and $1.4 million, respectively, were not included in the determination of total cash costs for silver operations. Additionally during the second quarter and first six months of 2005, San Sebastian recognized depreciation, depletion and amortization expense of $0.5 million and $0.9 million, respectively, which is reflected in the total for all properties and combined silver properties above.

(3)	Includes approximately $907,000 related to San Sebastian cost of sales and other direct production costs during the first quarter of 2006 for prior period doré shipments.

(4)	Ounces mined from the 5900 level development project at Lucky Friday are not included in the determination of total cash costs during the second quarter and first six months of 2005. Approximately 55,000 ounces and 58,000 ounces of silver, respectively, were excluded from the calculation.

(5)

Costs per ounce of gold are based on the gold produced by the La Camorra mine and our Block B concessions, including Mina Isidora, only. During the quarters and first six months ending June 30, 2006 and 2005, a total of 1,676 and 1,095 ounces, and 2,431 and 1,862 ounces of gold, respectively, were produced from third-party mining operations located near the La Camorra mine and Block B concessions. The revenues from these gold ounces were treated as a by-product credit and included in the calculation of gold costs per ounce. Included in total cash costs for the three and six months ending June 30, 2006 and 2005, were the costs to purchase the ore of approximately $1.0 million and $0.7 million, respectively, and $1.4 million and $1.1 million, respectively.

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Financial Liquidity and Capital Resources

Our liquid assets include (in thousands):

	June 30, 2006		December 31, 2005
Cash and cash equivalents	$	65,567	$	6,308
Adjustable rate securities		15,200		—
Marketable equity securities		—		40,862
Non-current investments		3,567		2,233

Total cash, cash equivalents and investments	$	84,334	$	49,403

The growth in our cash, cash equivalents and investments in the first half of the year was due to cash generated by our operations, an increase in the fair market value of our investment in common stock of Alamos Gold, Inc., which we sold in February 2006, and sale of our Noche Buena property in April 2006. We believe that cash flow generated from operations, existing cash and investments, potential equity offerings, sale of assets, and our $30.0 million credit facility will be sufficient to finance capital requirements, exploration, general corporate activities, and acquisition or capital improvement opportunities.

Our cash balance at June 30, 2006 included $11.1 million held in local currency in Venezuela (based on the official exchange rate of Bs. 2,150 = $1.00), with the balance expected to grow as approvals for foreign currency exchange continue to be limited and our ability to convert bolivares to U.S. dollars is likewise limited. For a more detailed discussion, see Note 2 of Notes to Interim Consolidated Financial Statements and the La Camorra segment above.

Cash requirements for the remainder of 2006 are expected to include:

	•		Capital expenditures of approximately $18.0 million, primarily related to the completion of the expansion project at Lucky Friday, surface infrastructure at Mina Isidora in Venezuela and development and mine development and surface infrastructure at Greens Creek;
	•		Exploration and pre-development expenditures of approximately $16.0 million, primarily related to:

	»		Continued pre-development and underground exploration drilling, and a feasibility study, at the Hollister Development Block project;
	»		Surface drilling programs and a scoping study at the Hugh Zone, along with drilling at other targets, near our San Sebastian property in Mexico;
	»		Exploration on our Block B concessions and near our La Camorra mine in Venezuela; and
	»		Underground drilling beyond the current proven and probable reserves at our Lucky Friday and Greens Creek mines.

	•		General funding of operations and corporate general and administrative expenses; and
	•		Reclamation and other closure costs of approximately $6.0 million, including an increase of $1.0 million to the surety bond at Greens Creek.

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Operating activities provided $28.6 million cash in the first six months of 2006, compared to $6.0 million used in the same period of 2005. Net income, adjusted for non-cash elements, grew by $26.8 million due primarily to rising metals prices, increased gold production, losses incidental to a strike at our San Sebastian operation in 2005, and liquidation of product inventory in Venezuela. Liquidation of working capital in the first half of 2006 yielded cash, whereas cash was consumed by working capital increases in the same period of 2005. The difference was primarily the result of reductions in gold inventories in Venezuela in 2006, in contrast to increases in 2005. Furthermore, we reduced value-added tax receivables in Venezuela this year, partly as a result of sales of gold into the local market.

Investing activities provided $31.9 million cash in the first half of 2006, due primarily to the sale of our holding in Alamos Gold, Inc for $57.4 million. Additions to properties, plants and equipment totaled $14.2 million in 2006 primarily for expansion of the 5900 level at Lucky Friday and the development of Mina Isidora in Venezuela. Capital spending in 2006 represents a reduction of 41% over the comparable period in 2005, as the La Camorra shaft project was finished in 2005. Net purchases of short-term investments used $15.2 million cash in the first six months of 2006, compared to net maturities of $14.1 million during the 2005 period. Investing activities in 2006 also included the sale of our Noche Buena property for $4.4 million.

Financing activities in the first six months of 2006 used $1.3 million, which included net repayments on debt of $3.0 million and $0.3 million in dividends paid to preferred shareholders, offset by $2.3 million received from stock issued under employee stock option plans.

Contractual Obligations and Contingent Liabilities and Commitments

The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our earn-in agreement obligations, outstanding purchase orders and certain capital expenditures and lease arrangements as of June 30, 2006 (in thousands):

	Payments Due By Period
	Less than 1 year		1-3 years		4-5 years		After 5 years		Total
Purchase obligations ⁽¹⁾	$	6,549		—		—		—	$	6,549
Contractual obligations ⁽²⁾		4,732		—		—		—		4,732
Hollister development block ⁽³⁾		11,468		—		—		—		11,468
Short-term debt ⁽⁴⁾		228		57		—		—		285
Operating lease commitments ⁽⁵⁾		697		314		—		—		1,011

Total contractual cash obligations	$	23,674	$	371	$	—	$	—	$	24,045

(1)	As of June 30, 2006, our 29.73% portion of purchase obligations at Greens creek included $0.9 million related to capital projects.

(2)	As of June 30, 2006, we were committed to approximately $2.0 million for ore and Venezuelan employee transportation, $1.3 million for various capital projects at Greens Creek and the La Camorra unit and $0.5 million in contracted exploration drilling.

(3)

In March 2006, we reached an agreement with Great Basin Gold Ltd. to modify the 2002 earn-in agreement to the Hollister Development Block gold exploration project. The modifications to the earn-in agreement provide that we will complete and fund 100% of remaining stage one activities by March 31, 2007, and will fully fund stage two until we deliver a feasibility study. Total estimated remaining cost to fulfill our commitments under the modified agreement is approximately $11.5 million.

(4)	Represents anticipated expense of 0.75% per annum on the sum of the average unused portion of our $30.0 million revolving credit agreement, which had no amounts outstanding at June 30, 2006.

(5)

We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements.

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We maintain reserves for costs associated with mine closure, land reclamation and other environmental matters. At June 30, 2006, our reserves for these matters totaled $67.3 million, for which no contractual or commitment obligations exist. Future expenditures related to closure, reclamation and environmental expenditures are difficult to estimate, although we anticipate we will make expenditures relating to these obligations over the next thirty years. For additional information relating to our environmental obligations, see Note 5 of Notes to Interim Consolidated Financial Statements.

At June 30, 2006, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make a wide variety of estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements in our annual report filed on Form 10-K for the year ended December 31, 2005. We have identified our most critical accounting policies below that are important to the portrayal of our current financial condition and results of operations. Management has discussed the development and selection of these critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented below.

Revenue Recognition

Sales of all metals products sold directly to smelters, including by-product metals, are recorded as revenues when title and risk of loss transfer to the smelter at forward prices for the estimated month of settlement. Sales from our Greens Creek and Lucky Friday units include significant value from by-product metals mined along with net values of each unit’s primary metal. Due to the time elapsed from the transfer to the smelter and the final settlement with the smelter, we must estimate the price at which our metals will be sold in reporting our profitability and cash flow. Recorded values are adjusted to month-end metals prices until final settlement. If a significant variance was observed in estimated metals prices or metal content compared to the final actual metals prices or content, our monthly results of operations could be affected. Sales of metals in products tolled, rather than sold to smelters, are recorded at contractual amounts when title and risk of loss transfer to the buyer. Third party smelting, refinery costs and freight expense are recorded as a reduction of revenue.

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Our sales are based on a provisional sales price containing an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement.

Changes in the market price of metals significantly affect our revenues, profitability and cash flow. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control, such as political and economic conditions; demand; forward selling by producers; expectations for inflation; central bank sales; custom smelter activities; the relative exchange rate of the U.S. dollar; purchases and lending; investor sentiment; and global mine production levels. The aggregate effect of these factors is impossible to predict. Because our revenue is derived from the sale of silver, gold, lead and zinc, our earnings are directly related to the prices of these metals.

Proven and Probable Ore Reserves

At least annually, management reviews the reserves used to estimate the quantities and grades of ore at our mines which management believes can be recovered and sold economically. Management’s calculations of proven and probable ore reserves are based on in-house engineering and geological estimates using current operating costs and metals prices. Periodically, management obtains external audits of reserves.

In 2005, proven and probable ore reserves at our La Camorra mine decreased from those reported at the end of 2004, as the mine exhibited lower ore grades and no significant results were returned from drilling on the La Camorra veins. Declining proven and probable ore reserves at a lower ore grade will have an impact on any decisions for longer-term plans at the La Camorra mine, and we will continue to assess whether remaining ounces can be economically extracted from the mine.

Reserve estimates will change as existing reserves are depleted through production and as production costs and/or metals prices change. A significant drop in metals prices may reduce reserves by making some portion of such ore uneconomic to develop and produce. Changes in reserves may also reflect that actual grades of ore processed may be different from stated reserve grades because of variation in grades in areas mined, mining dilution and other factors. Estimated reserves, particularly for properties that have not yet commenced production, may require revision based on actual production experience.

Declines in the market prices of metals, increased production or capital costs, reduction in the grade or tonnage of the deposit or an increase in the dilution of the ore or reduced recovery rates may render ore reserves uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques are sufficient to offset such effects. If our realized price for the metals we produce were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, net losses, reduced cash flow, restatements or reductions in reserves and asset write-downs in the applicable accounting periods. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized.

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Depreciation and Depletion

The mining industry is extremely capital intensive. We capitalize property, plant and equipment, and depreciate these items consistent with industry standards. The cost of property, plant and equipment is charged to depreciation expense based on the estimated useful lives of the assets using straight-line and unit-of-production methods. Depletion is computed using the unit-of-production method. As discussed above, our estimates of proven and probable ore reserves may change, possibly in the near term, resulting in changes to depreciation, depletion and amortization rates in future reporting periods.

Impairment of Long-Lived Assets

Management reviews the net carrying value of all facilities, including idle facilities, on an annual basis or more frequently if conditions or assumptions materially change that could negatively impact any net carrying value. We estimate the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. These estimates of undiscounted future cash flows are dependent upon the future metals price estimates over the estimated remaining mine life. If undiscounted cash flows and the asset fair value are less than the carrying value of a property, an impairment loss is recognized.

Management’s estimates of metals prices, recoverable ore reserves and operating, capital and reclamation costs are subject to risks of change and uncertainties affecting the recoverability of our investment in various projects. Although management believes it has made a reasonable estimate of these factors based on current conditions and information, it is reasonably possible that changes could occur in the near term which could adversely affect management’s estimate of net cash flows expected to be generated from our operating properties and the need for asset impairment write-downs. All estimates and assumptions are inherently subjective to some extent and may be impacted by bias, error or changing conventions in the methodology of their determination, or in changing industry conditions.

Environmental Matters

Our operations are subject to extensive federal, state and local environmental laws and regulations. The major environmental laws to which we are subject include, among others, the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law). CERCLA can impose joint and several liability for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The risk of incurring environmental liability is inherent in the mining industry. We own or operate properties, or have previously owned and operated properties, used for industrial purposes. Use of these properties may subject us to potential material liabilities relating to the investigation and cleanup of contaminants and claims alleging personal injury or property damage as the result of exposures to, or release of, hazardous substances.

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At our operating properties, we accrue costs associated with environmental remediation obligations in accordance with Statement of Financial Accounting Standards (SFAS) No. 143 “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires us to record a liability for the present value of our estimated environmental remediation costs and the related asset created with it in the period in which the liability is incurred. The liability will be accreted and the asset will be depreciated over the life of the related asset. Adjustments for changes resulting from the passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation will be made.

At our non-operating properties, we accrue costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable from a range of reasonable estimates in accordance with SFAS No. 5 “Accounting for Contingencies” and AICPA Statement of Position 96-1 “Environmental Remediation Liabilities.” Accruals for estimated losses from environmental remediation obligations have historically been recognized no later than completion of the remedial feasibility study for such facility and are charged to provision for closed operations and environmental matters.

We periodically review our accrued liabilities for costs of remediation as evidence becomes available indicating that our remediation liabilities have potentially changed. Such costs are based on management’s then current estimate of amounts expected to be incurred when the remediation work is performed within current laws and regulations. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Future closure, reclamation and environment-related expenditures are difficult to estimate in many circumstances due to the early stages of investigation, uncertainties associated with defining the nature and extent of environmental contamination, the uncertainties relating to specific reclamation and remediation methods and costs, application and changing of environmental laws, regulations and interpretations by regulatory authorities and the possible participation of other potentially responsible parties. Reserves for closure costs, reclamation and environmental matters totaled $67.3 million at June 30, 2006, and we anticipate that the majority of these expenditures relating to these reserves will be made over the next 30 years. It is reasonably possible that the ultimate cost of remediation could change in the future and that changes to these estimates could have a material effect on future operating results as new information becomes known. For environmental remediation sites known as of June 30, 2006, if the highest estimate from the range (based upon information presently available) were recorded, the total estimated liability would be increased by approximately $52.4 million. For additional information, see Note 5 of Notes to Interim Consolidated Financial Statements.

By-product Credits

Cash costs per ounce are consistent with how costs per ounce are calculated within the mining industry. Cash costs per ounce of silver include significant credits from by-product metals production, including gold, lead and zinc. Our current view of our proven and probable reserves indicates that our treatment of gold, lead and zinc as by-products at the Greens Creek and Lucky Friday units continues to be appropriate. However, management periodically assesses the relationships between metals produced to ensure that presentation of by-product credits in our calculation of cash costs per ounce remains appropriate.

Significant by-product credits are used in calculation of cash costs per ounce of silver at the Greens Creek and Lucky Friday units. For these operations, we view zinc, lead and gold strictly as by-products because:

•

We have historically presented Greens Creek and Lucky Friday as producers primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;

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	•		Silver has historically represented a higher value that any other metal;
	•		Silver is the primary object of the cost structures at Greens Creek and Lucky Friday, which utilize selective mining methods for recovery of silver rather than bulk methods for recovery of lower-value base metals; and
	•		By-products include two other metals for Lucky Friday, and three other metals for Greens Creek.

The values of all by-products per ounce of silver produced were:

	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
Greens Creek	$	21.16	$	10.45	$	18.81	$	9.61
Lucky Friday		8.58		6.04		8.31		6.17

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 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. 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 under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

Currency and Related Risks in Venezuela

The functional currency for our operations in Venezuela remains the U.S. dollar. Accordingly, we translate our monetary assets and liabilities at the Venezuelan fixed exchange rate of Bs. 2,150 to $1.00, as well as our income and expenses, as the rate has not changed since March 2005. Exchanging our cash held in local currency into U.S. dollars can be done through specific governmental programs which have been limited and slow, or through the use of negotiable instruments on which we would likely incur foreign currency losses. As a result, our cash balances denominated in bolivares that are maintained in Venezuela have increased from a U.S. dollar equivalent of approximately $1.1 million at December 31, 2005, to $11.1 million at June 30, 2006. Additionally, we will convert into Venezuelan currency the proceeds of Venezuelan exports made over the past 180 days, or approximately $33.0 million, over the remainder of 2006. Although we are currently making appropriate applications through the Venezuelan government, our cash balances denominated in the Venezuelan bolivar may continue to grow and any conversions may result in losses when and if in the future we decide to distribute money outside Venezuela.

Venezuela Value-added Taxes on Purchases

Value-added taxes (“VAT”) are assessed in Venezuela on purchases of materials and services. The current portion of outstanding VAT is recorded as an account receivable on our consolidated balance sheet, with a balance of $2.6 million (net of a reserve for anticipated discounts totaling $0.3 million) at June 30, 2006, and $7.7 million at December 31, 2005 (net of a reserve for anticipated discounts of $1.3 million). Classified as a non-current asset on our consolidated balance sheet at June 30, 2006, was $5.1 million in outstanding VAT (net of reserve for anticipated discounts totaling $0.9 million).

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As an exporter from Venezuela, we are eligible for refunds from the government for payment of VAT, and we prepare a monthly filing to obtain this refund. Refunds are given by the government in the form of tax certificates, which are marketable in Venezuela. We received our most recent certificate from the Venezuelan government in March 2006, and we are reasonably current on collection of VAT refunds. While we believe that we will receive certificates for all outstanding VAT from the Venezuelan government, issuance of certificates is slow and the likelihood of recovery at our recorded value may diminish over time. We have established a reserve of 12.5% and 15% of face value at June 30, 2006 and December 31, 2005, respectively, with reserves established by our analysis of past collections and the likelihood of future collections.

New Accounting Pronouncements

	•		Fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
	•		Clarifies which interest-only strips are not subject to the requirements of SFAS 133;
	•		Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
	•		Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
	•		Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”) “Accounting for Uncertainty in Income Taxes,” which will become effective for us beginning January 2007. FIN No. 48 clarifies the accounting for uncertainly in income taxes recognized in accordance with SFAS No. 109 “Accounting for Income Taxes,” prescribing a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. Currently, the adoption of FIN No. 48 is not expected to have a material effect on our consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We believe there has been no material change in our market risk since the end of our last fiscal year, with the exception of currency and related risks in Venezuela. In the normal course of business, we also face risks that are either nonfinancial or nonquantifiable (see Part II, Item 1A - “Risk Factors” in this report and Item 1 - “Business” and Item 1A - “Risk Factors” in our Form 10-K for the year ended December 31, 2005).

Cash

The Venezuelan exchange control regulations have limited our ability to repatriate cash, receive dividends or other distributions without substantial cost. At June 30, 2006 and December 31, 2005, we held the U.S. dollar equivalent of approximately $11.1 million and $1.1 million, respectively, denominated in the Venezuelan bolivar (2,150 bolivares to $1.00). Additionally, we will convert into Venezuelan currency the proceeds of Venezuelan exports made over the past 180 days, or approximately $33.0 million, over the remainder of 2006. Exchanging our cash held in local currency into U.S. dollars can be done through specific governmental programs, or through the use of negotiable instruments on which we would likely incur foreign currency losses. Although we are making appropriate applications through the Venezuelan government, our cash balances denominated in Venezuelan bolivares may continue to grow and any conversions may result in losses when and if in the future we decide to distribute money outside Venezuela.

Short-term Investments

Our short-term investments of $15.2 million consist of adjustable rate securities as of June 30, 2006, and were subject to changes in market interest rates and were sensitive to those changes. Our adjustable rate securities were subject to a weighted-average interest rate of 5.23% and mature over the next twelve months.

Other

At times, we use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts, to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production. We use these instruments to reduce risk by offsetting market exposures.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as required by Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2006, in ensuring them in a timely manner that material information required to be disclosed in this report has been properly recorded, processed, summarized and reported. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

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Part II – Other Information

Hecla Mining Company and Subsidiaries

Item 1. Legal Proceedings

For information concerning legal proceedings, refer to Note 5 of Notes to Interim Consolidated Financial Statements, which is incorporated by reference into this Item 1.

Item 1A. Risk Factors

For information concerning Currency and Related Risks in Venezuela, refer to the La Camorra segment discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference into this Item 1A. There have been no additional material changes to the Risk Factors set forth in Part I, Item 1A in our Form 10-K for the year ended December 31, 2005.

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

At the annual meeting of shareholders held on May 5, 2006, the following matters were voted on by Hecla’s shareholders:

A. Election of Two Directors:

			Votes For			Votes Withheld			Percentage of Outstanding Shares Entitled to Vote			Percentage of Shares Present at Meeting
George R. Nethercutt, Jr.				98,097,645			1,583,125			82.62%			98.41%
John H. Bowles				98,032,315			1,648,455			82.56%			98.35%

B. Approval of the amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock of Hecla:

Votes For			Votes Against			Abstentions			Broker Non-votes			Percentage of Outstanding Shares Entitled to Vote			Percentage of Shares Present at Meeting
87,731,793			11,604,345			344,540			92			73.89%			88.01%

C. Proposal for an Employee Stock Purchase Plan*:

Votes For			Votes Against			Abstentions			Broker Non-votes			Percentage of Outstanding Shares Entitled to Vote			Percentage of Shares Present at Meeting
48,443,208			3,604,198			420,130			47,213,234			40.80%			48.60%

*Did not gather enough shareholder votes for a quorum, therefore the proposal did not pass.

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Item 5. Other Information

On August 4, 2006, our Board of Directors appointed Mr. Dean McDonald as Vice President – Exploration. Mr. McDonald has 24 years of experience in exploration and project evaluation. For the past three years he has been Vice President of Exploration and Business Development for Committee Bay Resources Ltd. in Vancouver, British Columbia. Prior to that, Mr. McDonald was Exploration Manager at Miramar Mining Corporation/Northern Orion Explorations from 1996 to 2003. Mr. McDonald holds a Ph.D. in Geology from the University of Western Ontario and a M.Sc. in Structural and Mineral Deposits from the University of New Brunswick. Neither Committee Bay Resources Ltd. nor Miramar Mining Corporation/Northern Orion Explorations are related to us.

Our Board of Directors also approved a Change-in-Control Agreement (“Employment Agreement”) and Indemnification Agreement with Mr. McDonald effective September 1, 2006. Mr. McDonald’s Employment Agreement and Indemnification Agreement are substantially identical to prior employment agreements and indemnification agreements entered into with our other executive officers. As part of Mr. McDonald’s employment, he will receive a base salary of $150,000 and is eligible for an annual bonus with a target of 40% of his base salary, with the opportunity to receive an additional bonus depending on our performance. Mr. McDonald will also be eligible to participate in our Long-Term Incentive Plan, on terms approved by our Board of Directors, and other employee benefit plans. The material terms of the Employment Agreement are set forth in Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission for the period ended June 30, 2003. The material terms of the Indemnification Agreement are set forth in Exhibit 10.4 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission for the period ended December 31, 2004.

In connection with his appointment, Mr. McDonald will receive 10,000 shares of restricted common stock under the terms of our Key Employee Deferred Compensation Plan. The first 5,000 shares will vest on September 1, 2007, and the remainder will vest on September 1, 2008. Mr. McDonald will also receive nonqualified stock options to purchase up to 20,000 shares of our common stock at an exercise price to be determined on September 1, 2006, by taking the mean between the highest and lowest reported sales prices of our common stock on the New York Stock Exchange on September 1, 2006. The first 10,000 nonqualified stock options will vest on March 1, 2007, and the remainder will vest on September 1, 2007. Mr. McDonald will also receive 1,200 performance units under our Long-Term Incentive Plan.

Item 6. Exhibits

See the exhibit index to this Form 10-Q for the list of exhibits.

Items 2 and 3 of Part II are not applicable and are omitted from this report.

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Hecla Mining Company and Subsidiaries

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HECLA MINING COMPANY (Registrant)

Date: August 9, 2006	By	/s/ Phillips S. Baker, Jr.

		Phillips S. Baker, Jr., President and Chief Executive Officer

Date: August 9, 2006	By	/s/ Lewis E. Walde

		Lewis E. Walde, Vice President and Chief Financial Officer

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Table of Contents

Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-Q – June 30, 2006
Index to Exhibits

3.1

Certificate of Incorporation of the Registrant as amended to date.*

3.2

By-Laws of the Registrant as amended to date. Filed as exhibit 3.2 to Registrant’s Current Report on Form 8-K filed on February 21, 2006 (File No. 1-8491), and incorporated herein by reference.

4.1(a)

Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant. Filed as exhibit 4.1(d)(e) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-8491), and incorporated herein by reference.

4.1(b)

Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as exhibit 4.5 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-8491), and incorporated herein by reference.

4.2

Rights Agreement dated as of May 10, 1996, between Hecla Mining Company and American Stock Transfer & Trust Company, which includes the form of Rights Certificate of Designation setting forth the terms of the Series A Junior Participating Preferred Stock of Hecla Mining Company as Exhibit A and the summary of Rights to Purchase Preferred Shares as Exhibit B. Filed as exhibit 4 to Registrant’s Current Report on Form 8-K dated May 10, 1996 (File No. 1-8491), and incorporated herein by reference.

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

_________________

* Filed herewith

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Note 1. Basis of Preparation of Financial Statements

Note 2. Cash, Short-term Investments, Investments and Restricted Cash

Note 3. Income Taxes

Note 4. Inventories

Note 5. Commitments and Contingencies

Note 6. Income (Loss) per Common Share

Note 7. Business Segments

Note 8. Employee Benefit Plans

Note 9. Stock-Based Compensation Plans

Note 10. Long-term Debt and Credit Agreement

Note 11. New Accounting Pronouncements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Hecla Mining Company

Overview

Results of Operations

Corporate Matters

Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)

Financial Liquidity and Capital Resources

Critical Accounting Policies

New Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 5. Other Information

Item 6. Exhibits

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934