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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, 2004

Commission file number      1-8491      

     HECLA MINING COMPANY     
(Exact name of registrant as specified in its charter)

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 at least the past 90 days. Yes XX . No __.

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes XX . No __.

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

Hecla Mining Company and Subsidiaries

Form 10-Q

For the Quarter Ended June 30, 2004

I N D E X*

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PART I. - Financial Information

        Item l  -        Condensed Financial Statements (unaudited)

                -        Consolidated Balance Sheets -
                         June 30, 2004 and December 31, 2003                                       3

                -        Consolidated Statements of Operations and Comprehensive
                         Income - Three Months and Six Months Ended
                         June 30, 2004 and 2003                                                    4

                -        Consolidated Statements of Cash Flows -
                         Six Months Ended June 30, 2004 and 2003                                   5

                -        Notes to Consolidated Financial Statements                                6

        Item 2  -        Management's Discussion and Analysis of
                         Financial Condition and Results of Operations                            21

        Item 3 -         Quantitative and Qualitative Disclosures About Market Risk               43

        Item 4 -         Controls and Procedures                                                  45

PART II. - Other Information

        Item 1  -        Legal Proceedings                                                        46

        Item 3 -Defaults Upon Senior Securities                                                   46

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

        Item 6- Exhibits and Report on Form 8-K                                                   46

*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)

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

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Part I - Financial Information (Continued)

Hecla Mining Company and Subsidiaries

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

The accompanying notes are an integral part of the 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)

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

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Notes to Consolidated Financial Statements

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, consolidated statements of cash flows and notes to consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company (“we” or “our” or “us”). These unaudited 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, 2003.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Investments and Restricted Cash

Short-term Investments

        Short-term investments included certificates of deposit and held-to-maturity securities, which are carried at amortized cost. Due to the short-term nature of these investments, the amortized cost approximates fair market value. All of these investments are due within the next twelve months and consisted of the following as of June 30, 2004 and December 31, 2003 (in thousands):

Restricted Investments

        Various laws applicable to us and certain of our permits require that we put financial assurances in place for certain environmental and reclamation obligations and other potential liabilities. Our restricted investments are primarily investments in money market funds and bonds of U.S. government agencies. These investments are restricted primarily for reclamation

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funding or surety bonds and were $19.5 million at June 30, 2004, and $6.4 million at December 31, 2003.

        During the third quarter of 2003, the parties to the Greens Creek joint venture determined it would be necessary to replace existing surety requirements with a $26.6 million restricted trust for future reclamation funding. Our 29.73% share of the restricted trust at June 30, 2004 is $7.9 million which is included in restricted investments on the consolidated balance sheet.

        In April 2004, we posted a cash deposit with the Superior Tax Court in Venezuela of approximately $4.2 million related to alleged unpaid tax liabilities that predate our purchase of the La Camorra unit. The former owner has assumed defense of the pending tax case. For more information, see Note 5 to the financial statements.

        We have received notification of approval of the federal permits needed from the Bureau of Land Management (“BLM”) for the Hollister Development Block exploration project in Nevada, subject to a public comment period. The BLM reviewed the necessary bonding calculations associated with this project and in March 2004 required us to deposit approximately $1.0 million in a restricted account as collateral for this bond.

        Investments restricted for environmental and reclamation obligations at sites other than those discussed above totaled $6.4 million at June 30, 2004 and December 31, 2003.

Note 3. Income Taxes

        For the three and six months ended June 30, 2004, we recorded a $1.1 million and $2.0 million tax provision, respectively, for foreign income taxes, consisting primarily of a deferred tax provision for utilization of a tax net operating loss carryforward in Mexico and a current provision for accrued Mexican and Venezuelan withholding tax payable on interest expense. For the three and six months ended June 30, 2003, we recorded a $0.9 million and $1.6 million tax provision, respectively, for foreign income taxes, consisting primarily of deferred taxes and a current provision for accrued Mexican withholding tax payable on interest expense.

        The income tax provision for the first six months of 2004 varies from the amount that would have been provided by applying the statutory income tax rate to our income before income taxes primarily due to the benefit from utilization of a tax loss for currency devaluation net of inflation gains in Venezuela, and the benefit of a 1% rate differential in Mexico net of an increase in the valuation allowance on net deferred tax assets in Mexico. The income tax provision for the first six months of 2003 varies from the amount that would have been provided by applying the statutory rate to the income before income taxes primarily due to the availability and utilization of net operating losses in Mexico and Venezuela.

        The net deferred tax asset at June 30, 2004 is comprised of a Mexican tax net operating loss carryforward and differences in tax basis of assets. We recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized.

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Note 4. Inventories

        Inventories consist of the following (in thousands):

         In February 2004, approximately 5,000 ounces of gold production, valued at a cost of $1.0 million, was provisionally withheld from export from Venezuela by the Venezuelan government, pending an administrative review, and is included in our product inventory at June 30, 2004. On July 21, 2004, the gold was released by the Central Bank of Venezuela and was shipped to our refiner for further processing and sale by us.

        At June 30, 2004, we had forward sales contracts through December 31, 2004, for 22,660 ounces of gold at an average price of $288.25 per ounce, compared to 78,728 ounces at June 30, 2003. These contracts meet the criteria to be treated as normal sales in accordance with SFAS 138 and, as a result, these contracts are not required to be accounted for as derivatives under SFAS 133. These forward sales contracts expose us to certain losses, generally the amount by which the contract price exceeds the spot price of a commodity, in the event of nonperformance by the counterparties to these agreements. The London Final gold prices at June 30 were $395.80 per ounce in 2004, and $346.00 per ounce in 2003.

        We have a quarterly Gold Lease Rate Swap at a fixed rate of 1.5% on 11,330 ounces of the above gold forward contracts. The ounces covered under the swap are adjusted each quarter, in accordance with the expiration of the gold forward contracts. At June 30, 2004, the fair market value of the Gold Lease Rate Swap was approximately $47,000, which represents the amount the counterparty would have to pay us if the contract was terminated.

Note 5. 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 located in the Kellogg, Idaho area. The 1994 Consent Decree (the “1994 Decree”) settled our response-cost responsibility under CERCLA at the Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and Refining Company, which was also a party to the 1994 Decree, filed for Chapter 11 bankruptcy and in January 2001, the Federal District Court approved a new Consent Decree

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between Sunshine, the U.S. Government and the Coeur d’Alene Indian Tribe which settled Sunshine’s environmental liabilities in the Coeur d’Alene Basin lawsuits described below and released Sunshine from further obligations under the 1994 Decree.

        In response to a request by us and ASARCO Incorporated, the United States Federal District Court in Idaho, having jurisdiction over the 1994 Decree, issued an Order in September 2001 that the 1994 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 1994 Decree. In its Order, the Court reserved the final ruling on the appropriate modification to the 1994 Decree until after the issuance by the EPA of a Record of Decision (“ROD”) on the Basin-wide Remedial Investigation/Feasibility Study. The EPA issued the ROD on the Basin in September 2002, proposing a $359 million Basin 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 requested the Court release Hecla and ASARCO from future work under the 1994 Decree within the Bunker Hill site. On November 18, 2003, the Idaho Federal District Court issued its order on ASARCO’s and our request for final relief on the motion to modify the 1994 Decree. The Court held that we and ASARCO were entitled to a reduction of $7,000,000 from the remaining work or costs under the 1994 Decree. Pursuant to the Court’s order, the parties to the 1994 Decree have negotiated an agreement for crediting this reduction against the government’s past cost claims and future work and payments under the 1994 Decree. In January 2004, both the United States and the State of Idaho filed notice of their appeal of the Federal District Court’s order modifying the 1994 Consent Decree.

        On February 2, 2003, ASARCO entered into a Consent Decree with the United States relating to a transfer of certain assets to its parent corporation, Grupo de Mexico, S.A. de C.V. The Consent Decree also addresses ASARCO’s environmental liabilities on a number of sites in the United States, including the Bunker Hill site. The provisions of the Consent Decree could limit ASARCO’s annual obligation at the Bunker Hill site for 2003 to 2005.

        As of June 30, 2004, we have estimated and accrued a liability for remedial activity costs at the Bunker Hill site of $6.1 million, which are anticipated to be made over the next four to five years. Although we believe the accrual is adequate based upon our current estimates of aggregate costs, it is reasonably possible that our estimate may change in the future due to the assumptions and estimates inherent in the accrual.

Coeur d’Alene River Basin Environmental Claims

      Coeur d’Alene Indian Tribe Claims

        In July 1991, the Coeur d’Alene Indian Tribe brought a lawsuit, under CERCLA, in Idaho Federal District Court 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

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Tribe’s NRD case.

      U.S. Government Claims

        In March 1996, the United States filed a lawsuit in Idaho Federal District Court against certain mining companies that conducted historic mining operations in the Silver Valley of northern Idaho, including us. 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 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, 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 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.

        During 2000 and into 2001, we were involved in settlement negotiations with representatives of the U.S. Government and the Coeur d’Alene Indian Tribe. We also participated with certain of the other defendants in the litigation in a State of Idaho-led settlement effort. On August 16, 2001, we entered into a now terminated Agreement in Principle with the United States and the State of Idaho to settle the governments’ claims for natural resource damages and clean-up costs related to the historic mining practices in the Coeur d’Alene Basin in northern Idaho. In August 2002, because the parties were making no progress toward a final settlement under the terms of the Agreement in Principle, the United States, the State of Idaho and we agreed to discontinue utilizing the Agreement in Principle as a settlement vehicle. However, we may participate in further settlement negotiations with the United States, the State of Idaho and the Coeur d’Alene Indian Tribe in the future.

        The first phase of the trial commenced on the consolidated Coeur d’Alene Indian Tribe’s and the United States’ claims on January 22, 2001, and was concluded on July 30, 2001. The first phase of the trial addressed the extent of liability, if any, of the defendants and the allocation of liability among the defendants and others, including the U.S. Government. On September 3, 2003, the Court issued its Phase I ruling, holding that we have some liability for Coeur d’Alene 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 these releases. The natural resource damages to which this 31% applies and the Court’s determination of an appropriate clean-up plan will be addressed in the Phase II trial.

        The Court also found that while certain Basin natural resources had been injured, “there

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has been an exaggerated overstatement” by the plaintiffs of Basin environmental conditions and the mining impact. The Court also significantly limited the scope of the trustee plaintiffs’ resource trusteeship and will require proof in the Phase II trial of the trustees’ percentage of trusteeship in co-managed resources. The Court also left for the Phase II trial issues on the deference, if any, to be afforded the government’s clean-up plan and on defendants’ constitutional due process/retroactivity defense. In disclosure documents filed with the Court in December 2003, the U.S. Government claimed to have incurred approximately $100 million for past environmental study, remediation and legal costs associated with the Coeur d’Alene Basin for which it is alleging it is entitled to reimbursement in the Phase II trial. A portion of these costs is also included in the work to be done in the ROD. The Coeur d’Alene Tribe, in a similar disclosure document, alleges its claim for natural resource damages in the Phase II trial will be between $965 million and $1.8 billion and their past cost claim may be $5.6 million. The Phase II trial is currently scheduled to commence in April 2005. Two of the defendant mining companies, Coeur d’Alene Mines Corporation and Sunshine Mining and Refining Company, settled their liabilities under the litigation during the first quarter of 2001. We and ASARCO are the only defendants remaining in the United States’ litigation.

        Although the U.S. Government has previously issued its ROD proposing a clean-up plan totaling approximately $359 million, based upon the Court’s prior orders, including its September 3, 2003 order and other factors and issues to be addressed by the Court in the Phase II trial, we estimated the range of our potential liability for remediation in the Basin to be $18.0 million to $58.0 million, with no amount in the range being more likely than any other number at this time. Based upon generally accepted accounting principles, we accrued the minimum liability within the range. As of June 30, 2004, we have estimated and accrued a potential liability for claims in the Coeur d’Alene Basin litigation of $18.0 million. It is reasonably possible that our ability to estimate what, if any, additional liability we may have relating to the Coeur d’Alene Basin may change in the future depending on a number of factors, including information obtained or developed by us prior to the Phase II trial, any interim Court determinations and the outcome of the Phase II trial.

      Class Action Litigation

On or about January 7, 2002, a class action complaint was filed in the Idaho District Court, County of Kootenai, against several corporate defendants, including Hecla. We were served with the complaint on January 29, 2002. The complaint seeks certification of three plaintiff classes of Coeur d’Alene Basin residents and current and former property owners to pursue three types of relief: various medical monitoring programs, real property remediation and restoration programs, and damages for diminution in property value, plus other damages and costs they allege resulted from historic mining and transportation practices of the defendants in the Coeur d’Alene Basin. On April 23, 2002, we filed a motion with the Court to dismiss the claims for relief relating to any medical monitoring programs and the remediation and restoration programs. At a hearing before the Idaho District Court on our and other defendants’ motions held October 16, 2002, the Judge struck the complaint filed by the plaintiffs in January 2002 and instructed the plaintiffs to re-file the complaint limiting the relief requested by the plaintiffs to wholly private damages. The Court also dismissed the medical monitoring claim as a separate cause of action and stated that any requested remedy that encroached upon the EPA’s clean-up in the Silver

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Valley would be precluded by the pending Federal Court case described above. The plaintiffs re-filed their amended complaint on January 9, 2003. As ordered by the Court, the amended complaint omits any cause of action for medical monitoring and no longer requests relief in the form of real property remediation or restoration programs. At a hearing on May 7, 2003, the Court vacated the entire amended complaint, and gave plaintiffs’ counsel until June 30, 2003, to re-file an amended complaint that complies with Idaho law. Plaintiffs submitted a second amended complaint on June 9, 2003, which we have answered. Discovery on the issue of class certification is proceeding. We believe the claims alleged against us are subject to challenge on a number of bases and we intend to vigorously defend this litigation.

      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 northern Idaho. 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 1994 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, 2004, we have not reduced our accrual or recorded a receivable for reclamation and closure costs to reflect the receipt of any potential insurance proceeds.

Other

      Independence Litigation

        In March 2002, Independence Lead Mines Company (“Independence”), the holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the Lucky Friday unit, notified us of certain alleged defaults by us under the 1968 lease agreement between the unit owners (Independence and us under the terms of the 1968 DIA Unitization Agreement) as lessors and defaults by us as lessee and operator of the properties. We are a net 81.48% interest holder under these Agreements. 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, and our decisions with respect to the character of work are final. On June 17, 2002, Independence filed a lawsuit in Idaho State District Court seeking termination of the lease agreement and requesting unspecified damages. On March 18, 2003, Independence filed a motion for partial summary judgment or in the alternative, for preliminary injunction (“Motion”). The Motion requested that the Court terminate our leasehold interest in property owned by

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Independence within the DIA area, rule that we have committed waste while mining ore within property owned by Independence, and prohibit us from any further mining within property owned by Independence. We filed our response to the Motion on May 28, 2003, and a hearing was held in July 2003 on the Motion. By order dated August 8, 2003, the Court denied the plaintiff’s Motion. Trial of the case occurred from March 23 through April 1, 2004. On July 19, 2004 the court issued a decision that found in our favor on all issues. We believe that we have complied in all material respects with all of our obligations under the 1968 lease agreement and intend to continue defending our right to operate the property under the lease agreement.

      Velardeña Mill Litigation

        In Mexico, our subsidiary, Minera Hecla, was involved in litigation in Mexico City concerning a lien on certain major components of the Velardeña mill that predated the sale of the mill to Minera Hecla. At the time of the purchase, the lien amount was believed to be approximately $590,000, which was deposited by the prior owner of the mill with the Court. On January 23, 2003, Minera Hecla deposited $145,000, which represented the amount of accrued interest since the date of sale, and the Court in Mexico City canceled the lien. On September 17, 2003, the lien holder filed the last in a series of unsuccessful appeals before a federal appeals court in Mexico City. On February 3, 2004, the federal appeals court in Mexico City upheld the lower court decisions that the lien had been cancelled. We believe that the lien has been fully satisfied and the lien holder has exhausted all appeals.

        Minera Hecla is also involved in other litigation in state and federal courts located within the State of Durango, Mexico concerning the Velardeña mill. On October 10, 2003, representatives from Minera William, S.A. de C.V. (an affiliate of the prior owner of the Velardeña mill and subsidiary of ECU Silver Mining, a Canadian company) presented to Minera Hecla court documents from a state court in Durango, Mexico that purported to award custody of the mill to Minera William to satisfy an alleged unpaid debt by the prior owner. Minera Hecla was not a party to and did not have any notice of the legal proceeding in Durango. On October 21, 2003, Minera Hecla obtained a temporary restraining order from a federal court in Durango to preserve our possession of the mill. On February 2, 2004, Minera Hecla obtained a permanent restraining order that prohibits further interference with our operation and possession of the mill. We believe the claim of Minera William is without merit and it has no right to any portion of the Velardeña mill. We intend to zealously defend our ownership interest.

        The court proceedings discussed above do not affect Minera Hecla’s San Sebastian mine, located approximately 65 miles from the Velardeña mill. The above-mentioned dispute could result in future disruption of operations at the Velardeña mill. Although there can be no assurance as to the outcome of these proceedings, we believe an adverse ruling will not have a material adverse effect on our financial condition.

        Venezuela Litigation

         On February 20, 2004, the Venezuelan National Guard impounded a shipment of approximately 5,000 ounces of gold doré produced from the La Camorra unit that is owned and operated by our wholly owned subsidiary, Minera Hecla Venezolana (“MHV”). The impoundment was allegedly made due to irregularities in documentation that accompanied that shipment. That shipment was stored at the Central Bank of Venezuela until its return to us on July 21, 2004. All subsequent shipments of gold doré have been exported without intervention by Venezuelan government authorities. We have cooperated with the Venezuelan government in its investigation of the matter. On March 19, 2004, we filed with the Superior Tax Court in Bolivar City, state of Bolivar an injunction action against the National Guard to release the impounded gold doré. On April 6, 2004, that Court granted our request for an injunction but conditioned release of the gold pending resolution of an unrelated matter involving the Venezuelan tax authority (SENIAT) that was proceeding in the Third Superior Tax Court in Caracas. On June 16, 2004 the third Superior Tax Court in Caracas ordered return of the impounded gold to Hecla, which was in fact returned to us on July 21, 2004 and was shipped to our refines for further processing and sale by us. We believe we are in compliance with our export license and all applicable Venezuelan laws.

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        MHV is also involved in litigation in Venezuela with SENIAT concerning alleged unpaid tax liabilities that predate our purchase of the La Camorra unit from Monarch Resources Investments Limited (“Monarch”) in 1999. Pursuant to our Purchase Agreement, Monarch has assumed defense of and responsibility for that pending tax case in the Superior Tax Court in Caracas. On or about April 2, 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, on April 7, 2004, MHV made a cash deposit with the Court of approximately $4.2 million. On June 16, 2004 the Superior Tax Court in Caracas ordered suspension and revocation of the embargo action filed by the SENIAT. Although the Company believes the cash deposit will continue to prevent any further action by SENIAT with respect to the embargo, there can be no assurances as to the outcome of this proceeding.

        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, it is the opinion of our management that the outcome of these other proceedings will not have a material adverse effect on our financial condition.

Note 6. Long-Term Debt and Credit Agreements

        In February 2004, we made a final payment of $0.5 million on the outstanding balance of a pre-existing credit agreement used to provide project financing at the La Camorra mine, and a final payment of $1.0 million on a subordinated loan agreement entered into in connection with the project financing agreement. Additionally, approximately $0.9 million in interest was paid at the same time under these agreements. As a result of the final payment, our debt under these agreements has been fully discharged.

        At June 30, 2004, our wholly owned subsidiary, Minera Hecla, S.A. de C.V. (“Minera Hecla”), had $2.8 million outstanding under a project loan used to acquire a processing mill at Velardeña, Mexico, to process ore mined from the San Sebastian mine near Durango, Mexico.

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The credit facility is non-recourse to us. Under the terms of the credit facility, Minera Hecla will make monthly payments for principal and interest over 63 months at a fixed interest rate equal to 13%. The final payment on this loan is due July 1, 2006. The loan is collateralized by the mill at Velardeña and the Saladillo, Saladillo 1 and Saladillo 5 mining concessions.

        In February 2003, the Venezuelan government implemented exchange controls, which have required us, in some instances, to convert United States dollars into the country’s currency. Rules and regulations regarding the implementation of exchange controls in Venezuela have been published and periodically revised and/or updated. In March 2004 our subsidiary, Minera Hecla Venezolana, established a line of credit in Venezuelan bolivars at a local bank to facilitate the payment of national vendors in the country’s currency. The line, with a balance of $2.4 million at March 31, 2004, was secured by $2.0 million in restricted cash, which was held by the bank. In June 2004, we repaid the balance of the line, including accrued interest, and converted the security of $2.0 million to cash.

Note 7. Income (loss) per Common Share

        The following table presents a reconciliation 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 cumulative preferred dividends in arriving at the income applicable to common shareholders for the three months and six months ended June 30, 2004 and 2003, in computing basic and diluted income (loss) per common share (dollars and shares in thousands, except per-share amounts).

        These calculations of diluted income (loss) per share for the three months and six months ended June 30, 2004 and 2003 exclude the effects of convertible preferred stock ($7.9 million in 2004 and $37.6 million in 2003), as well as common stock issuable upon the exercise of various stock options as their conversion and exercise would be anti-dilutive. For the three months ended June 30, 2004 and 2003, 1,077,500 and 1,689,167 stock options, respectively, were excluded in the calculation of diluted income (loss) per share. Stock options excluded totaled 2,389,168 for the six months ended June 30, 2004, and 1,328,500 in the 2003 period.

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Note 8. Business Segments

        We are organized and managed in three segments, which represent the geographical areas in which we operate: Venezuela (the La Camorra unit), Mexico (the San Sebastian unit) and the United States (the Greens Creek unit and the Lucky Friday unit). Prior to the fourth quarter of 2003, we were organized into a silver segment and a gold segment. We have changed our reportable segments to better reflect the economic characteristics of our operating properties and have restated the corresponding information for all periods presented. General corporate activities not associated with operating units, as well as idle properties, are presented as Other. Interest expense, interest income and income taxes are considered a general corporate expense and are not allocated to the segments.

        The following tables present information about reportable segments for the three and six months ended June 30, 2004 and 2003 (in thousands):

        The following table presents identifiable assets by reportable segment as of June 30, 2004 and December 31, 2003 (in thousands):

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Note 9. Shareholders’ Equity

        In February 2004, we reduced the number of Series B preferred shares outstanding by 273,961 shares, or 58.9%, pursuant to an exchange offer. This exchange offer allowed participating shareholders to receive 7.94 shares of common stock for each preferred, which resulted in the issuance of a total of 2,175,237 common shares. During March 2004, we entered into privately negotiated exchange agreements with holders of approximately 17% of the then outstanding preferred stock (190,816 preferred shares) to exchange such shares for shares of common stock. A total of 33,000 preferred shares were exchanged for 260,861 common shares as a result of the privately negotiated exchange agreements. As of June 30, 2004, a total of 157,816 shares of preferred stock remain issued and outstanding.

        Included in the loss applicable to common shareholders for the six months ended June 30, 2004 were preferred stock dividends of $11.3 million, which included non-cash dividend charges of approximately $10.9 million related to the exchanges of preferred stock for common stock discussed above. The non-cash dividends represent the difference between the value of the common stock issued in the exchange transactions and the value of the shares of common stock that would have been issued if the shares of the preferred stock had been converted into common stock pursuant to their original conversion terms. The non-cash dividend had no net impact on our total shareholders’ equity. Following the exchanges, the total of cumulative preferred dividends in arrears was $2.2 million as of June 30, 2004.

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Note 10. Stock-Based Plans

        At June 30, 2004, executives, key employees and directors had been granted options to purchase our common shares or were credited with common shares under the stock-based plans below. We have adopted the disclosure-only provisions of SFAS No. 123. No compensation expense was recognized during the three and six months ended June 30, 2004 and 2003 for unexercised options related to the stock-based plans. Had compensation expense for our stock-based plans been determined based on the fair market value at the grant date for awards during these periods consistent with the provisions of SFAS No. 123, our income (loss) and per share income (loss) applicable to common shareholders would have been decreased (increased) to the pro forma amounts indicated below (in thousands, except per share amounts):

Note 11. Asset Retirement Obligations

        In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which became effective January 1, 2003. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Subsequently, reclamation costs will be allocated to expense over the life of the related assets and will be adjusted for changes resulting from the passage of time and changes to either the timing or amount of the original fair value estimate underlying the obligation. The sum of our estimated reclamation and abandonment costs was discounted using a credit adjusted, risk-free interest rate of 6% from the time we expect to pay the retirement obligation to the time we incurred the obligation. Upon initial application of SFAS No. 143 on January 1, 2003, we recorded the following:

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        The following is a reconciliation of our total liability for asset retirement obligations (in thousands):

Note 12. New Accounting Pronouncements

        In April 2004, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue No. 04-2, which amends Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations” to the extent all mineral rights are to be considered tangible assets for accounting purposes. There has been diversity in practice related to the application of SFAS No. 141 to certain mineral rights held by mining entities that are not within the scope of SFAS No. 19 “Financial Accounting and Reporting by Oil and Gas Producing Companies.” The SEC staff’s position previously was entities outside the scope of SFAS No. 19 should account for mineral rights as intangible assets in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.” We have reclassified the net cost of mineral interests and associated accumulated amortization to property, plant and equipment as of June 30, 2004 ($5.0 million) and December 31, 2003 ($5.3 million).

        In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) “Consolidation of Variable Interest Entities.” In December 2003, the FASB issued a revision to this interpretation (FIN 46(r)). FIN 46(r) clarifies the application of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.” FIN 46 clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling

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financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We adopted FIN 46(r) in its entirety in the first quarter of 2004, which did not 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 (including information incorporated by reference) are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, 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,” “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 Item 1 – Business – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2003. 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.

Overview

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

• Manage all our business activities in a safe, environmentally responsible and cost-effective manner;
• Give preference to projects where we will be the manager of the operation;
• Provide a work environment that promotes personal excellence and growth for all our employees; and
• Conduct our business with integrity and honesty.

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

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        We are organized and managed in three segments, which represent the geographical areas in which we operate: Venezuela (the La Camorra unit), Mexico (the San Sebastian unit) and the United States (the Greens Creek unit and the Lucky Friday unit). The maps below indicate the locations of our operating units. For GAAP purposes and in accordance with SFAS 131 “Disclosures About Segments of an Enterprise and Related Information,” we are organized into three segments: Venezuela (the La Camorra unit), Mexico (the San Sebastian unit) and the United States (the Greens Creek unit and the Lucky Friday unit) as of June 30, 2004.

        We produce both metal concentrates, which we sell to custom smelters on contract, and unrefined gold and silver bullion bars (doré), which is further refined before sale to metals traders. Our revenue is derived from the sale of silver, gold, lead and zinc and, as a result, our earnings are directly related to the prices of these metals. Silver, gold, lead and zinc prices fluctuate widely and are affected by numerous factors beyond our control. During the first six months of 2004, we have seen the prices of the metals we produce remain reasonably stable. In the event these metals prices decline, we feel our strong balance sheet and low cost properties will allow us to continue to be successful.

        For the second quarter and first six months of 2004, we recorded net income of $2.7 million and $8.9 million, respectively, compared to income of $2.5 million and $9.3 million during the second quarter and first six months of 2003. However, while 2003‘s net income was affected by a one-time positive $4.0 million legal settlement, a $1.1 million positive cumulative effect of change in accounting principle, and $1.3 million lower provision for closed operations and environmental matters, net income during the first half of 2004 is a direct result of an over 41% favorable variance in gross profit over the prior period. This 41% variance is attributable primarily to increased market prices for our products compared to the same period in the previous year. For the first six months of 2004 compared to the same period in 2003, the average price of silver increased 39% and our average realized price of gold increased 13%. The average prices of lead and zinc, both of which are important by-products at our Greens Creek and Lucky

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Friday units, increased 81% for lead and 34% for zinc. Our exploration expenditures increased by 21% for the first six months of 2004, primarily due to increased exploration in Mexico. This increase is consistent with our corporate objectives to grow and expand production in Mexico in the future. Our balance sheet continues to be strong, with over $80.0 million in cash, approximately $28.0 million in investments maturing within the next twelve months, and minimal debt.

        In February 2004, we reduced the number of Series B preferred shares outstanding by 273,961 shares pursuant to an exchange offer. This exchange offer allowed participating shareholders to receive 7.94 shares of common stock for each preferred share exchanged which resulted in the issuance of a total of 2,175,237 common shares. During March 2004, we entered into privately negotiated exchange agreements with holders of approximately 17% of the then outstanding preferred stock to exchange such shares for shares of common stock. A total of 33,000 preferred shares were exchanged for 260,861 common shares as a result of the privately negotiated exchange agreements. As of June 30, 2004, a total of 157,816 shares of preferred stock remain issued and outstanding. In order to eliminate the effect of our dividend arrearages on our capital raising activities, we intend to evaluate and potentially implement further programs to reduce the number of remaining preferred shares outstanding, including the possible redemption of all outstanding preferred shares. At July 1, 2004, redemption of the remaining preferred shares would cost approximately $10.0 million.

        As previously reported in a press release in March 2004, approximately 5,000 ounces of gold production were provisionally withheld from export from Venezuela by the Venezuelan government, pending an administrative review. On July 21, 2004, the gold was released by the government from the Central Bank of Venezuela, and was shipped to our refiner for further processing and sale by us.

        The following table displays our actual silver and gold production (in thousand ounces) by operation for the quarters and six months ended June 30, 2004 and 2003, and projected silver and gold production for the year ending December 31, 2004.

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        Total cash and total production costs, and average metals prices were as follows:

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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 the Consolidated Financial Statements in our annual report filed on Form 10-K for the year ended December 31, 2003. We have identified our most critical accounting policies below that are most 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 metals products sold directly to smelters are recorded when title and risk of loss transfer to the smelter at current spot metals prices. Due to the time elapsed from the transfer to the smelter and the final settlement with the smelter (generally three months), we must estimate the price at which our metals will be sold in reporting our profitability and cash flow. Recorded values are adjusted monthly until final settlement at month-end metals prices. If there was a significant variance in estimated metals prices or assays compared to the final actual metals prices and assays, our monthly results of operations could be affected. Sales of metal in products tolled, rather than sold to smelters, are recorded at contractual amounts when title and risk of loss transfer to the buyer.

        Sales of concentrates and precipitates from the Greens Creek, Lucky Friday and San Sebastian units are sold directly to smelters, with recorded amounts adjusted to month-end metals prices until 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 a significant portion of our revenues is derived from the sale of silver, gold, lead and zinc, our earnings are directly related to the prices of these metals. If the market price for these metals falls below our total production costs, we will experience losses on such sales.

Proven and Probable Ore Reserves

        On a periodic basis, management reviews the reserves that reflect estimates of the quantities and grades of ore at our mines which management believes can be recovered and sold

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at prices in excess of the total cost associated with extracting and processing the ore. Management’s calculations of proven and probable ore reserves are based on in-house engineering and geological estimates using current operating costs, metals prices and demand for our products. Periodically, management obtains external audits of reserves.

        Reserve estimates will change as existing reserves are depleted through production and as production costs and/or metals prices change. 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. Reserves estimated for properties that have not yet commenced production may require revision based on actual production experience.

        Declines in the market price of metals, as well as increased production or capital costs, reduction in the grade or tonnage of the deposit, 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 is sufficient to offset such effects. If our realized price for the metals we produce, including hedging benefits, 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.

Depreciation and Depletion

        The mining industry is extremely capital intensive. We capitalize and depreciate property, plant and equipment consistently 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 a periodic basis. 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 are less than the carrying value of a property, an impairment loss is recognized based upon the estimated expected future cash flows from the property discounted at an interest rate commensurate with the risk involved.

        Management’s estimates of metals prices, recoverable proven and probable ore reserves, and operating, capital and reclamation costs are subject to risks and uncertainties of change

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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.

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 property, or have owned and operated property, used for industrial purposes. Use of these properties may subject us to potential material liabilities relating to the investigation and cleanup of contaminants, claims alleging personal injury or property damage as the result of exposures to, or release of, hazardous substances.

        At our operating properties, we accrue costs associated with environmental remediation obligations in accordance with 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. 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 remediation costs as evidence becomes available indicating that our remediation liabilities have potentially changed. Such costs are based on management’s 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

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environmental matters totaled $69.1 million at June 30, 2004, and we anticipate that expenditures relating to these reserves will be made over the next thirty years. This amount was derived from a range of reasonable estimates in accordance with SFAS No. 5 “Accounting for Contingencies.” 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, 2004, if the highest estimate from the range (based upon information presently available) were recorded, the total estimated liability would be increased by approximately $40.0 million. For additional information, see Note 5 to our Notes to Consolidated Financial Statements.

Foreign Exchange Gains in Venezuela

        The Venezuelan government has fixed the exchange rate of their currency to the U.S. dollar at 1,920 to $1 (as of February 7, 2004, formerly 1,600 to $1 since February 2003); which is the exchange rate we utilize to translate the financial statements of our Venezuelan subsidiary included in our consolidated financial statements. Rules and regulations regarding the implementation of exchange controls in Venezuela have been published and periodically revised and/or updated.

        Due to the exchange controls in place, the La Camorra unit recognized a foreign exchange gain of $9.0 million as a reduction to cost of sales, exploration and capital expenditures during the first six months of 2004 due to the use of multiple exchange rates in valuing U.S. dollar denominated transactions. As discussed above, the Venezuelan government has fixed the exchange rate of the bolivar to the U.S. dollar at 1,920 to $1; however, markets outside of Venezuela reflect a devaluation of the Venezuelan currency at approximately 46%.

By-product Credits at the San Sebastian Unit in Mexico

        Cash costs per ounce of silver at the San Sebastian unit include significant by-product credits from gold production and the strength of the price of gold. Cash costs per ounce are calculated pursuant to standards of the Gold Institute and are consistent with how costs per ounce are calculated within the mining industry. Total cash costs were $0.39 per silver ounce for the second quarter of 2004 and negative $0.09 per silver ounce for the six months ended June 30, 2004, compared to $0.20 per silver ounce and $0.07 per silver ounce during the second quarter and first six months of 2003. For the six months ended June 30, 2004 and 2003, gold by-product credits were approximately $5.82 per silver ounce and $3.95 per silver ounce, respectively. By-product credits at the San Sebastian unit are deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy were changed to treat gold production as a co-product, the following total cash costs per ounce would be reported:

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        Cash costs per ounce of silver or gold represent non-U.S. Generally Accepted Accounting Principles (“GAAP”) measurements that management uses to monitor and evaluate the performance of its mining operations. We believe cash costs per ounce of silver or gold produced provide an indicator of cash flow generation at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs.

Value-Added Taxes

        Value-added taxes (VAT) are assessed in Venezuela on purchases of materials and services. VAT is recorded as an account receivable on our consolidated balance sheet, with a balance of $5.2 million (net of a reserve for uncollectibility totaling $1.3 million) at June 30, 2004.

        As an exporter from Venezuela, Hecla is eligible for refunds from the government for payment of VAT, and Hecla prepares a monthly filing to obtain this refund. Refunds are given by the government in the form of tax certificates which are marketable in Venezuela, generally for approximately 95% of face value. Hecla received its most recent certificate from the Venezuelan government in September 2002. While we believe that we will receive certificates for all outstanding VAT from the Venezuelan government, issuance of certificates is slow and likelihood of recovery at recorded value may diminish over time. We have established a reserve of 21% of face value at June 30, 2004.

RESULTS OF OPERATIONS

        For the second quarter and first six months of 2004, we recorded income and loss applicable to common shareholders of $2.6 million and ($2.4) million, or $0.02 income and ($0.02) loss per share, respectively, compared to income applicable to common shareholders of $1.9 million and $8.0 million, or $0.02 and $0.07 income per common share during the second quarter and first six months of 2003. Included in the loss for the first six months of 2004 were preferred stock dividends of $11.3 million, which included non-cash dividend charges of approximately $10.9 million related to the exchanges of preferred stock for common stock, discussed previously. The non-cash dividends represent the difference between the value of the common stock issued in the exchange transactions and the value of the shares of common stock that would have been issued if the shares of the preferred stock had been converted into common stock pursuant to their terms. For more information, see Note 9 to our Notes to Consolidated Financial Statements.

The Mexico Segment

        The San Sebastian unit, located in the State of Durango, Mexico, reported sales of $9.9 million in the second quarter of 2004 and $20.1 million for the six months ended June 30, 2004, compared to $8.4 million and $16.8 million during the same periods in 2003, primarily due to a 36% increase in the price of silver and a 14% increase in the price of gold compared to the same

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periods in 2003. The increased metals prices are offset by lower silver production of 38% for the second quarter and 27% in the first six months of 2004 compared to the prior year, due to lower ore grades. We have experienced decreases in both grade and tons milled in Mexico, particularly in the Francine vein in Mexico, as discussed below.

        Production during the second quarter of 2004 totaled approximately 0.6 million ounces of silver and 10,000 ounces of gold, compared to 1.0 million ounces of silver and 12,000 ounces of gold during the second quarter of 2003. For the first six months of 2004, production totaled approximately 1.5 million ounces of silver and 22,000 ounces of gold compared to 2003 production in the same period of approximately 2.0 million ounces of silver and 23,000 ounces of gold. Tons milled increased in the second quarter of 2004 by 6% and in the first six months of 2004 by 14% over the same periods in 2003, however, the silver grade decreased to 16.4 ounces per ton in the second quarter of 2004 from 27.9 ounces per ton in the same period last year, and to 20.6 ounces per ton in the first six months of 2004 from 30.0 ounces per ton in 2003. San Sebastian’s gold grades were 0.27 in the second quarter of 2004 and 0.30 ounce per ton in the first six months of 2004, down from 0.32 and 0.35 ounces per ton during the same periods of 2003. We estimate production of between 2.4 and 2.6 million ounces of silver, and between 42,000 and 43,000 ounces of gold for the year ending December 31, 2004.

        The total cash costs at San Sebastian for the second quarters of 2004 and 2003 were $0.39 and $0.20 per silver ounce, with the increased cost driven by decreased ore grades, partly offset by increased gold by-product credits. For the six-month period, total cash cost per ounce of silver decreased to negative $0.09 in 2004 from $0.07 per ounce in 2003. Gold, a by-product credit of silver production, contributed to the decrease in year-to-date cost per ounce primarily due to higher gold prices in 2004. For the six-month periods, gold by-product credits were approximately $5.82 per silver ounce in 2004 and $3.95 per silver ounce in 2003.

        For further details on our cash costs per ounce, please see Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs (GAAP), below.

The United States Segment

        Greens Creek

        The Greens Creek unit, a 29.73%-owned joint-venture arrangement with Kennecott Greens Creek Mining Company located on Admiralty Island, near Juneau, Alaska, reported sales of $4.3 million and $14.4 million for our account during the second quarter and first six months of 2004, as compared to $7.9 million and $13.4 million during the comparable 2003 periods. Despite lower sales in the second quarter of 2004 when compared to the same period last year due to timing of shipments, our income from operations from the Greens Creek Unit was $0.8 million in the second quarter of 2004 compared to an income of $0.7 million in the 2003 period due to higher average metals prices. We reported income from operations of $3.8 million in the first half of 2004 on our share of the Greens Creek Unit, compared to $0.7 million income in the same 2003 period. Cost of sales and other direct production costs as a percentage of sales from products decreased to 36% in the second quarter of 2004 and 48% for the first half of 2004, from 64% and 65% in the related 2003 periods, primarily due to increases in gold, silver, lead and zinc prices during 2004, all of

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which contributed to increased gross margins. The effects of base metal by-product credits is significant for Greens Creek.

        Greens Creek silver production was down by 20% in the second quarter of 2004 from the second quarter of 2003 as a result of decreased ore grades. Silver production totaled approximately 0.7 million ounces during the second quarter of 2004 and 1.4 million ounces for the first six months of 2004, compared to 0.8 million ounces and 1.6 million ounces during the same 2003 periods. During the first half of 2004, Greens Creek produced approximately 13,000 ounces of gold, 4,000 tons of lead, and 11,000 tons of zinc, compared to 15,000 ounces of gold, 4,000 tons of lead, and 13,000 tons of zinc during the first half of 2003.

        Ore grades of silver produced were approximately 16 ounces per ton in the second quarter and 17 ounces per ton in the first half of 2004, compared to approximately 19 ounces and 18 ounces of silver per ton during the related 2003 periods, with decreases due to production from lower-grade ore zones. Gold grades were approximately 0.18 ounces per ton in both the second quarter and six months of 2004, compared to 0.20 ounces per ton and 0.19 ounces per ton in the second quarter and six months of 2003. While volume mined has kept pace with our expectations, ore grades have decreased as the joint venture has been unable to mine as much volume as expected from areas with higher silver grades. Increased grades of base metals have partially compensated for the decreased silver grade.

        The total cash costs per silver ounce decreased in both reporting periods from 2003 to 2004. In the second quarter, total cash cost per silver ounce decreased by approximately 46%, from $1.00 during the second quarter of 2003 to $0.54 per ounce in the second quarter of 2004. Total cash cost per silver ounce decreased by approximately 43% from the six months of 2003 to the same period in 2004, from $1.31 per ounce in 2003 to $0.77 per ounce in 2004. The decreases in costs per ounce are primarily due to the increased by-product credits from higher average gold, lead and zinc prices during the second quarter and six months of 2004 over the 2003 period. For the year ending December 31, 2004, production is forecasted to total between 3.1 and 3.2 million silver ounces, between 26,000 and 27,000 ounces of gold, 7,000 tons of lead, and 22,000 tons of zinc.

        For further details on our cash costs per ounce, please see Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs (GAAP), below.

        Lucky Friday

        The Lucky Friday unit, located in northern Idaho and a producing mine for Hecla since 1958, reported sales of approximately $3.9 million during the second quarter of 2004 and $8.7 million during the first half of the year, compared to $3.0 million and $6.1 million during the comparable 2003 periods. Income from operations of $0.4 million and $1.5 million were recorded for the second quarter and six months of 2004, improvements for both periods from a loss from operations of $39,000 during the second quarter of 2003 and income from operations of $16,000 in the first six months of 2003. The increases in both sales and income from operations during the 2004 periods over 2003 are due primarily to the increases in metals prices. Offsetting the favorable prices are decreases of 14% in silver production quarter-on-quarter and 19% for the six-month

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period, due primarily to a 17% decrease in the silver ore grade for both periods. These factors are primarily attributable to overall deeper mining resulting in longer haulage, fewer tons mined in February 2004 due to ore pass pocket repair, and higher-grade mining that took place during 2003.

        Cost of sales and other direct production costs as a percentage of sales from products decreased to 90.7% during the second quarter of 2004 from 101% during the second quarter of 2003, primarily due to an increase in sales, offset by increased volume, maintenance and development costs, and an increase in labor costs as compared to the second quarter of 2003. During the comparable six-months periods, cost of sales and other direct production costs as a percentage of sales from products decreased from 99.7% in the 2003 period to 82.7% in 2004, driven by the same factors that contributed to the variances in the second quarter. In December 2003, we announced our intent to develop the 5900 level of the Gold Hunter deposit. This project, which employs 16 workers, is anticipated to cost approximately $7.5 million. At June 30, 2004, the Gold Hunter project was 20% complete, and should reach full production in the third quarter of 2005.

        Due primarily to the 14% and 19% decreases in silver production for the second quarters and six-month periods of 2004 from 2003, the total cash cost per silver ounce increased during the second quarter of 2004 to $4.87 from $4.68 during the second quarter of 2003, and increased to $5.14 in the first six months of 2004 from $4.57 in the same period of 2003. For the year ending December 31, 2004, production is forecasted to total between 2.2 million and 2.3 million silver ounces and approximately 13,000 tons of lead.

        For further details on our cash costs per ounce, please see Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs (GAAP), below.

The Venezuela Segment

        We currently operate the La Camorra unit, located in the eastern Venezuelan State of Bolivar, approximately 120 miles southeast of Puerto Ordaz. The La Camorra unit refers to our Venezuelan operating properties and exploration projects, currently comprised of the La Camorra mine and Block B concessions. At the present time, the La Camorra unit is our sole designated gold operation.

        Sales increased to $13.5 million in the second quarter of 2004, or by 26%, from $10.7 million in the second quarter of 2003, and to $25.3 million in the first six months of 2004, or by 26% from $19.9 million in the first six months of 2003. The increases in both periods were primarily due to higher realized gold prices ($368 in the second quarter of 2004 versus $326 in the same period of 2003, and $373 for the first six months of 2004 versus $329 for the first six months of 2003). In addition, gold grades increased during both periods, to an average of 0.77 ounces per ton in the second quarter of 2004 from .068 ounces for ton in 2003, and to 0.81 ounces per ton for the first six months of 2004 from 0.75 ounces per ton in the first half of 2003. Our realized gold prices were less than the average London Final prices ($394 per ounce in the second quarter of 2004 versus $347 per ounce in the second quarter of 2003, and $401 per ounce for the first six months of 2004 compared to $349per ounce in the first six months of 2003) due to forward gold sales commitments at $288.25 per ounce for a portion of our production. As of

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June 30, 2004, a total of 22,660 ounces of gold are subject to forward contracts at the price of $288.25 per ounce, all scheduled for delivery by the end of 2004. Income from operations totaled $4.6 million and $8.5 million during the second quarter and first six months of 2004, compared to $4.7 million and $7.7 million during the related periods of 2003. Compared to results for the second quarter of 2003, operating income for the second quarter of 2004 was strengthened by a 14% increase in gold ounces produced, which was offset by increased production costs. The increase in operating income for the first six months of 2004 compared to the same period in 2003 is attributable to improvements in income from operations of $1.4 million, a 19% increase when compared to the first six months of 2003, primarily due to increases in sales driven by price and grade improvements. Cost of sales and other direct production costs as a percentage of sales from products increased during both reporting periods, to 65% during the second quarter of 2004, from 56% during the same period in 2003, and to 64% during the first six months of 2004 from 62% during the same period in 2003, due primarily to higher production costs.

        The La Camorra unit produced approximately 36,000 gold ounces during the second quarter and 73,000 gold ounces during the first six months of 2004, at total cash costs of $164 in the second quarter and $144 per ounce for the first six months compared to approximately 32,000 gold ounces in the second quarter of 2003 at a total cash cost of $139 per ounce, and 67,000 gold ounces in the first six months of 2003 at a total cash cost of $138 per ounce. La Camorra produced gold at average grades of 0.77 ounces of gold per ton in the second quarter of 2004 and 0.81 ounces of gold per ton in the first six months of 2004, compared to an average grade of 0.68 ounce of gold per ton during the second quarter of 2003, and 0.75 ounces of gold per ton in the first six months of 2003. Total gold production for the La Camorra unit is projected to reach approximately 145,000 ounces for the year ending December 31, 2004.

        As reported in our Form 10-K for the year ended December 31, 2003, Venezuela has experienced political unrest that has resulted in a severe economic downturn since the fourth quarter of 2002. The Venezuelan Constitution contains a provision to call a presidential referendum halfway through the term of office if a prescribed percentage of the electorate petitions for a referendum. During December 2003, approximately 3.4 million signatures were collected on petitions with approximately 2.4 million valid signatures needed for a recall election. In March 2004, Venezuela’s elections council ruled that 1.83 million signatures on the petitions were deemed valid, and another 876,000 signatures were deemed to require confirmation, which led to public protests. During May, enough signatures were verified to call for a referendum, which will be held August 15, 2004.

        We continue to maintain low costs in part due to the weak Venezuelan currency, the bolivar. The Venezuelan government has fixed the exchange rate of their currency to the U.S. dollar at 1,920 to $1 (as of February 7, 2004, formerly 1,600 to $1 since February 2003); which is the exchange rate we utilize to translate the financial statements of our Venezuelan subsidiary included in our consolidated financial statements. Rules and regulations regarding the implementation of exchange controls in Venezuela have been published and periodically revised and/or updated. However, markets outside of Venezuela reflect a devaluation of the Venezuelan currency at approximately 46%, which benefits our cost structure, as a portion of the gains are offset against costs of production, exploration and capital expenditures.

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        Because of the exchange controls in place and their impact on local suppliers, some supplies, equipment parts and other items we previously purchased in Venezuela have been ordered outside the country. Increased lead times in receiving orders from outside Venezuela has continued to require an increase in supply inventory, including an increase of 21% as of the end of June 2004 compared to December 31, 2003.

        As previously reported in a press release in March 2004, approximately 5,000 ounces of gold production, valued at a cost of $1.0 million, was provisionally withheld from export from Venezuela by the Venezuelan government, pending an administrative review, and is included in our product inventory at June 30, 2004. On July 21, 2004, the gold was released by the government from the Central Bank of Venezuela and was shipped to our refiner for further processing and sale by us.

        Although we believe we will be able to manage and operate the La Camorra unit and related exploration projects successfully, due to the continued political, regulatory and economic uncertainty and its ramifications on the office of the president, exportation, and exchange controls and the effect of all of these on our operations including, among other things, litigation, labor stoppages and the impact on our supplies of oil, gas and other products, there can be no assurance we will be able to operate without interruptions to our operations.

Corporate Matters

        Other operating expense, net of other operating income, increased $5.9 million during the first half of 2004 compared to the first half of 2003. While 2003 expenses were lowered by a cash settlement from Zemex Corporation received during the first quarter of 2003 ($4.0 million), we have increased our exploration costs ($1.0 million) and provisions for closed operations and environmental matters ($1.3 million).

        Included in the first quarter 2003 net income is a positive cumulative effect of a change in accounting principle of $1.1 million relating to the adoption of SFAS No. 143 “Accounting for Asset Retirement Obligations.” For additional information, see Note 11 to our Notes to Consolidated Financial Statements.

        Exploration expense increased $0.4 million and $1.0 million during the second quarter and six months of 2004 compared to the same periods in 2003, primarily due to increased exploration expenditures in Mexico at or near San Sebastian ($0.8 million for the six months). Exploration expenditures in Venezuela increased by approximately $0.4 million for the first six months of 2004, with increased activity of $0.6 million on the Block B concessions offset by decreased expenditures at the Canaima resource.

        Activity at the Hollister Development Block in Nevada, or pre-development expense on the statements of operations, was approximately $1.1 million during the first six months of 2004, compared to $1.0 million during the same period in 2003. At the end of the first quarter of 2004, Hecla received notification of approval of the federal permits needed from the Bureau of Land Management (“BLM”) for this project. Final permits were issued and surety bonds required by the

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BLM are in place. Once an interim arrangement for property access and work authorization is reached, site preparation work can commence.

        The provision for closed operations and environmental matters increased $0.6 million and $1.3 million during the second quarter and first six months of 2004 compared to the same periods in 2003, principally due to a provision for future reclamation and other closure costs during the first quarter of 2004 ($0.4 million) and legal and other expenditures related to Idaho’s Coeur d’Alene Basin.

        General and administrative expenses increased $0.1 million in the second quarter and decreased $0.2 million during the first six months of 2004 compared to the same periods in 2003. The decrease for the six-month period is primarily due to lower accruals for employee incentive compensation during the first quarter of 2004 ($0.6 million), offset by other general and administrative increases.

        The provision for income taxes was increased by $0.2 million during the second quarter of 2004 compared to the same period in 2003, and increased by $0.4 million in the first six months of 2004 compared to the comparable 2003 period, due to routine assessment of the company’s deferred tax asset related to Mexico, and withholding tax accrued on additional interest expense in Venezuela.

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

        The following tables present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs (GAAP) for our gold (the Venezuela segment only) and combined silver operations (the Mexico and United States segments), as well as a reconciliation for each individual silver operating property, for the quarters and six months ended June 30, 2004 and 2003 (in thousands, except costs per ounce). We believe cash costs per ounce of silver or gold provide an indicator of cash flow generation at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other operating mining properties. Cost of sales and other direct production costs 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 for our silver and gold operating properties in the tables below, as well as the cost of sales and other direct production costs associated with our former industrial minerals segment, is presented in our Consolidated Statement of Operations and Comprehensive Income.

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