Independence Lead Mines- Silver Valley

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Independence Lead Mines - History

Independence Lead Mines (ILDM) originated from a claim staked in 1886 near Mullan. In 1890 the area became part of Idaho. Over the course of several decades more claims were staked, purchased, sold and several companies merged to form Independence Lead Mines. ILDM today, consists of 15 patented and 17 un-patented claims. These 32 claims are part of a long belt that includes the Star, Morning, Independence and Gold Hunter Mines. The Lucky Friday Mine is about one mile to the southeast.

In February 1968, prompted by the US Government’s removal of the price cap on silver and the subsequent rise in silver prices, Independence Lead Mines, Abot Mines, and Day Mines signed a series of three agreements to comprise the DIA Gold Hunter Project. First, a Vertical Boundary Agreement was signed by ILDM with neighboring claim holders. Second, a Unitization Agreement was signed with Day and Abot Mines in preparation for the signing of the third Agreement, a Lease Agreement with Hecla Mining. Day Mines owned 42% of Abot and was the lead negotiator for the Unitized Group with Hecla. The Lease Agreement provides ILDM with an 18.52% Net Profit Interest (NPI). The Lease Agreement calls for Hecla to be repaid its initial development and exploration costs, cover ongoing costs, establish a three month working capital account, repay $450K to Day Mines and repay all advanced royalty payments (a monthly advance) before ILDM starts to receives it’s NPI.

The 1968 Unitization Agreement included the Eastern Independence claims but not the West Independence claims. The West Independence consists of about 80 acres of patented claims. In 1983 a high-grade silver-copper vein was discovered near the property line between the Morning Mine (Purchased by Hecla in 1966 from ASARCO) and West Independence. Hecla Mining merged with Day Mines in Nov-Dec. 1981 and with Abot Mines in March 2001, leaving Independence Lead as the sole Lessor.

The Hecla –DIA exploration program was planned to consist of 10,450 feet of laterals, crosscuts and drifts and 24,800 feet of diamond drilling at the 4050- level. Per the 1976 ILDM Annual Report “ On May 6, 1977, a major strike was made at the “Y” at the target area”. A 14-year hiatus occurred before Hecla announced in their 10K - “ discovered hi grade ore in 1991 at the 4050 level”. (Note that the DIA Project completely missed the 1978-1988 silver boom.) Some developmental work occurred at the 4050 Level from 1992-1994. In 1995 – 96 Hecla completed a drift at the 4900 Level and enough drilling to report P& P reserves on their 1996 10K. Production started in 1997, with full production starting on 1/6/98 per the 12/03 ILDM Shareholder Letter. The 1998 Hecla 10K states “full production reached on schedule in 2d Qtr”.

On March 1, 2002 ILDM provided written notice to Hecla that the Lease Agreement was terminated and asked for arbitration. A Preliminary Injunction/Partial Summary Judgment Hearing was held on July 17, 2003, that denied ILDM’s request to terminate Hecla’s Lease Agreement. A nine-day trial started on March 22, 2004 and was completed on April 2, 2004. Written closing arguments and rebuttals were completed on May 17, 2004. The Court’s decision released on July 19, 2004 ruled in favor of Hecla. Independence is appealing the decision to the Idaho Supreme Court.

The issue at hand is the milling of 1,389,680 tons of mineralized material from the mineralized zone at a loss or at below cost. As of June 30, 2004, Hecla had amassed $34.23M in DIA Project debt while receiving approximately $105.7M in Net Smelter Returns and producing approximately 30M equivalent ounces of silver. ILDM maintains that Hecla has not been a prudent operator by not mining commercial ore per the Lease Agreement. ILDM also alleges waste due to “wasting millions of dollars due to deficient milling operations and hi grading and sterilization of lower grade material”. ILDM states that they notified Hecla in August 1999 that “the DIA Project had gone amiss and to continue to mine and mill the deposit at a loss and provide ILDM with more Project Debt would place the two companies on a collision course”. ILDM believes that Hecla’s actions have broken the Lease and Unitization Agreements. Sources: 2003-2004 ILDM Shareholders Letters- six each and 6/30/04 DIA Project Statement of Project Costs. Hecla maintains, “ They have the exclusive right to manage per the DIA Agreements”. Source: Hecla 2002 & 2003 10K’s.
The due consideration to Independence (ILDM) in the 1968 Lease Agreement is the 18.52% Net Profit Interest (NPI). Per conversations with ILDM’s President, the May 1997 Hecla Feasibility Study used to decide whether or not to proceed with Production at the 4900 Level, did not include a NPI to ILDM. The Nov. 2003 Feasibility Study for the on-going 5900 Level expansion for the years 2004-2011 again did not consider any Net Profit Interest to ILDM or any of the development costs from 1992-1998. Hecla treats the 1992-1998 development costs as sunk costs for Feasibility Study purposes and as debt to ILDM for DIA purposes. Under what metal price assumptions, recovery percentages, and time frame could one conclude that Hecla will eliminate all existing debt and cover future costs, to pay a NPI to Independence Lead?

The 1968 Lease Agreement, specifically the NPI provision, provides the operator with a great deal of latitude to determine what is or is not a net profit. With today’s accounting flexibilities, most if not all NPI provisions and agreements result in the Lessor never receiving any Net Profit payments. Some Cost is always applied to negate any Net Profit. It is far better to have a Net Smelter Return Agreement without any capital payback requirements, -- which does appears to be the prevalent practice in most other Joint Venture Leases in today’s environment. Does anyone know of a successful NPI agreement in the last 20 years where the Junior Partner/Claimholder actually received a yearly dividend?

The DIA Project is still operating at a loss. Per court documents, the Lucky Friday Mine/Mill has not operated at a profit since 1985. Low metals prices, decreased grades at the original Lucky Friday deposit, and higher costs are cited as reasons. However additional reasons exist. In 1986 a smaller and underpowered 4’ cone crusher was installed at the mill. Over the trommel reject started at this time per a former Hecla employee. Recovery of silver, lead, and zinc from the Gold Hunter mineralized material has been low due to inadequate crushing and floatation cell recovery. Approximately 100,000 tons of over the trommel reject is piled up near the mill in a large mound because the mill does not have a means to re-introduce the over the trommel mineralized material back into the mill. The cone crusher does not crush fine enough and the floatation cells did not have enough residual time and air control features to adequately recover metals in this competitive worldwide market. Other problems exist also. An estimated $7.4 Million has been lost from the Gold Hunter Project from 1/1997-7/2003 due to poor recovery at the mill.

The Waste Issue:
1. An expert witness for Independence Lead estimated that Hecla has lost $7.4M in DIA NSR from Jan. 1997 thru June 2003 due to an inadequate mill crushing and grinding circuit and antiquated 1923 vintage floatation equipment in the mill. Hecla’s management in the past appears to have been against modernizing or upgrading the mill. (The 3d Qtr Hecla Report indicates that Hecla is planning to do some mill upgrade.)
2. Over 200,000 tons of mineralized material appears to have been sterilized during hi-grading operations.
3. Idaho State Law precludes waste and can require triple punitive damages.
4. The main issue locally is the solid paying jobs provided at the Lucky Friday Mine and Mill. The June 29, 2004 Edition of the Shoshone Press shows a picture of the local US Congressman visiting the Mine. This article emphasized the number of jobs that Hecla provides. A modern mill with world-class recovery rates would help protect good paying jobs, and provide more profit to Hecla and Independence Lead.

The Lease Agreement required that Hecla mine commercial ore. Only in the 1998-1999 time frame did the Project show a small net profit and the overall DIA debt decline. DIA debt has gone up approx $2.79M since 6/1/98, the date of full production, thru 6/30/04. Hecla has enjoyed $105.7M in NSR while Independence Lead received $34.23M in Project Debt. Note that the $1500 per month payment that Independence receives from Hecla, is an Advanced Royalty Payment (i.e. debt) that must also be paid back before receiving the NPI.

The Judge stated that Hecla has not managed the Lease Agreement in Independence’s best interest, but still ruled in favor of Hecla.

Independence Lead Mines- Observations: Part Two - Potential

1) Per Hecla’s 2003-10K the Lucky Friday Unit has the following resources:
P & P - 10.154M oz
Mineralized Material 33.762M oz
Other Material 51.753M oz
Total 95.669M oz

The Lucky Friday Mine and DIA Gold Hunter Project resources; i.e. P&P, mineralized material, and other material have been mixed and reported together since the 1996 Hecla 10K. The last time the Lucky Friday Mine had a separate breakout of P&P was 1995 with 5.488M oz. Double that amount to approx. 11M oz to obtain an estimate of all categories of mineralized material that could be present at the original Lucky Friday Mine and reported on the 2003 -10K. An estimate of the Gold Hunter mineralized material would be 95.669 – 11 = 84.669M oz.

2) The May 4, 2004 ILDM shareholders letter states “ The estimated resource of 84 Million ounces of silver remaining in the deposit excludes base metals and the potential that exists along the 2500 feet that remains unexplored to the west.” Thus 84 million ounces of resource has been identified on ILDM’s claims, of which 10.154M ounces was deemed by Hecla to be economic to mine as of Dec. 2003.
There should be more P&P reserves, today, with the current higher metals prices.

3) Hecla 93-94 10K’s state that they drove a tunnel at the 4050 level and found mineralization. The subsequent tunnel that was driven on the 4900 level is where the 30M eq. ounces (3/6/04 ILDM SH Letter) have been mined. A Dec 2003 Hecla news release states that Hecla will drive a new tunnel on the 5900 level to access 28M ounces of silver. In an April 4, 2004 interview conducted by Dave Bond with Phil Baker, Hecla CEO, Baker states that Hecla wants to develop another layer beneath the 5900 level to access still another 30M ounces. This could be at about the 6800-foot level. If so, the mineralized zone could be estimated to run from the 7100 level up to about the 3600 level, which would be a 3500-foot vertical, 1500 foot long and 170 –200 feet wide mineralized zone and provide a potential estimate of 84M + 30M ounces = 114M ounces. The known mineralization, found on ILDM’s eastern claims is thus in a large zone. The 5/4/04 ILDM shareholders letter states, “This deposit is an unappreciated monster.” The 3d Qtr Hecla Report announced that recent drilling extended the mineralized zone to the east about 250 feet. This would make the mineralized zone about 1750 feet long.

4) The West Independence claims has exploration potential based on the 1983 discovery of a high-grade silver and copper - tetrahedrite vein.

5) ILDM has 4,625,793 shares outstanding per the November 15, 2004 10Q.

6) The average mill feed grade for the DIA Project through 6/30/04 has been 15.62 oz/ton Ag, 8.69% Pb and 1.61% Zn. The average mill feed is expected to go higher based on Hecla’s latest drill results as shown on the last page of the latest ILDM Shareholders Letter found at the new Independence Lead Mines Website, Independence-Lead.com. The drill results shown are exceptional with some of the intercepts over 100 oz/ton, which again causes one to focus on the poor recovery capability and small tonnage capability of the mill. As an example, assume that a zone at the 5900 Level provides 50 ounces per ton silver to the mill feed. With 93% mill recovery on silver and lead, the mill would be sending 3.5 ounces of silver per ton to the tailing pond. At $6.45 per ounce of silver the Project would be losing an estimated $18 per ton NSR on the silver alone. As a comparison, Sterling Mining is going after 3 ounces per ton with their Baroness Tailings Project.

Hecla truly needs to hire a mill expert to redesign and refurbish the mill and eliminate the series of bottlenecks that are currently present, to include the capacity bottleneck. The payback time for a mill upgrade could be very reasonable. Again, a modern hi-tech mill with world-class recovery rates (i.e. 98%+) would help protect good paying jobs, and provide more profit to Hecla and Independence Lead in both up and down markets

Habe ich aus dem Silverminers board geklaut ! Fand ich interessant!

1) independence is Independent
2) management (Bernard Lannen)does not take a salary, won the company from the Magnusun, and put up a fight with Hecla, and will continue to fight for what is right. That is he will fight for the shareholders, not the insiders
3) Mining is not a pipe dream, will increase according to HL to 4 million ounces at $4/ounce in 2006
4) Hecla's own reports imply there is a lot of silver there-most feel 100 million ounces+
5) Even if ILDM loses the appeal and has to make up 35 million to Hecla for sunk costs before receiving an 18.5% income royalty- figure out 4 million ounces/yr X silver price netted for smelter price minus $4/ounce. Plug in $10-$15 ounce for you silver bulls and figure out the payback-won't be long!
6) If they win the appeal BONUS TIME!
7) Despite the verbiage from Hecla, Independence OWNS the Gold Hunter property!
Drilling potential to the west
9) Independence shares outstanding 5 million X 50 cents= $2.5 market cap! Come on- there are some shore homes on sinking New Jersey sand going for more than that!
10)Who knows what the real float is
11) Most of the other independents are, shall we say "mysterious" in their ownership, directorships and accounting
12) Is the market really saying that Hecla as a whole is worth 300X Independence? and CdE the same?
13) Yes, i like Demotte and Sterling-is Srlm worth 25X ILDM? And yes SRLM is undervalued.
14) Dear Jason Hommel- put those numbers in your pipe and smoke it!

I expect that Independence will move up with any up move in silver. ILDM is not inactive. Hecla expects to mine 4 million ounces on ILDM's land in 2006, and it is being currently mined.

In a rising silver market a positive legal outcome becomes less paramount, because at higher silver, a quick payback of sunk costs becomes a given and it will be receiving royalties in the millions at higher silver prices.

Let's say silver goes to $12/ounce and the net smelter payment is $8.(This net number is a guess) If HL's cost is $4 than at 4 million ounces they are netting 16 million a year. If the sunk costs at that point are 32 million (close to where they are now) than Hl will cover those in two years. After that and some advance payment fees are covered Independence will receive over 18% of the income a year. Using the same example, they would begin receiving annual checks of nearly 3 million a year. At 5 million shares outstanding that is 60 cents for every share. At say 20x earnings ILDM would be trading at $12; a 2400% return-and that would be in a rational market.

Homepage:

http://wallace-id.com/independence/index.html

November 24, 2004

Dear Shareholder:

At this writing your management is very optimistic. We have some positive plans for 2005 and will address those with you early in the year. For our new shareholders, I will lightly go over our legal position taken in defense of (lessee) Hecla Mining Company's actions, and discuss our plans going forward. Included in this letter there are some marvelous diamond drill results from drilling done on Independence Lead Mines Company's mining claims.

In an effort to serve our shareholders and potential shareholders the company opened a website at independence-lead.com. At this website, those who wish to know more about Independence Lead Mines Company's story may obtain information of interest. Here, you may read about the greatest hijacking of a natural resource in the history of the State of Idaho, and you can find out how it was done.

Trial:
With just a few ageing Independence shareholders present, a nine-day trial started on March 22, 2004. The case was kept out of the public view with no newspaper coverage during the trial. After the trial had ended, Independence's only concern was, would the judge be realistic in calculating damages? Hecla had mined/milled 1,209,000 tons of mineralized material, and sold concentrates at low metal prices returning $90,000,000 in net smelter receipts. Would the judge comprehend the extent of the damages that should be awarded?

The court ruled on Case #CV-02-4061 on July 19, 2004. Independence's management had hoped that the company had drawn a judge with the fairness and wisdom of a King Solomon. Independence was not asking the court for a free lunch, but simply a square deal. The main legal basis for Independence's lawsuit was that Hecla had violated the “Prudent Operator Standard,” a covenant in all mining leases. Lest the reader forget, there is also an implied covenant in all contracts of good faith and fair dealing that requires each party to take reasonable measures to ensure that the other party obtains the benefits of the agreement. Unfortunately this judge was no Solomon. In the shadow of Hecla's corporate office, the court seemed to go to great lengths to miss-state and misinterpret the law, and use incoherent reasoning to arrive at a ruling for Hecla and against Independence. In 1968, the shareholders of Day Mines, Inc., Independence Lead Mines Company, and Abot Mining Company ratified a fair and equitable lease agreement. The court itself turned that agreement into an unconscionable agreement by its interpretation of the contract, giving Hecla complete and unrestrained discretion, thereby holding the lessee to zero accountability under the agreement. Anytime one is denied justice others are in danger of that same injustice. Management knew the Idaho Supreme Court was going to hear this case, but it was always believed Hecla would be the one taking the case to the higher court.

Appeal:
On August 10, 2004, attorneys for Independence filed notice of appeal with the Court and with Hecla Mining Company's attorney. Also on this date, Independence requested a copy of the court transcript of the trial and ninety days later the transcript is yet to be received. We firmly believe the Idaho Supreme Court will over-turn the lower court, grant Independence the covenants within the lease and return our unique deposit to its owners, the shareholders of Independence Lead Mines Company.

Potential:
Please consider the following trend, and its possibilities. The upper Gold Hunter deposit produced 3,000.000 tons at an average grade of 4oz silver and 4% lead. Hecla's mining on the 4900 level has produced approximately 1,400,000 tons at an average grade of 15.54oz silver, 8.67% lead, and 1.64% zinc. Over the years mining and diamond drilling has shown the tremendous strength of the deposit as it lengthens to the east and west with depth. Results of recent deep diamond drilling have revealed numbers never seen before. The following selected diamond drill footage has not been adjusted to actual width, but the grade of silver is truly awesome.