Hecla buys Rio’s stake in Greens Creek

Hecla Mining (HL-N) has struck a US$750-million deal to buy out its majority partner Rio Tinto (RTP-N, RIO-L) at their co-owned Greens Creek underground silver mine near Juneau, in Alaska’s panhandle.

Building on its current 29.7% interest, Hecla will pay US$700 million in cash and US$50 million in shares for Rio Tinto’s 70.3% interest, which is held through two wholly owned subsidiaries — Kennecott Greens Creek Mining and Kennecott Juneau Mining. Hecla has been a non-operating partner at the mine for more than two decades.

Hecla is borrowing US$400 million from Scotia Capital, and will use available cash to fund the remaining US$300-million cash portion. While details of the loan haven’t yet been pinned down, no silver or gold hedging will be required of Hecla.

“We see this as a company-transforming transaction,” said Hecla president and CEO Phillips Baker Jr. during a conference call with analysts.

The Greens Creek deposit is a polymetallic, stratiform, massive sulphide deposit that has undergone intense deformation. Mineralization is described as occurring discontinuously along the contact between a structural hangingwall of quartz-mica-carbonate phyllites and a structural footwall of graphitic and calcareous argillite.

The major sulphide minerals are pyrite, sphalerite, galena, and tetrahedrite- tennanite.

Located beside the Admiralty Island National Monument, the Greens Creek property includes 17 patented lode claims and one patented mill site claim, plus property leased from the U.S. Forest Service. Greens Creek also has title to mineral rights on 7,500 acres of federal land adjacent to the properties.

Accessible by road, the Greens Creek assets include a work camp, a mine, a concentrator, a tailings impoundment area, a shiploading facility and a ferry dock. Hydroelectric power is gradually replacing diesel as the mine’s primary electricity source.

Concentrates are shipped to several smelters worldwide, while some gold-silver dor is poured on-site.

Ranking as the world’s fifth-largest silver mine, Greens Creek last year produced 8.6 million oz. silver, 68,000 oz. gold, 63,000 tonnes zinc and 21,000 tonnes lead, generating about US$150 million in cash flow. Counting the latter three metals as byproduct credits, the total average cash cost of silver production was negative US$5.27 per oz. silver.

Mining is carried out at a rate of about 2,100 tonnes per day, primarily using cut-and-fill and long-hole stoping mining methods.

The acquisition will almost double Hecla’s annual silver production to about 11 million oz., and boost its silver and gold reserves by about 150% and 140%, respectively.

As it has plenty of underground mining experience elsewhere, Hecla anticipates a smooth transition as it assumes operatorship at the mine from Rio Tinto. The mineworkers’ union has been decertified and employees numbered 293 at the end of 2006.

“Rio Tinto are excellent operators,” Baker said. “This isn’t a case where Hecla is able to come in and make some major improvement on what Rio has done.”

Beyond the mine workings, Hecla touts the exploration potential of Greens Creek’s rugged, 12-sq.-mile land position, and is promising to step up efforts there.

The mine sale represents only the first of a series of sales of US$15 billion-worth of Rio Tinto’s non-core assets — which, for the company, often means precious metals assets.

In November, Rio Tinto said it was considering selling: Rio Tinto Energy America (coal), its talc business, Alcan’s packaging and engineered products units, its interest in the Cortez gold mine in Nevada, the Northparkes copper mine in Australia and two uranium assets — Sweetwater in the U.S. and Kintyre in Australia.

There is also speculation that it could sell its share in the Ekati diamond mine in Canada’s Northwest Territories.

The sales are necessary because of the financial burdens the company took on with its US$38-billion debt-fuelled acquisition of Canadian aluminum major Alcan last year, which helped leave Rio Tinto with US$45 billion in debt at the end of 2007.

Rio Tinto has set the ambitious goal of selling off US$10 billion in assets before year-end.

“Once Rio did the Alcan transaction, we immediately stepped into high gear to position ourselves to be able to pick the Greens Creek asset up,” Baker commented.

Hecla also announced a second deal to acquire substantially all of the assets of Independence Lead Mines (ILDS-O), located in northern Idaho’s Silver Valley. These include the West Independence property and ILM’s mining claims pertaining to an agreement with the Lucky Friday mine, which includes any future interest or royalty obligation to ILM.

Hecla will pay out 6.9 million shares to ILM shareholders, worth about US$67 million.

“This transaction not only guarantees that Hecla will receive one-hundred per cent of the future profits of the Lucky Friday Mine, but also helps to consolidate our land position in the Star Morning district,” Baker said.