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Miner Completes Acquisition of Nevada Mines Having 'High Upside Potential'
Research Report

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A CIBC report reviewed the deal and the assets.

In a July 24 research note, CIBC analyst Cosmos Chiu reported that Hecla Mining Co.'s (HL:NYSE) acquisition of Klondex Mines closed the previous day. CIBC resumed coverage on the company with a Neutral rating and $4.25 per share price target, down from $4.75 per share, as "acquisitions with a share component can take some time to digest and for the acquirer's share price to recover." Hecla shares are currently trading at around $3.34.

However, CIBC views the transaction as being favorable for Hecla. Chiu discussed its positive implications and Hecla's plans for its new assets. Hecla paid a 1.2x price:net asset value multiple for Klondex. The deal immediately added $0.10 per share to the company's cash flow, or boosted cash flow per share by greater than 20%.

What the precious metals miner acquired in Klondex were "assets with high upside potential in Nevada," the high-grade Fire Creek mine, the Hollister mine, and the Midas mill and mine. They "fit well into Hecla's core competency of high-grade narrow vein mining," noted Chiu. Through a spinout, Hecla disposed of Klondex's "problematic" True North mine in Manitoba. True North had not had a positive free cash flow quarter since Klondex had acquired it in 2016 whereas the Nevada assets had generated about $20 million in free cash flow in Q1/18.

The acquisition "adds profitable gold production ounces" to Hecla's portfolio. By 2019, from the Klondex Nevada assets alone, CIBC estimates a production increase to 185,000 ounces (185 Koz) from 174 Koz. It forecasts the combined Hecla to generate about 600 Koz of gold equivalent annually after a full year of production. "This makes Hecla one of the more substantial players within the intermediate precious metals producer universe and could be a positive factor in generating investor interest in the company," Chiu pointed out.

At Fire Creek, Hecla aims to grow the current resource and reserve, which are currently sufficient for a mine life through at least 2023. "We expect Hecla will be able to convert resources into reserves, while also achieving success at the regional targets including Zeus," Chiu indicated.

At Hollister, Hecla will continue improving ore recovery at Midas via additional leach tanks and carbon screens. The latter alone has already taken recoveries to greater than 80%, just under the 85–90% goal.

The Hatter Graben target at Hollister, which offers potential exploration upside, could be "a game changer," added Chiu. Mineralization there remains open in all directions.

Chiu concluded that "in Nevada, Hecla can leverage its operational expertise in underground mining and is in a position to increase the high-grade reserve/resource at Fire Creek while continuing to improve the recoveries at Hollister."


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Disclosures from CIBC, Hecla Mining Co., July 24, 2018

Analyst Certification:
Each CIBC World Markets Corp./Inc. research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

Analysts employed outside the U.S. are not registered as research analysts with FINRA. These analysts may not be associated persons of CIBC World Markets Corp. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Potential Conflicts of Interest:
Equity research analysts employed by CIBC World Markets Corp./Inc. are compensated from revenues generated by various CIBC World Markets Corp./Inc. businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets Corp./Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers.
Additionally, CIBC World Markets Corp./Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.

In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets Corp./Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.

Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Important Disclosure Footnotes for Hecla Mining Company (HL)

· Hecla Mining Company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.

· CIBC World Markets Inc. has received compensation for investment banking services from Hecla Mining Company in the past 12 months.

· CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Hecla Mining Company in the next 3 months.

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