Hecla Mining Company — Q3 2012 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops and produces silver, gold, lead and zinc. Its operating segments are Greens Creek in Alaska and Lucky Friday in Idaho. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Sales | $81.9 million | $120.5 million | $240.0 million | $374.8 million |
| Gross profit | $37.3 million | $67.8 million | $109.5 million | $215.2 million |
| Gross margin | 45.6% | 56.3% | 45.6% | 57.4% |
| Income from operations | $8.7 million | $43.5 million | $31.7 million | $166.0 million |
| Operating margin | 10.7% | 36.1% | 13.2% | 44.3% |
| Net income attributable to common shareholders | $(1.0) million | $55.8 million | $13.8 million | $132.2 million |
| Basic EPS | $0.00 | $0.20 | $0.05 | $0.47 |
| Cash flow from operations | Not separately provided | Not separately provided | $66.5 million | $187.9 million |
At September 30, 2012, cash and cash equivalents were $232.2 million, down from $266.5 million at December 31, 2011. Including non-current marketable equity securities, liquid assets totaled $241.2 million. Total assets were $1.404 billion and total liabilities were $256.3 million. Capital lease liabilities totaled approximately $14.8 million; the company had no borrowings under its $150 million revolving credit facility and was in compliance with its covenants.
Capital expenditures were $81.3 million during the first nine months, while investing cash outflows totaled $83.8 million. Financing cash outflows were $16.9 million, including $10.7 million of common dividends, $4.6 million of capital-lease repayments and $0.4 million of preferred dividends. Cash decreased by $34.3 million during the period.
Material changes versus the prior comparable period
- Lucky Friday production was suspended during 2012 while the Silver Shaft was rehabilitated. Lucky Friday generated no sales in the third quarter and only $0.2 million in the first nine months, compared with $43.5 million and $114.1 million in the comparable 2011 periods.
- Lucky Friday suspension-related costs were $6.1 million in the third quarter and $18.7 million in the first nine months, including $4.6 million of depreciation, depletion and amortization for the nine-month period.
- Greens Creek remained the primary operating asset. Third-quarter sales increased to $81.9 million from $77.0 million, but nine-month sales declined to $239.8 million from $260.7 million. Nine-month gross profit fell to $109.2 million from $146.3 million, primarily because of lower silver, zinc and lead prices, lower grades and recovery issues.
- Base-metal derivative results deteriorated sharply, with losses of $9.1 million in the third quarter and $8.1 million in the first nine months, compared with gains of $40.4 million and $38.9 million in the prior-year periods.
- Exploration and pre-development expense increased to $17.1 million in the third quarter and $36.7 million for the first nine months, compared with $11.6 million and $20.8 million, respectively, in 2011.
- Operating cash flow declined by $121.5 million year over year, primarily due to lower earnings from the Lucky Friday suspension and unfavorable working-capital changes.
Guidance, outlook, commentary and risks
- Management expected Silver Shaft rehabilitation to be completed in late 2012 and Lucky Friday production to recommence in early 2013, although timing could vary. The company expected to spend up to $62 million on Lucky Friday shaft and related capital projects and approximately $25 million on non-capitalized standby costs.
- The Lucky Friday No. 4 Shaft project was expected to resume in early 2013, with total estimated project cost of approximately $200 million, including approximately $90 million spent through September 30, 2012. Completion was expected in early 2016.
- Management estimated 2012 capital expenditures of approximately $137 million and exploration and pre-development expenditures of approximately $54 million.
- Management believed available cash, investments, operating cash flow and the undrawn revolving facility would be adequate for the next 12 months, including environmental settlement payments, Lucky Friday spending, capital projects and potential dividends or share repurchases.
- The Coeur d'Alene Basin settlement required a $25 million payment in October 2012, a $15 million cash payment by October 2013 and approximately $55.5 million of additional payments, subject to warrant proceeds and a remaining balance due by August 2014.
- Greens Creek reclamation estimates were under review and could increase materially because of potentially expanded long-term water-treatment requirements. The company anticipated higher reclamation bonding needs, but the amount and availability of additional bonding were uncertain.
- Environmental and legal exposures included the Johnny M site, ASARCO CERCLA contribution claims, Superfund matters, Lucky Friday water-permit issues, shareholder litigation and a union claim relating to compensation during the Lucky Friday shutdown. Management generally believed these matters would not have a material adverse effect, but some liabilities could not be reasonably estimated.
- Accrued reclamation and closure costs totaled $148.1 million, including $95.8 million related to the Coeur d'Alene Basin. Metals prices, derivative valuations, mineral reserves, reclamation estimates and deferred tax assets remained significant sources of accounting and operating risk.
Most important facts for investors to verify
- Progress, cost and restart timing for Lucky Friday, including Silver Shaft rehabilitation and No. 4 Shaft construction.
- Actual silver, gold, zinc and lead prices, production volumes, recoveries and Greens Creek operating costs.
- Derivative contract exposures, settlement prices and the potential earnings impact of future base-metal price movements.
- Cash generation relative to the Coeur d'Alene Basin settlement, capital spending, exploration spending and capital-lease obligations.
- Updated Greens Creek reclamation estimates, bonding requirements and other environmental contingencies.
- Outcome and potential exposure from shareholder, derivative, union, CERCLA and regulatory proceedings.