Hecla Mining Company — Q1 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 report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $91.2 million | $136.4 million | Down 33% |
| Gross profit | $48.2 million | $79.6 million | Down 39% |
| Gross margin | 52.9% | 58.4% | Down 5.5 points |
| Income from operations | $25.4 million | $68.7 million | Down 63% |
| Operating margin | 27.9% | 50.4% | Down 22.5 points |
| Net income | $12.6 million | $43.4 million | Down 71% |
| Income applicable to common shareholders | $12.4 million | $43.2 million | Down 71% |
| Diluted EPS | $0.04 | $0.15 | Down $0.11 |
| Cash provided by operations | $41.4 million | $60.9 million | Down 32% |
| Capital expenditures | $24.7 million | $21.8 million | Up $2.8 million |
At March 31, 2012, cash and cash equivalents were $278.5 million, compared with $266.5 million at December 31, 2011. Total cash, cash equivalents and non-current investments were $282.1 million. Total assets were $1.40 billion and total liabilities were $248.4 million. The company had $13.6 million of capital lease liabilities and no borrowings under its $100 million senior secured revolving credit facility. Management reported compliance with all credit-facility covenants.
The company generated a $12.0 million increase in cash during the quarter. Investing activities used $24.6 million, financing activities used $4.8 million, and the company paid $3.6 million of common dividends and $0.1 million of preferred dividends.
Material changes versus the prior comparable period
- Lucky Friday production was suspended following an MSHA order requiring rehabilitation of the Silver Shaft. Lucky Friday sales fell to $0.3 million from $34.6 million, and the segment moved from $19.9 million of operating income to a $5.9 million operating loss.
- Lucky Friday recorded $6.2 million of suspension-related costs, including $1.5 million of depreciation, depletion and amortization.
- Greens Creek sales declined to $90.9 million from $101.8 million. Gross profit declined to $47.9 million from $59.4 million, principally because of lower throughput, lower silver production and grades, and weaker lead and zinc prices.
- Consolidated exploration and pre-development expense increased to $9.0 million from $3.3 million.
- Mark-to-market losses on base-metal derivative contracts increased to $5.2 million from $2.0 million. A separate $1.0 million net loss on contracts related to provisional concentrate sales was included in sales.
- The income tax provision decreased to $7.3 million from $23.5 million, primarily because of lower pretax income. Management expected an approximately 40% effective tax rate for 2012; the first-quarter rate was 37%.
- Average realized silver and gold prices increased to $36.59 per ounce and $1,751 per ounce, respectively, while realized lead and zinc prices declined to $1.00 and $0.95 per pound.
Guidance, outlook, commentary and risks
- Management anticipated Lucky Friday Silver Shaft work would be completed in late 2012 and production would resume in early 2013, although timing could vary. Care-and-maintenance expenses for 2012 were estimated at approximately $17.5 million.
- Management expected to spend up to $50 million on Lucky Friday rehabilitation and related surface and underground capital projects, including approximately $10 million for loose-material removal and $20 million for shaft improvements.
- The #4 Shaft project was temporarily suspended. Total project cost was estimated at approximately $200 million, including approximately $90 million spent through March 31, 2012, with completion previously expected in early 2016.
- For 2012, management estimated approximately $140 million of capital expenditures and approximately $40 million of exploration and pre-development expenditures.
- Management stated that available cash, operating cash flow and the undrawn revolving facility were expected to cover near-term obligations, including environmental settlement payments and Lucky Friday expenditures.
- The company remained obligated to pay $25 million by October 8, 2012, $15 million by October 8, 2013, and approximately $55.4 million by August 2014 under the Coeur d’Alene Basin settlement.
- Environmental and reclamation liabilities totaled approximately $151.9 million at March 31, 2012, including $95.1 million related to the Coeur d’Alene Basin.
- Other risks include volatile silver, gold, lead and zinc prices; mine safety and regulatory actions; uncertainty over environmental liabilities; derivative counterparty and market risk; and potential cost or schedule overruns at Lucky Friday.
- Two putative securities class actions and six shareholder derivative actions were filed in connection with alleged disclosures concerning Lucky Friday. The company stated that it could not predict the outcome or estimate damages and intended to defend the claims.
- A union claim relating to compensation during the Lucky Friday shutdown could result in a liability ranging from $0 to $10 million; no liability was recorded.
- On May 8, 2012, the board declared a second-quarter common dividend totaling approximately $6.4 million and authorized repurchases of up to 20 million shares. No shares had been repurchased as of the filing date.
Important facts for investors to verify
- Progress toward Silver Shaft rehabilitation and the actual date of Lucky Friday production resumption.
- Actual 2012 cash costs, capital spending and care-and-maintenance costs relative to management’s estimates.
- Liquidity after the $25 million environmental settlement payment and other required settlement obligations.
- Exposure to lead and zinc forward contracts, including potential mark-to-market losses and contract settlement quantities.
- Developments in the securities, derivative, environmental and mine-safety proceedings, including the unrecorded union claim.
- Whether Greens Creek throughput, grades and by-product credits recover from first-quarter levels.
- Realization of the $113 million net deferred tax asset and changes in environmental and reclamation estimates.