Hecla Mining Company — Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, produces and markets 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 quarter and six months ended June 30, 2011, filed August 9, 2011. Results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales of products | $117.9 million, versus $88.6 million | $254.2 million, versus $168.5 million |
| Gross profit | $67.8 million, versus $38.1 million | $147.4 million, versus $65.6 million |
| Income from operations | $53.8 million, versus $24.6 million | $122.5 million, versus $40.2 million |
| Net income | $33.3 million, versus $17.1 million | $76.7 million, versus $38.9 million |
| Income applicable to common shareholders | $33.2 million, or $0.12 basic per share | $76.4 million, or $0.27 basic per share |
| Cash provided by operating activities | Not separately reported for the quarter | $127.2 million, versus $74.8 million |
| Capital additions | Not separately reported for the quarter | $40.6 million in investing cash flow additions; approximately $43.1 million including capital lease additions |
Sales increased approximately 33% in the second quarter and 51% year to date. Gross margin was approximately 57.5% for the quarter and 58.0% year to date, compared with approximately 43.0% and 38.9%, respectively, in the prior-year periods. Operating margin was approximately 45.6% for the quarter and 48.2% year to date, compared with approximately 27.7% and 23.9%.
- Cash and cash equivalents were $377.4 million at June 30, 2011, up from $283.6 million at December 31, 2010. Cash, cash equivalents and investments totaled $381.6 million.
- Total assets were $1.46 billion and total liabilities were $417.2 million. Shareholders’ equity was $1.04 billion.
- The company had no borrowings under its $60 million revolving credit facility and was in compliance with all credit covenants. Capital lease liabilities totaled $7.5 million.
- Current accrued reclamation and closure costs were $175.6 million; total reclamation and closure liabilities were approximately $318.6 million.
- The company paid approximately $3.5 million of preferred dividends during the first half of 2011. Its 6.5% mandatory convertible preferred stock automatically converted into approximately 18.9 million common shares on January 1, 2011.
Material changes versus the prior comparable period
- Higher silver, gold, zinc and lead prices were the primary driver of the improvement. First-half realized prices were $36.19 per silver ounce, $1,478 per gold ounce, $1.17 per pound of lead and $1.06 per pound of zinc, versus $17.94, $1,178, $0.93 and $0.92, respectively.
- Greens Creek sales increased to $183.6 million from $123.5 million for the first half, while gross profit increased to $106.4 million from $46.6 million. Production declined because of lower ore volume and grades, and mining and milling costs per ton increased.
- Lucky Friday sales increased to $70.6 million from $45.0 million, and gross profit increased to $41.0 million from $19.0 million. Production was affected by a fatal April accident and an approximately 10-day operational shutdown.
- Lucky Friday total cash cost increased to $5.74 per silver ounce from $3.81 for the first half. Greens Creek remained a negative-cost operation on a by-product-credit basis, at negative $1.64 per silver ounce versus negative $5.45.
- Income taxes increased substantially to $43.1 million from $2.0 million for the first half, primarily due to higher pretax income and the absence of the prior-year $7.7 million valuation-allowance benefit.
- Derivative results declined from a $2.0 million gain in the prior-year first half to a $1.5 million loss in 2011 for contracts on forecasted production. A $0.7 million gain on contracts related to provisional concentrate sales was included in product sales.
- Environmental and reclamation accruals increased materially because of the proposed Coeur d’Alene Basin settlement. The company accrued $262.2 million for Basin obligations, an increase of $193.2 million from September 30, 2010.
Guidance, outlook, risks and unusual items
- Management maintained its 2011 silver production estimate of 9 to 10 million ounces.
- The Lucky Friday #4 Shaft project received final Board approval in August 2011. Total expected cost is approximately $200 million, including approximately $70 million spent through June 30, 2011, with completion expected in the second half of 2014.
- Management estimated approximately $112 million of 2011 capital expenditures and $33 million of exploration and pre-development expenditures.
- A proposed Consent Decree for the Coeur d’Alene Basin settlement was lodged in June 2011 but had not yet been approved by the court. Proposed payments total approximately $263.4 million over about three years, including an initial payment of approximately $166.9 million in cash, stock or warrant proceeds, plus later cash and warrant-related payments. If the decree is not entered, liability could exceed the current accrual and could change rapidly and materially.
- Lucky Friday’s April fatality remains subject to investigations by the company and MSHA. The company incurred approximately $1.4 million of additional operating costs, and reopening of stope 15 remained contingent on MSHA approval.
- Environmental claims and information requests remain outstanding at the Johnny M, Carpenter Snow Creek, Gilt Edge, Nelson Tunnel/Commodore and other sites. The company stated that some liabilities cannot yet be reasonably estimated.
- Commodity prices, production interruptions, ore grades, power and labor costs, environmental obligations, mine safety, reclamation requirements and permitting remain significant risks. Forward contracts expose the company to counterparty and market risk.
- The company stated that cash, investments, operating cash flow and available financing should be adequate for the next twelve months, including potential settlement payments and planned capital spending.
Important facts for investors to verify
- Whether the Coeur d’Alene Basin Consent Decree was ultimately entered and whether the proposed payment schedule and $262.2 million accrual were sufficient.
- The timing, cost, financing and construction progress of the Lucky Friday #4 Shaft project.
- MSHA findings, penalties, operational restrictions and production effects arising from the Lucky Friday fatality.
- Actual 2011 silver production versus the 9-to-10-million-ounce estimate and the sustainability of elevated metal prices and margins.
- Changes in deferred tax asset realizability, tax expense and the $149 million net deferred tax asset reported at June 30, 2011.
- Future environmental, reclamation and closure expenditures, including claims not recorded because amounts could not be estimated.
- Derivative positions, provisional concentrate pricing adjustments and the potential effect of metal-price changes on receivables and earnings.