Hecla Mining Company — Q3 2010 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 three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Sales of products | $115.8 million | $95.2 million | $284.4 million | $224.5 million |
| Gross profit | $54.5 million | $38.1 million | $120.1 million | $65.1 million |
| Income from operations | $41.5 million | $29.3 million | $81.7 million | $55.4 million |
| Net income | $19.8 million | $25.9 million | $58.7 million | $35.8 million |
| Income applicable to common shareholders | $16.4 million | $22.5 million | $48.5 million | $25.5 million |
| Diluted EPS | $0.06 | $0.09 | $0.18 | $0.11 |
| Gross margin | 47.1% | 40.0% | 42.2% | 29.0% |
| Operating margin | 35.8% | 30.8% | 28.7% | 24.7% |
Q3 net income declined despite higher sales and operating income because of $13.2 million of derivative losses and a substantially higher income tax provision. Nine-month net income improved, but included significant non-cash and tax-related items.
- Cash provided by operating activities was $115.3 million in the first nine months of 2010 versus $51.9 million in the prior-year period.
- Capital expenditures were $48.5 million versus $17.3 million; exploration expense was $16.2 million versus $5.0 million.
- Cash and cash equivalents were $216.6 million at September 30, 2010, compared with $104.7 million at December 31, 2009. Total cash, cash equivalents and investments were $218.1 million.
- Total assets were $1.18 billion and shareholders’ equity was $968.2 million at September 30, 2010.
- Total liabilities were $209.4 million, including $5.9 million of capital lease obligations and $125.9 million of accrued reclamation and closure liabilities. The company had no borrowings under its $60 million revolving credit facility.
- Cash increased $111.9 million during the first nine months, primarily from operating cash flow and $45.6 million of proceeds from warrant and stock-option exercises.
Material changes versus the prior comparable periods
- Sales increased 21.7% in Q3 and 26.7% for the first nine months, driven primarily by higher metal prices and stronger segment performance.
- Greens Creek sales increased to $88.8 million from $71.7 million in Q3 and to $212.3 million from $167.2 million for nine months. Gross profit increased by $13.2 million and $40.6 million, respectively.
- Lucky Friday sales increased to $27.0 million from $23.5 million in Q3 and to $72.0 million from $57.3 million for nine months. Gross profit increased by $3.2 million and $14.4 million, respectively.
- Average realized silver prices increased to $21.45 per ounce in Q3 and $19.29 for nine months, compared with $16.33 and $14.93, respectively, in 2009. Realized gold prices also increased materially.
- Silver production was 2.71 million ounces in Q3 and 7.83 million ounces for nine months, compared with 2.73 million and 8.58 million ounces in 2009. Greens Creek’s nine-month silver production declined 7% because of lower grades, while Lucky Friday production also declined.
- Base-metal forward contracts initiated in 2010 generated $13.2 million of Q3 losses and $11.2 million of nine-month losses on forecasted shipments. Additional contract results related to provisional sales were a $5.3 million Q3 loss and a $1.0 million nine-month gain.
- Interest expense declined by $2.3 million in Q3 and $8.5 million for nine months following repayment of debt associated with the Greens Creek acquisition in October 2009.
- Income tax expense increased to $8.1 million in Q3 and $10.1 million for nine months, compared with $0.6 million and $1.0 million, respectively, in 2009.
- Exploration expense increased by $4.2 million in Q3 and $11.2 million for nine months. The company also recorded higher provisions for closed operations and environmental matters.
Guidance, outlook, commentary and risks
- Management estimated 2010 silver production of 10 million to 11 million ounces.
- Management expected approximately $20 million of exploration spending and $75 million to $80 million of capital expenditures for full-year 2010.
- Hecla commenced engineering and early construction for the Lucky Friday #4 Shaft. Total project spending was expected to be approximately $150 million to $200 million, including approximately $50 million by year-end 2010. Final board approval was expected by mid-2011, subject to engineering, metal prices, costs and environmental liability considerations.
- The company stated that existing cash, operating cash flow, investments and its undrawn revolving facility should be adequate for obligations over the next twelve months, but additional financing may be required for acquisitions or major expansion.
- The company’s base-metal forward contracts are marked to market through earnings and expose results to metal-price movements, counterparty risk and differences between contract and spot prices.
- Environmental and reclamation matters remain material. The company had accrued $65.6 million for its estimated minimum liability for Coeur d’Alene Basin remediation and past costs, within an estimated range of $65.6 million to $93.6 million, excluding potential natural-resource damages that could not be estimated.
- The EPA proposed an upper Coeur d’Alene Basin cleanup plan with an estimated net present value of approximately $1.3 billion, compared with the prior $359 million basin-wide plan. Hecla stated that its ultimate liability is uncertain and could materially affect financial results or liquidity.
- Other contingencies included the Bunker Hill Superfund Site, Gilt Edge and Nelson Tunnel/Commodore matters, a $2.5 million maximum Rio Grande Silver guaranty, and Lucky Friday water-permit compliance risks. The company had $9.4 million of letters of credit outstanding, primarily related to reclamation and workers’ compensation bonding.
- The company reported no material changes to the risk factors in its 2009 Form 10-K. Management concluded that disclosure controls were effective as of September 30, 2010.
Important facts for investors to verify
- Reconcile the effect of the $13.2 million Q3 derivative loss and the remaining derivative liabilities of approximately $12.8 million at September 30, 2010.
- Assess sensitivity to silver, gold, zinc and lead prices, including provisional concentrate pricing and forward-contract positions.
- Review the scope, timing and potential cost of the Coeur d’Alene Basin litigation and EPA cleanup proposal, including possible natural-resource damages not included in accrued liabilities.
- Confirm the basis for the $65.6 million environmental accrual and the $125.9 million total reclamation, closure and environmental reserves.
- Evaluate funding requirements and approval risks for the Lucky Friday #4 Shaft, including the anticipated $150 million to $200 million total project cost.
- Review the deferred tax asset realization assessment; management indicated that the valuation allowance could change in the fourth quarter and that the filing did not provide a clear final value for any such adjustment.
- Consider production and grade trends, especially the decline in nine-month silver production and the impact of the Lucky Friday shaft repair stoppage.