Business Context and Reporting Period
Hecla Mining Company filed this Form 10-K for the fiscal year ended December 31, 2010. The company explores, develops, produces and markets silver, gold, lead and zinc through its wholly owned Greens Creek mine in Alaska and Lucky Friday mine in Idaho. Greens Creek generated 75% of 2010 sales and Lucky Friday generated 25%. Venezuelan operations were sold in 2008 and are reported as discontinued operations.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Sales of products | $418.8 million | $312.5 million | 34% increase |
| Gross profit | $194.8 million | $101.1 million | 92% increase |
| Gross margin | 46.5% | 32.3% | Improved |
| Net income | $49.0 million | $67.8 million | 28% decrease |
| Income applicable to common shareholders | $35.4 million | $54.2 million | 35% decrease |
| Diluted EPS | $0.13 | $0.23 | Decrease |
| Cash provided by operating activities | $197.8 million | $119.2 million | 66% increase |
| Capital expenditures | $67.4 million cash basis | $27.7 million | Increase |
| Cash and cash equivalents | $283.6 million | $104.7 million | Increase |
| Debt | No borrowings under revolving facility; $3.8 million long-term capital leases | Debt substantially repaid | Lower leverage |
Reported operating income was a loss of $51.6 million because the $201.1 million provision for closed operations and environmental matters more than offset mine-level profitability. The provision included a $193.2 million increase related to the Coeur d’Alene Basin. The company recorded a $123.5 million income tax benefit, including an $88.1 million reduction in the deferred-tax-asset valuation allowance.
Average realized prices increased for all four metals: silver $22.70 per ounce, gold $1,271 per ounce, lead $0.98 per pound and zinc $0.96 per pound. Silver production declined to 10.6 million ounces from 11.0 million ounces, while gold, lead and zinc production increased. Consolidated total cash cost per silver ounce, a non-GAAP measure, improved to negative $1.46 from $1.91.
Material Changes Versus the Prior Comparable Period
- Higher metal prices and improved production of lead and zinc drove the record sales and gross profit.
- Greens Creek gross profit increased to $144.8 million from $72.7 million; Lucky Friday gross profit increased to $50.0 million from $28.3 million.
- Exploration expense increased to $21.6 million from $9.2 million as exploration activity resumed across Alaska, Idaho, Colorado and Mexico.
- The company recorded $20.8 million of losses on mark-to-market forward contracts for forecasted lead and zinc sales, plus $3.0 million of losses on contracts associated with provisional concentrate sales.
- Interest expense declined to $2.2 million from $11.3 million following repayment of the Greens Creek acquisition debt in 2009.
- Common shares outstanding increased to 258.5 million at year-end from 238.3 million. On January 1, 2011, 2.0125 million mandatory convertible preferred shares converted into approximately 18.9 million common shares.
- The Lucky Friday mine experienced an approximately two-week production stoppage in the second quarter because of deterioration in the #2 Shaft escape-way infrastructure; normal production resumed after repairs.
Guidance, Outlook, Risks and Unusual Items
- Management estimated approximately $97 million of 2011 capital expenditures and $28 million of exploration expenditures.
- Management expected to seek Board approval in the first half of 2011 for the Lucky Friday #4 Shaft. The project was estimated at approximately $200 million in total capital expenditures, including approximately $50 million spent through December 31, 2010, and approximately four additional years of construction.
- The company had a three-year, $60 million secured revolving credit facility, expiring January 31, 2014, with no borrowings outstanding and compliance with all covenants at December 31, 2010. Management stated that available liquidity and expected operating cash flow were adequate for the next twelve months.
- The company accrued $318.8 million for reclamation and environmental obligations, including $262.2 million for the Coeur d’Alene Basin and Bunker Hill matters. The Basin accrual reflected the net present value of proposed settlement payments totaling approximately $263.4 million.
- The proposed Basin settlement was non-binding and required a final agreement, management and client approvals, public comment, and court approval. Proposed payments included $102 million in cash shortly after entry of a Consent Decree, $55.5 million in cash or common stock, additional payments of $25 million and $15 million, and up to $65.9 million by August 2014.
- If the Basin settlement is not finalized, the company disclosed that liability could exceed the recorded accrual. The EPA’s proposed upper-Basin remediation plan had an estimated net present value cost of approximately $1.3 billion, while natural-resource-damage claims asserted by the United States and the Coeur d’Alene Tribe could be in the billions.
- Lucky Friday faced potential EPA civil penalties relating to alleged 2009 water-discharge violations. The company disputed the assertions and was negotiating with the EPA.
- Mining results remain highly sensitive to silver, gold, lead and zinc prices, fuel and other input costs, ore grades, recoveries, permitting, mine safety, environmental obligations, labor and access to smelters.
- Management concluded that no impairment of Greens Creek or Lucky Friday long-lived assets was required at December 31, 2010, but stated that prolonged metal-price declines or higher costs could result in future write-downs.
Important Facts for Investors to Verify
- Whether the Coeur d’Alene Basin settlement was finalized and whether payments, surety requirements or environmental liabilities changed after the filing date.
- The cash impact of the proposed settlement relative to the $283.6 million cash balance and planned 2011 capital and exploration spending.
- Actual approval, cost, schedule and financing for the Lucky Friday #4 Shaft.
- Subsequent realized metal prices, production volumes, ore grades and cash costs, particularly at Greens Creek.
- Exposure and fair-value changes from lead and zinc forward contracts, including the $20.8 million 2010 loss and remaining contracted volumes.
- The effect of the January 2011 preferred-stock conversion and outstanding warrants on future share count, dilution and earnings per share.
- Changes in deferred tax assets and valuation allowances, which materially affected 2010 net income and cash-flow presentation.
- Resolution of the Lucky Friday water-permit matter and any other environmental, safety or reclamation claims.