Hecla Mining Company — Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company discovers, 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, 2011, compared with the three months ended March 31, 2010.
Financial Performance and Position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Sales of products | $136.4 million | $79.9 million |
| Gross profit | $79.6 million | $27.5 million |
| Gross margin | 58.4% | 34.5% |
| Income from operations | $68.7 million | $15.7 million |
| Operating margin | 50.4% | 19.6% |
| Net income | $43.4 million | $21.8 million |
| Income applicable to common shareholders | $43.2 million | $18.4 million |
| Basic diluted EPS | $0.16 / $0.15 | $0.08 / $0.07 |
| Cash flow from operations | $60.9 million | $17.8 million |
| Capital expenditures | $21.8 million | $6.7 million |
Cash and cash equivalents increased to $321.7 million at March 31, 2011, from $283.6 million at December 31, 2010. Cash, cash equivalents and marketable investments totaled $326.9 million. Total assets were $1.417 billion and total liabilities were $406.2 million. The company had $6.7 million of capital lease liabilities and no borrowings under its $60 million revolving credit facility; management reported compliance with all debt covenants.
The company’s environmental, reclamation and closure liabilities totaled $319.1 million, including a $262.2 million accrual for the proposed settlement of Coeur d’Alene Basin environmental claims.
Material Changes Versus the Prior Comparable Period
- Revenue increased 71%, primarily because average silver, gold, zinc and lead prices were higher. Average silver prices increased to $31.66 per ounce from $16.92; realized silver prices were $36.49 per ounce versus $16.92.
- Greens Creek sales increased to $101.8 million from $56.5 million, and gross profit increased to $59.4 million from $17.4 million. Silver production rose 6%, while zinc and lead production declined because of lower grades and mine sequencing.
- Lucky Friday sales increased to $34.6 million from $23.3 million, and gross profit increased to $20.2 million from $10.1 million. Silver production declined to 756,824 ounces from 882,079 ounces.
- Income benefited from a $7.2 million net positive adjustment to provisional concentrate settlements, compared with a $3.0 million negative adjustment in Q1 2010.
- The effective tax result changed materially: Q1 2011 included a $23.5 million income tax provision, versus a $6.2 million benefit in Q1 2010, primarily because of deferred tax asset amortization and the absence of the prior-year valuation allowance benefit.
- Preferred dividends declined because all 2,012,500 shares of the 6.5% mandatory convertible preferred stock converted into approximately 18.9 million common shares on January 1, 2011.
- Cash used in investing increased to $23.5 million, reflecting higher capital spending and purchases of marketable securities.
Guidance, Outlook, Risks and Unusual Items
- Management maintained 2011 silver production guidance of 9 million to 10 million ounces, notwithstanding the Lucky Friday shutdown described below.
- Management estimated 2011 capital expenditures of approximately $97 million and exploration expenditures of approximately $28 million.
- Hecla had begun developing the Lucky Friday #4 Shaft. The project was expected to cost approximately $200 million in total, including approximately $60 million spent through March 31, 2011, and to require approximately four additional years if approved.
- Negotiators reached proposed financial and non-monetary terms for a Coeur d’Alene Basin settlement requiring aggregate payments of approximately $263.4 million. The proposed Consent Decree remained subject to plaintiff and court approval, and the company warned that liability could materially exceed the $262.2 million accrual if settlement is not finalized.
- On April 15, 2011, after the reporting period, a fatal ground-fall accident occurred at Lucky Friday. Mining operations were halted, MSHA issued orders restricting activity, and company and government investigations began. Additional rescue, operating, regulatory, penalty or litigation costs could not be estimated at filing.
- The company recognized a $2.0 million loss on forward contracts for forecasted zinc and lead production and carried $15.6 million of derivative contract liabilities at March 31, 2011.
- Key ongoing risks include volatile metal prices, environmental and reclamation obligations, mine safety and permitting requirements, operating disruptions, derivative-market exposure, and uncertainty regarding deferred tax asset realization.
Important Facts for Investors to Verify
- Whether the Coeur d’Alene Basin Consent Decree was ultimately approved and the timing and funding of the proposed settlement payments.
- The duration and financial impact of the Lucky Friday shutdown, MSHA enforcement actions, investigations and any related penalties or litigation.
- Actual 2011 silver production versus the 9–10 million-ounce estimate and the effect of Lucky Friday disruptions.
- Metal prices, provisional concentrate settlement adjustments and derivative results, which materially affect revenue and earnings.
- Funding requirements and approval status for the approximately $200 million Lucky Friday #4 Shaft project.
- Changes in the company’s $319.1 million reclamation and closure liability, including the $262.2 million Basin accrual and potential liabilities at other Superfund sites.