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Business Context and Reporting Period

Company: Hecla Mining Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Hecla Mining discovers, acquires, develops, produces, and markets silver, gold, lead, and zinc. Operations are organized into two primary segments: the Greens Creek unit (Alaska) and the Lucky Friday unit (Idaho). The company previously operated in Venezuela (La Camorra unit), but these operations were sold in July 2008 and are reported as discontinued operations.

Key Financial Metrics

Margins: Gross margin for the six months ended June 30, 2009, was approximately 20.9% ($27.0M / $129.3M), compared to 19.3% in the prior year period.

Material Changes vs. Prior Period

• Profitability Improvement: The company reported a net income of $9.8 million for the six months ended June 30, 2009, a significant turnaround from a net loss of $25.5 million in the same period in 2008. This improvement is largely driven by the absence of losses from discontinued Venezuelan operations and increased gross profit at the Greens Creek unit.
• Revenue Growth: Sales increased by approximately 23% year-over-year, primarily due to increased production volumes at Greens Creek (following the acquisition of 100% ownership in April 2008) and higher gold prices, despite lower average prices for silver, zinc, and lead.
• Debt Reduction: Total debt decreased significantly from $161.7 million to $42.2 million. The company utilized proceeds from equity offerings (underwritten public offering in February and private placement in June) to repay approximately $123.6 million of its term and bridge facilities.
• One-Time Items:
  • Gain on Sale: A $6.2 million pre-tax gain was recognized from the sale of the Velardeña mill in Mexico.
  • Benefit Plan Termination: A $9.0 million non-cash gain was recognized from the termination of a post-retirement medical benefit plan.
  • Impairment: A $3.0 million loss on impairment of investments (Rusoro stock) was recorded in Q2 2009.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Production Estimate: Management estimates 2009 silver production to be between 10 and 11 million ounces.
• Liquidity: Management believes cash, cash equivalents, investments, and cash from operations will be adequate to meet obligations for the next twelve months. Sustaining capital expenditures are estimated at $16 to $20 million for the remainder of the year.
• Debt Covenants: The company is in compliance with its credit agreement covenants, including minimum EBITDA and unencumbered cash requirements.

Risks and Contingencies:

• Metals Prices: Volatility in silver, gold, zinc, and lead prices remains a primary risk. While gold prices improved, silver, zinc, and lead prices were lower in the first half of 2009 compared to 2008.
• Environmental Liabilities: Significant contingent liabilities exist regarding the Bunker Hill Superfund site and the Coeur d'Alene River Basin. The company has accrued $65.6 million for Basin remediation and $3.0 million for Bunker Hill, but potential liabilities could be higher depending on litigation outcomes and EPA cost assessments.
• Legal Proceedings: Ongoing litigation with the Coeur d'Alene Indian Tribe and the U.S. Government regarding natural resource damages in the Basin. Phase II of the trial is anticipated to be rescheduled for late 2009 or early 2010.

Key Facts for Investor Verification

• Debt Structure: Verify the remaining term facility balance of $38.3 million and the specific repayment schedule ($30.0 million due in 2010, $8.3 million due Sept 2010).
• Environmental Accruals: Review the adequacy of the $65.6 million accrual for Coeur d'Alene River Basin remediation against potential future court rulings and EPA cost claims.
• Equity Dilution: Note the issuance of approximately 54.2 million shares of common stock and warrants in two separate offerings during the first half of 2009 to fund debt repayment.
• Greens Creek Performance: Monitor the impact of declining silver ore grades (13% decline in Q2 2009 vs 2008) on future production costs and margins.
• Discontinued Operations: Confirm that all Venezuelan operations are fully divested and that no further losses or gains are expected from this segment.