Business Context and Reporting Period
Company: Hecla Mining Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: Hecla is engaged in the exploration, development, mining, and processing of gold, silver, lead, zinc, and industrial minerals. Operations are segmented into Metals-Gold, Metals-Silver, and Industrial Minerals. The company's profitability is heavily influenced by volatile global metal prices.
Key Financial Metrics
| Metric (in thousands) | Q1 1999 | Q1 1998 |
|---|---|---|
| Sales of Products | $41,658 | $40,129 |
| Gross Profit | $4,260 | $4,476 |
| Income from Operations | $728 | $1,366 |
| Net Income (Loss) | $(1,499) | $2,847 |
| Loss Applicable to Common Shareholders | $(3,511) | $835 |
| Diluted EPS (Loss) | $(0.06) | $0.02 |
| Cash and Cash Equivalents | $3,470 | $5,377 |
| Long-Term Debt | $45,919 | $42,923 |
| Net Cash from Operating Activities | $622 | $(7,677) |
Liquidity: As of March 31, 1999, Hecla had $3.5 million in cash and cash equivalents. The company had $36.0 million outstanding under a $55.0 million bank agreement, with an additional $9.2 million borrowing capacity available. Total shareholders' equity was $149.2 million.
Material Changes vs. Prior Period
- Net Loss vs. Profit: The company reported a net loss of $1.5 million in Q1 1999 compared to a net income of $2.8 million in Q1 1998. This reversal was driven by a $1.4 million non-cash charge due to a change in accounting principle (SOP 98-5) regarding start-up costs for the Greens Creek mine, and a $1.8 million decrease in "Interest and other income" due to the absence of a one-time land sale gain recorded in 1998.
- Revenue Growth: Sales increased 4% to $41.7 million, driven by a $2.4 million increase in silver sales and a $1.9 million increase in industrial minerals sales. This offset a $2.9 million decline in gold sales following the completion of mining at the La Choya mine.
- Production Volumes: Gold production decreased to 29,000 ounces (from 36,000 in 1998), while silver production increased to 1.77 million ounces (from 1.53 million in 1998).
- Cost Structure: Cost of sales increased 3% to $31.3 million. Depreciation, depletion, and amortization rose 18% to $6.1 million, primarily due to increased production at Greens Creek and Lucky Friday mines and depreciation of the La Choya pit expansion.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Acquisition: On April 1, 1999, Hecla entered an agreement in principle to acquire Monarch Resources Limited (La Camorra gold mine in Venezuela) for $28.0 million ($15.0 million cash, $13.0 million stock). The deal is subject to due diligence and regulatory approval.
- Asset Sales: The company plans to sell its MWCA subsidiary (industrial minerals) in 1999 to generate cash and reduce debt, though success is not assured.
- Capital Expenditures: Minimum capital expenditures for the remainder of 1999 are estimated at $5.0 million, focused on Greens Creek, industrial minerals, and the Noche Buena project in Mexico.
- Production Guidance: Projected 1999 gold production is 83,000–87,000 ounces; silver production is projected at 7.18–7.59 million ounces.
Risks and Contingencies
- Environmental Liabilities: Significant legal proceedings exist regarding the Bunker Hill Superfund Site and the Coeur d'Alene River Basin. The company has accrued $5.0 million for Bunker Hill remediation and $0.3 million for Basin activities, but estimates may change. A lawsuit by the U.S. Government regarding natural resource damages is set for trial in November 2000.
- Other Litigation: A lawsuit in California regarding the Cactus Gold mine seeks $29.6 billion in damages; the company believes the claims are without merit. Additionally, dioxin-related claims against K-T Clay are pending, with $11.0 million in insurance coverage believed available.
- Market Risk: The company is exposed to fluctuations in gold, silver, lead, and zinc prices. It utilizes forward sales and call options to hedge exposure. As of March 31, 1999, it held forward commitments for 3,000 ounces of gold and 2.35 million ounces of silver.
- Year 2000 Compliance: The company is actively remediating IT systems, with completion scheduled by September 30, 1999. Estimated incremental costs are $201,000.
Investor Verification Checklist
- Accounting Change Impact: Verify the $1.4 million charge related to SOP 98-5 and its effect on the reported loss.
- Monarch Acquisition Status: Confirm if the $28 million acquisition of Monarch Resources was finalized and funded as planned.
- MWCA Sale Progress: Monitor the status of the planned sale of the MWCA subsidiary to assess debt reduction capabilities.
- Environmental Accruals: Review updates on the Bunker Hill and Coeur d'Alene River Basin litigation to assess potential increases in the $5.3 million accrued liability.
- Debt Covenants: Confirm continued compliance with the $55 million bank agreement covenants, especially given the loss position.