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Hecla Mining Company - Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007. Hecla Mining Company is a precious metals producer engaged in the exploration, development, and mining of silver, gold, lead, and zinc. Operations are organized into four segments: Lucky Friday (Idaho), Greens Creek (Alaska), La Camorra (Venezuela), and San Sebastian (Mexico). The company reported 120,263,789 shares of common stock outstanding as of May 7, 2007.

Key Financial Metrics

Liquidity and Debt: The company held $111.3 million in cash and short-term investments. There was no outstanding balance on its $30.0 million revolving credit facility as of March 31, 2007. Environmental and reclamation reserves totaled $65.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 34% to $53.1 million, driven by higher average prices for silver ($13.31/oz vs $9.69/oz), gold ($650/oz vs $554/oz), lead, and zinc.
• Profitability Decline: Net income dropped significantly from $38.4 million to $8.1 million. This decrease is primarily attributed to the absence of a $36.4 million pre-tax gain from the sale of an investment in Alamos Gold, Inc., which occurred in Q1 2006.
• Segment Performance:
  • Lucky Friday: Gross profit increased by $4.5 million due to higher production (33% increase in tons milled) and metal prices, despite lower ore grades.
  • Greens Creek: Gross profit increased by $1.5 million, aided by higher by-product credits (zinc, lead, gold) which resulted in a negative total cash cost per ounce of silver.
  • La Camorra: Gross profit decreased by $1.3 million due to escalating labor and transportation costs, lower gold grades, and reduced production as the mine reaches the end of its known life.
• Working Capital: Operating cash flow improved significantly to $16.4 million, compared to a cash use of $0.3 million in the prior year, largely due to changes in working capital timing and higher net income adjusted for non-cash items.

Outlook, Risks, and Unusual Items

• Hollister Sale: The company completed the sale of its interest in the Hollister Development Block in April 2007 for $45 million in cash and $15 million in Great Basin Gold stock. A pre-tax gain of approximately $63 million is expected to be recognized in Q2 2007.
• Venezuela Currency Risk: Effective Jan 1, 2007, the functional currency for Venezuelan operations changed to the Bolívar, resulting in a $7.2 million reduction in the carrying value of net assets. The company faces exchange control risks, holding $27.4 million in local currency, and incurred $1.4 million in foreign exchange losses in Q1 2007.
• Environmental Litigation: Significant contingencies remain regarding the Bunker Hill Superfund site and Coeur d'Alene River Basin. The company estimates a potential liability range of $23.6 million to $72.0 million for past costs and remediation in the Basin, with $23.6 million currently accrued. The outcome of these proceedings is uncertain.
• Guidance: Management targets 6.0 million ounces of silver and 140,000 ounces of gold production for 2007. An aggressive exploration program of approximately $22 million is planned.

Investor Verification Checklist

• Hollister Gain Timing: Verify the recognition of the $63 million gain from the Hollister sale in the Q2 2007 earnings report.
• Venezuela Repatriation: Monitor the ability to convert Bolívar-denominated cash ($27.4 million) to USD and potential further foreign exchange losses given the disparity between official and open market rates.
• Environmental Accruals: Track developments in the Bunker Hill and Coeur d'Alene River Basin litigation, as final liability could materially exceed the current $65.3 million reserve.
• La Camorra Decline: Assess the impact of declining reserves and production at the La Camorra mine on future cash flows as the mine approaches the end of its known life in 2007.
• By-Product Credits: Evaluate the sustainability of negative cash costs at Greens Creek, which relies heavily on high zinc and lead prices to offset operating costs.