Business Context and Reporting Period
Company: Hecla Mining Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: Hecla is engaged in the exploration, development, mining, and processing of gold, silver, lead, zinc, and industrial minerals. The company operates through three primary segments: Metals-Gold, Metals-Silver, and Industrial Minerals. The Metals-Gold and Metals-Silver segments are highly sensitive to fluctuating global metal prices, while the Industrial Minerals segment provided 59% of total revenue in the first six months of 1999.
Key Financial Metrics
Revenue and Profitability (Six Months Ended June 30, 1999):
- Sales of Products: $87.7 million (up 2% from $85.8 million in 1998).
- Gross Profit: $9.3 million.
- Income from Operations: $2.6 million.
- Net Income: $0.8 million (includes a $1.4 million non-cash charge for a change in accounting principle).
- Income (Loss) Applicable to Common Shareholders: $(3.2) million (Loss of $0.06 per share), primarily due to $4.0 million in preferred stock dividends and the accounting change charge.
- Cost of Sales Margin: Cost of sales decreased to 76% of sales from 78% in the prior year period.
Cash Flow (Six Months Ended June 30, 1999):
- Operating Cash Flow: $6.4 million provided by operating activities.
- Investing Cash Flow: $(11.4) million used, primarily for the acquisition of Monarch Resources Investments Limited (MRIL) and capital expenditures.
- Financing Cash Flow: $14.3 million provided, driven by long-term debt borrowings and common stock issuances.
- Cash and Cash Equivalents: Increased to $11.8 million from $2.5 million at year-end 1998.
Balance Sheet Highlights (June 30, 1999):
- Total Assets: $286.6 million.
- Total Liabilities: $109.7 million.
- Long-Term Debt: $48.5 million (includes $25.0 million under bank agreement, $10.5 million project financing for MRIL, and $3.0 million subordinated loan).
- Shareholders' Equity: $176.9 million.
Material Changes vs. Prior Period
- Acquisition of MRIL: On June 25, 1999, Hecla acquired Monarch Resources Investments Limited (MRIL) for $25.0 million ($9.0 million cash and 6.7 million shares). MRIL owns the La Camorra gold mine in Venezuela and the El Salidillo silver property in Mexico. Production at La Camorra was temporarily suspended for tailings impoundment construction.
- Accounting Change: Adoption of SOP 98-5 resulted in a $1.4 million cumulative effect charge to write off unamortized start-up costs associated with the Greens Creek mine.
- Production Volumes: Gold production decreased to 55,000 ounces (vs. 67,000 in 1998) due to the completion of mining at La Choya and suspension at La Camorra. Silver production increased to 3.7 million ounces (vs. 3.2 million in 1998).
- Capital Structure: Hecla issued 4.7 million shares of common stock for net proceeds of $11.9 million and increased borrowings to fund the MRIL acquisition and operations.
- Cost Structure: Depreciation, depletion, and amortization increased by 17% ($1.8 million) due to higher production at Lucky Friday and Greens Creek, and depreciation of the La Choya pit expansion.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Capital Expenditures: Estimated at $9.4 million for the remainder of 1999, primarily for La Camorra ($6.0 million) and Greens Creek ($2.1 million).
- Exploration: Estimated at $2.0 to $2.5 million for the remainder of 1999, focusing on domestic properties (Rosebud, Greens Creek) and foreign targets in Mexico and South America.
- Environmental Expenditures: Estimated at $7.0 to $8.0 million for the remainder of 1999.
- Asset Sales: Hecla is attempting to sell its MWCA subsidiary (industrial minerals) to generate cash and reduce debt, with a closing anticipated in the second half of 1999.
- Production Resumption: La Camorra mine production is expected to resume in the fourth quarter of 1999.
Risks and Contingencies:
- Environmental Litigation: Significant ongoing litigation regarding the Bunker Hill Superfund site and the Coeur d'Alene River Basin. Hecla has accrued $4.6 million for Bunker Hill remediation and $0.2 million for Basin activities, but estimates may change. The U.S. Government has appealed a summary judgment dismissal of its Natural Resource Damage claims.
- Other Legal Claims: A lawsuit in California regarding the Cactus Gold mine seeks $29.6 billion in damages; Hecla believes the claims are without merit. A dioxin contamination claim regarding ball clay production has $8.0 million in claims, with $11.0 million in insurance coverage believed available.
- Commodity Prices: Revenues are heavily dependent on gold, silver, lead, and zinc prices, which are volatile. Hecla utilizes forward sales and swaps to hedge exposure (e.g., 306,045 ounces of gold sold forward at $288/oz).
- Year 2000 Compliance: Hecla is implementing remediation plans for Y2K issues, with incremental costs estimated at $175,000. Risks include temporary inability to process/ship products if third-party suppliers fail.
Investor Verification Checklist
- MRIL Acquisition Integration: Verify the timeline for resuming production at the La Camorra mine and the impact of the $10.5 million project financing on cash flow.
- Environmental Accruals: Monitor the reassessment of the Bunker Hill and Coeur d'Alene River Basin liabilities, as management noted estimates could change in the near term.
- MWCA Sale Status: Confirm the progress of the planned sale of the MWCA subsidiary, which is critical for debt reduction and liquidity.
- Preferred Dividends: Note the $4.0 million quarterly preferred dividend obligation which significantly impacts net income available to common shareholders.
- Commodity Hedging: Review the terms of the gold forward sales ($288/oz) and silver call options to understand upside/downside exposure relative to spot prices.