Hecla Mining Company 2011 Form 10-K Summary
Business context and reporting period
Hecla Mining Company explores, develops, produces and markets silver, gold, lead and zinc. Its operating segments are the 100%-owned Greens Creek mine in Alaska and the Lucky Friday mine in Idaho. The filing covers the fiscal year ended December 31, 2011, with comparative 2010 and 2009 information. Although the request references 2011 Q4, this is an annual Form 10-K; fourth-quarter supplementary results are included.
Greens Creek generated 72% of 2011 sales and Lucky Friday generated 28%. Lucky Friday production was materially disrupted by accidents, a rock burst and an MSHA order requiring rehabilitation of the Silver Shaft.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change or comment |
|---|---|---|---|
| Sales of products | $477.6 million | $418.8 million | Up 14.0% |
| Gross profit | $265.0 million | $194.8 million | Gross margin approximately 55.5% versus 46.5% |
| Income from operations | $197.6 million | $(51.6) million | Improved primarily because 2010 included a major environmental provision |
| Net income | $151.2 million | $49.0 million | Up substantially |
| Income applicable to common shareholders | $150.6 million | $35.4 million | Up substantially |
| Diluted EPS | $0.51 | $0.13 | Improved despite higher share count |
| Cash from operating activities | $69.9 million | $197.8 million | Down $127.9 million, mainly from settlement-related cash payments and working-capital changes |
| Capital expenditures and additions | $137.4 million including non-cash additions | $74.7 million | Higher investment in Lucky Friday, Greens Creek and San Juan Silver |
| Cash and cash equivalents | $266.5 million | $283.6 million | Down $17.1 million |
| Noncurrent debt and capital leases | $6.3 million | $3.8 million | Company had no drawn revolving-credit borrowings |
| Accrued reclamation and closure costs | $153.8 million | $318.8 million | Reduced after approximately $169 million of settlement payments |
Average realized prices increased for all four metals. Silver realized price was $35.30 per ounce versus $22.70 in 2010; gold was $1,592 per ounce versus $1,271; lead was $1.05 per pound versus $0.98; and zinc was $1.00 per pound versus $0.96.
- Greens Creek sales were $342.9 million and gross profit was $188.5 million, compared with $313.3 million and $144.8 million in 2010.
- Lucky Friday sales were $134.7 million and gross profit was $76.5 million, compared with $105.5 million and $50.0 million in 2010.
- Silver production declined to 9.48 million ounces from 10.57 million ounces; gold production declined to 56,818 ounces from 68,838 ounces.
- Total cash cost per silver ounce was $1.15, compared with negative $1.46 in 2010, reflecting higher costs and lower production partially offset by stronger by-product prices.
- Exploration and pre-development expense increased 45% to $31.4 million.
- The company recognized a $38.0 million gain on forecasted lead and zinc forward contracts, versus a $20.8 million loss in 2010.
Material changes versus the prior comparable period
- Higher metal prices drove record sales and gross profit despite lower production volumes and lower ore grades.
- The 2010 results included a $193.2 million increase in the Coeur d'Alene Basin environmental accrual. The 2011 provision for closed operations and environmental matters was $9.7 million.
- Operating cash flow fell sharply because Hecla paid approximately $168 million in October 2011 under the Coeur d'Alene Basin settlement, with an additional approximately $1 million paid by year-end.
- All outstanding 6.5% Mandatory Convertible Preferred Stock converted into approximately 18.9 million common shares on January 1, 2011, increasing the common share count and eliminating approximately $3.3 million of quarterly preferred dividends.
- Hecla acquired the remaining 30% interest in the San Juan Silver project for 5.4 million common shares valued at approximately $33.8 million at closing.
- Capital investment increased materially, including continued construction of the Lucky Friday #4 Shaft project. Total project cost was estimated at approximately $200 million, with approximately $90 million spent through year-end.
Guidance, outlook, risks and unusual items
- Management expected Lucky Friday production to remain suspended until early 2013 while the Silver Shaft was rehabilitated and a haulage-way bypass was constructed around the rock-burst area. The #4 Shaft project was also temporarily suspended.
- Management estimated 2012 capital expenditures of approximately $140 million, exploration and pre-development expenditures of approximately $40 million, up to $50 million for Lucky Friday surface and underground projects, and approximately $17.5 million of non-capitalized Lucky Friday care-and-maintenance costs.
- The company estimated that Silver Shaft rehabilitation would cost approximately $10 million, with an additional $20 million for shaft improvements and $20 million for other capital projects.
- Management believed available cash, operating cash flow and the undrawn $100 million revolving credit facility would meet obligations for the next twelve months. The facility expires September 30, 2014 and includes leverage, interest coverage, current ratio and tangible net worth covenants; Hecla was compliant at year-end.
- Remaining Coeur d'Alene Basin settlement obligations totaled approximately $95.4 million: $25 million due by October 2012, $15 million by October 2013 and approximately $55.4 million due by August 2014, subject to warrant proceeds and a final balance obligation. Third-party surety is required.
- Key risks include silver, gold, lead and zinc price volatility; higher fuel, labor and consumable costs; mining accidents and seismic events; MSHA enforcement and permitting; environmental liabilities; reserve uncertainty; smelter concentration; pension underfunding; and access to capital.
- Two fatal incidents occurred at Lucky Friday in 2011, and a December rock burst injured seven employees. The mine closure and rehabilitation requirements could extend or cost more than currently estimated.
- Two putative securities class actions were filed in February 2012. The company stated that it could not predict the outcome or estimate damages and believed the claims were without merit.
- The company reported no material off-balance-sheet arrangements. BDO USA, LLP issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Timing, cost and regulatory approval for Lucky Friday’s Silver Shaft rehabilitation, haulage-way bypass and return to production.
- Actual cash generation after the Coeur d'Alene settlement payments and the remaining $95.4 million obligation.
- Exposure of earnings and cash flow to silver and by-product metal prices, including the effect of provisional concentrate pricing and derivatives.
- 2012 and subsequent capital requirements for the #4 Shaft and other mine infrastructure.
- Potential MSHA penalties, safety-related litigation and the outcome of the securities class actions.
- Whether accrued environmental, reclamation and closure liabilities of $153.8 million adequately cover remaining obligations.
- Changes in reserves, mine life and production costs, particularly at Greens Creek following lower 2011 grades and higher diesel-power usage.
- Liquidity covenant compliance and continued availability of the $100 million revolving credit facility.