Hecla Mining Company — Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, produces and markets silver, gold, lead and zinc. Its reportable operating segments are Greens Creek in Alaska and Lucky Friday in Idaho. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $67.0 million | $117.9 million | $158.2 million | $254.2 million |
| Gross profit | $24.0 million | $67.8 million | $72.2 million | $147.4 million |
| Income from operations | $(2.5) million | $53.8 million | $23.0 million | $122.5 million |
| Net income | $2.5 million | $33.3 million | $15.1 million | $76.7 million |
| Income applicable to common shareholders | $2.4 million | $33.2 million | $14.8 million | $76.4 million |
| Diluted EPS | $0.01 | $0.11 | $0.05 | $0.26 |
| Cash flow from operations | Not separately provided | Not separately provided | $31.2 million | $127.2 million |
Approximate gross margin declined to 35.8% in the second quarter from 57.5% and to 45.6% for the first six months from 58.0%. Operating margin was approximately negative 3.7% in the second quarter versus 45.6% and 14.5% for the first six months versus 48.2%.
- Cash and cash equivalents were $233.3 million at June 30, 2012, down from $266.5 million at December 31, 2011. Cash, cash equivalents and non-current investments totaled approximately $236.0 million.
- First-half investing cash use was $51.4 million, primarily reflecting $51.5 million of capital expenditures. Financing cash use was $13.0 million, including $10.0 million of common dividends and $2.5 million of capital lease repayments.
- Current assets were $339.5 million and current liabilities were $91.8 million, implying a current ratio of approximately 3.7.
- Capital lease liabilities totaled $13.6 million. The company had no borrowings under its revolving credit facility as of the filing date and was in compliance with all covenants.
- The revolving credit facility was increased from $100 million to $150 million on August 2, 2012, with maturity extended three years from signing. Interest-rate margins increased modestly.
- Accrued reclamation and closure costs totaled $151.5 million, including approximately $95.5 million related to the Coeur d’Alene Basin settlement.
Material changes versus the prior comparable period
- Revenue fell 43% in the quarter and 38% for the first half, principally because Lucky Friday production was suspended and metal prices were generally lower.
- Lucky Friday generated essentially no production revenue in the second quarter and only $0.2 million of first-half sales from provisional price adjustments, compared with $36.0 million and $70.6 million in the 2011 periods.
- Lucky Friday’s production suspension reduced gross profit by approximately $20.8 million in the quarter and $40.7 million for the first half. Suspension-related costs were $6.5 million in the quarter and $12.6 million for the first half.
- Greens Creek gross profit declined by $23.0 million in the quarter and $34.5 million for the first half, reflecting lower silver, zinc and lead prices, lower grades, higher mining and maintenance costs, and lower production in the first quarter.
- Exploration and pre-development expense increased to $10.6 million in the quarter and $19.6 million for the first half, versus $5.8 million and $9.1 million, respectively, in 2011.
- Base-metal derivative contracts generated a $6.2 million second-quarter gain and a $0.9 million first-half gain, compared with a $0.6 million gain and $1.5 million loss in the respective 2011 periods.
- Income-tax expense decreased to $0.7 million in the quarter and $8.0 million for the first half, versus $19.6 million and $43.1 million, primarily because of lower pretax income.
- Operating cash flow decreased by $96.0 million year over year, largely because of lower earnings and unfavorable working-capital changes associated with concentrate shipments and reduced Lucky Friday activity.
Guidance, outlook, risks and unusual items
- Lucky Friday production was expected to remain suspended until early 2013 while the Silver Shaft was rehabilitated. Management expected to spend up to $50 million on shaft and related capital projects and approximately $26 million in non-capitalized care-and-maintenance costs during 2012. Timing could vary.
- The #4 Shaft project was temporarily suspended, with total expected cost of approximately $200 million, including approximately $90 million spent through June 30, 2012. Completion was expected in early 2016, subject to metal prices, liquidity, operating costs and project execution.
- Management estimated 2012 capital expenditures of approximately $130 million and exploration and pre-development expenditures of approximately $54 million.
- Management expected its 2012 effective tax rate to be approximately 40%, compared with approximately 35% in 2011, partly because of the loss of percentage depletion benefits associated with the suspended Lucky Friday operation.
- The company remained obligated to pay $25 million by October 8, 2012, $15 million by October 8, 2013, and approximately $55.4 million by August 2014 under the Coeur d’Alene Basin settlement.
- Greens Creek’s reclamation and closure plan may require a significant increase in the asset-retirement obligation and reclamation bond. The company stated that it could not yet reasonably estimate the increase.
- Environmental and legal matters include EPA-related claims involving the Gilt Edge, Nelson Tunnel/Commodore, Johnny M and Carpenter Snow Creek sites, ASARCO contribution claims, Lucky Friday water-permit matters, shareholder litigation and derivative actions. The company generally believes these matters will not materially affect its financial position, but some potential exposures remain uncertain.
- The company accrued $1.4 million for estimated Johnny M site costs and identified a potential $0 to $10 million exposure related to a Lucky Friday labor claim, for which no liability was recorded.
- Metal prices remain a significant risk. Second-quarter average realized prices were $27.05 per ounce for silver, $1,588 per ounce for gold, $0.87 per pound for lead and $0.87 per pound for zinc.
- After quarter-end, Hecla withdrew its approximately $100 million cash tender offer for U.S. Silver on August 7, 2012, after a condition to the offer was not satisfied.
- The board authorized repurchases of up to 20 million common shares. None had been repurchased under the program by June 30; 60,000 shares were repurchased in July at an average price of $4.89.
Most important facts for investors to verify
- Progress, cost and restart timing for the Lucky Friday Silver Shaft rehabilitation and the expected early-2013 production restart.
- Funding capacity for the Lucky Friday shutdown, #4 Shaft project, 2012 capital program and $95.4 million of remaining Coeur d’Alene settlement payments.
- Updated Greens Creek reclamation obligations, bonding requirements and long-term water-treatment assumptions.
- Exposure and accrual sufficiency for environmental proceedings, shareholder litigation and the Lucky Friday labor claim.
- Metal-price sensitivity, provisional concentrate settlements and the valuation effects of base-metal derivative contracts.
- Realization of the $112.1 million net deferred tax asset, which depends on future taxable income.