Business Context and Reporting Period
Company: Hecla Mining Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 Metals-Gold, Metals-Silver, and Industrial Minerals segments. A significant portion of revenue is derived from industrial minerals (56% in the first nine months of 1999).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 1999 | Nine Months Ended Sept 30, 1999 | Nine Months Ended Sept 30, 1998 |
|---|---|---|---|
| Sales of Products | $38,305 | $126,021 | $124,395 |
| Cost of Sales | $30,281 | $96,708 | $96,918 |
| Gross Profit | $2,620 | $11,965 | $11,625 |
| Net Loss | $(34,002) | $(33,166) | $5,202 (Income) |
| Loss Applicable to Common Shareholders | $(36,015) | $(39,204) | $(836) |
| Loss Per Share (Basic & Diluted) | $(0.54) | $(0.64) | $(0.02) |
| Cash and Cash Equivalents | $6,099 | $6,099 | $4,085 |
| Long-Term Debt | $51,855 | $51,855 | $42,923 |
| Total Assets | $275,375 | $275,375 | $252,062 |
Cash Flow (Nine Months Ended Sept 30, 1999):
- Net cash provided by operating activities: $3,412
- Net cash used by investing activities: $(15,688)
- Net cash provided by financing activities: $15,895
Material Changes vs. Prior Period
The company reported a significant shift from net income in the prior year to a substantial net loss in the current period. Key drivers include:
- Environmental and Reclamation Accruals: A non-cash charge of $27.3 million was recorded in the third quarter for future expenditures at the Grouse Creek property and the Bunker Hill Superfund site. This was necessitated by changes in closure plans, specifically the need to dewater tailings impoundments rather than reclaim them as wetlands.
- Asset Write-Downs: A $4.2 million write-down was recorded, primarily for the MWCA subsidiary (industrial minerals), reflecting book value in excess of expected sales prices as the company attempts to sell the division.
- Accounting Change: A $1.4 million cumulative effect charge was recognized due to the adoption of SOP 98-5, requiring the expensing of start-up costs for the Greens Creek mine rather than capitalization.
- Production Variances: Gold production decreased to 76,000 ounces (vs. 95,000 in 1998) due to the cessation of mining at La Choya. Silver production increased to 5.7 million ounces (vs. 5.4 million in 1998).
- Acquisition: Hecla acquired Monarch Resources Investments Limited (MRIL) on June 25, 1999, for $25.0 million (cash and stock), adding the La Camorra gold mine in Venezuela to its portfolio.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Capital Expenditures: Estimated minimum capital expenditures for the remainder of 1999 are approximately $4.2 million, focused on La Camorra, Greens Creek, and industrial minerals.
- Production Resumption: Production at the La Camorra mine resumed in October 1999 after a temporary suspension for tailings impoundment construction.
- Project Suspension: Development of the Noche Buena gold project in Mexico has been suspended due to current gold prices; Hecla will reconsider if prices rise.
- Divestiture: Hecla is actively marketing the MWCA subsidiary, with letters of intent signed for the sale of its aggregate and bark divisions, expected to close in Q4 1999.
Risks and Contingencies:
- Environmental Litigation: Significant ongoing litigation regarding the Bunker Hill Superfund site and the Coeur d'Alene River Basin. While Hecla believes current accruals ($51.6 million total for closure/reclamation) are adequate, estimates may change as new information develops.
- Commodity Prices: Revenues and profitability are heavily influenced by volatile global metal prices. Realized gold prices decreased 6% year-over-year for the nine-month period.
- Year 2000 Compliance: Hecla has completed remediation of primary information systems but faces risks related to third-party supplier compliance.
- Derivatives: The company holds forward sales commitments for gold, silver, zinc, and lead to manage price risk. As of Sept 30, 1999, the estimated cost to close out gold forward sales was $11.5 million.
Investor Verification Checklist
- Environmental Accrual Adequacy: Verify the $27.3 million third-quarter accrual for Grouse Creek and Bunker Hill against updated regulatory closure plans and potential cost escalations.
- MWCA Sale Completion: Confirm the closing of the MWCA divestiture in Q4 1999 and the final sale price relative to the $4.2 million write-down.
- La Camorra Performance: Monitor the operational ramp-up and production costs of the newly acquired La Camorra mine following its October 1999 restart.
- Liquidity and Debt Covenants: Review compliance with the $55.0 million bank agreement and the $11.0 million project financing facility for MRIL, particularly given the recent losses.
- Legal Proceedings: Track the status of the U.S. Government and Coeur d'Alene Tribe natural resource damage claims, specifically the appeal of the statute of limitations dismissal.