Hecla Mining Company: Q3 2011 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company produces silver, gold, lead and zinc through its Greens Creek and Lucky Friday operating units. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $120.5 million | $115.8 million | $374.8 million | $284.4 million |
| Gross profit | $67.8 million | $54.5 million | $215.2 million | $120.1 million |
| Income from operations | $43.5 million | $41.5 million | $166.0 million | $81.7 million |
| Net income | $55.9 million | $19.8 million | $132.6 million | $58.7 million |
| Income applicable to common shareholders | $55.8 million | $16.4 million | $132.2 million | $48.5 million |
| Diluted EPS | $0.19 | $0.06 | $0.45 | $0.18 |
| Cash flow from operations | Not separately provided | Not separately provided | $187.9 million | $115.5 million |
Approximate gross margins were 56.3% in Q3 and 57.4% for the first nine months. Operating margins were approximately 36.1% and 44.3%, respectively; net margins were approximately 46.4% and 35.4%.
- Cash and cash equivalents were $413.7 million at September 30, 2011, up from $283.6 million at December 31, 2010. Total cash, cash equivalents and investments were $417.0 million.
- Total liabilities were $416.7 million and shareholders’ equity was $1.10 billion at September 30, 2011.
- The company had no borrowings under its revolving credit facility. The facility was increased from $60 million to $100 million on October 10, 2011 and expires September 30, 2014. The company was in compliance with all covenants.
- Capital expenditures were $64.4 million in the first nine months, compared with $48.7 million in the prior-year period. Operating cash flow less reported capital expenditures was approximately $123.6 million.
Material changes versus the prior comparable period
- Sales increased 4% in Q3 and 32% for the first nine months, primarily reflecting higher realized prices for silver, gold, lead and zinc.
- Income applicable to common shareholders increased 240% in Q3 and 173% for the first nine months.
- Base-metal derivative contracts generated gains of $40.4 million in Q3 and $38.9 million for the first nine months, compared with losses of $13.2 million and $11.2 million, respectively, in 2010. These mark-to-market gains materially increased reported earnings and are not necessarily indicative of recurring operating performance.
- Greens Creek nine-month gross profit increased to $146.3 million from $88.3 million, despite lower production and payable metal quantities. Q3 gross profit declined to $39.9 million from $41.7 million, primarily due to shipment timing, lower grades and negative provisional pricing adjustments.
- Lucky Friday gross profit increased to $27.9 million in Q3 and $68.8 million for the first nine months, compared with $12.9 million and $31.9 million, respectively. Higher metal prices and improved Q3 silver grades were partly offset by higher costs.
- Total cash cost per silver ounce was negative $2.98 at Greens Creek and $5.94 at Lucky Friday in Q3, compared with negative $3.05 and $3.38, respectively, in Q3 2010. These are non-GAAP measures and are affected by by-product credits.
- The 6.5% mandatory convertible preferred stock converted into approximately 18.9 million common shares on January 1, 2011, eliminating approximately $3.3 million of quarterly preferred dividends. Common shares outstanding were 279.6 million at September 30, 2011.
Guidance, outlook, commentary and risks
- Management estimated 2011 silver production of 9 million to 10 million ounces.
- Management expected approximately $115 million of 2011 capital expenditures and approximately $32 million of exploration and pre-development expenditures; $74.5 million and $20.8 million, respectively, had been incurred through September 30.
- The Lucky Friday #4 Shaft project received final Board approval in August 2011. Total expected cost is approximately $200 million, including approximately $80 million spent through September 30, with completion expected in the second half of 2014. Completion could be affected by metal prices, liquidity, operating costs and capital-cost inflation.
- A September 2011 Consent Decree resolved the Coeur d’Alene Basin environmental litigation. Hecla paid approximately $168 million in early October 2011 and remained obligated for $25 million by October 2012, $15 million by October 2013 and approximately $56.4 million by August 2014, with additional interest and surety costs. The company had accrued $262.3 million for the settlement at September 30.
- Total reclamation, closure and environmental liabilities were $320.3 million at September 30, 2011. Other unresolved matters include the Johnny M, Gilt Edge, Carpenter Snow Creek and other environmental claims; the company states that some potential liabilities cannot yet be estimated.
- A fatal fall-of-ground accident at Lucky Friday in April 2011 caused an approximately 10-day operational stoppage and approximately $1.7 million of additional operating costs. MSHA investigations and potential enforcement actions remained relevant risks.
- Metal prices are volatile and significantly affect revenue, reserves, asset valuations, deferred tax assets and derivative valuations. The company also faces permitting, environmental, mine-safety, labor, shipping and regulatory risks.
- On November 8, 2011, the Board declared a $0.02 per-share common dividend, totaling approximately $5.6 million, under a new policy linked to realized silver prices. Dividend declarations remain discretionary.
Important facts for investors to verify
- Separate recurring mining performance from the $40.4 million Q3 and $38.9 million nine-month derivative gains.
- Assess post-quarter liquidity after the approximately $168 million Coeur d’Alene settlement payment and the remaining required payments.
- Monitor production, grades, shipment timing and rising unit costs at Greens Creek and Lucky Friday.
- Evaluate funding and execution risk for the approximately $200 million #4 Shaft project alongside environmental obligations and planned capital spending.
- Review the sensitivity of earnings and cash flows to silver, gold, lead and zinc prices, including provisional sales and derivative positions.
- Follow MSHA proceedings related to the Lucky Friday fatality and unresolved environmental claims, including the Johnny M liability that management considered probable but not estimable.