Hecla Mining Company: Q2 2010 Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company discovers, develops and produces silver, gold, lead and zinc. Its operating segments are Greens Creek in Alaska and Lucky Friday in Idaho. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales of products | $88.6 million | $74.6 million | $168.5 million | $129.3 million |
| Gross profit | $38.1 million | $17.2 million | $65.6 million | $27.0 million |
| Gross margin | 43.0% | 23.0% | 38.9% | 20.9% |
| Income from operations | $24.6 million | $8.9 million | $40.2 million | $26.1 million |
| Net income | $17.1 million | $2.5 million | $38.9 million | $9.8 million |
| Income applicable to common shareholders | $13.7 million | $(0.9) million | $32.1 million | $3.0 million |
| Basic EPS | $0.06 | $0.00 | $0.13 | $0.01 |
| Operating margin | 27.7% | 12.0% | 23.9% | 20.2% |
Cash provided by operating activities was $73.4 million in the first half of 2010, compared with $19.6 million in the prior-year period. Capital expenditures were $26.4 million, producing free cash flow before financing of approximately $46.9 million.
Cash and cash equivalents increased to $197.4 million at June 30, 2010 from $104.7 million at December 31, 2009. Including non-current marketable equity securities, liquid assets were approximately $198.7 million. Total assets were $1.13 billion and shareholders’ equity was $950.7 million.
The company had no borrowings under its $60 million senior secured revolving credit facility. Capital lease liabilities totaled $4.7 million, including $1.8 million current and $2.9 million non-current. Total liabilities were $179.0 million. The revolving facility expires March 12, 2013 and includes leverage, interest coverage, current ratio and tangible net worth covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18.8% in the second quarter and 30.3% in the first half, primarily reflecting higher realized prices for silver, gold, lead and zinc.
- Greens Creek sales rose to $66.9 million from $55.6 million in the quarter, while segment gross profit increased to $29.2 million from $11.9 million. Lucky Friday sales increased to $21.7 million from $19.1 million, and gross profit increased to $8.9 million from $5.3 million.
- Higher metal prices and by-product credits reduced total cash cost per silver ounce to negative $1.82 at Greens Creek and $4.47 at Lucky Friday in the second quarter, compared with $2.14 and $6.41, respectively, in the prior-year quarter. This is a non-GAAP measure.
- Silver production declined at both operations in the second quarter, to 1.83 million ounces at Greens Creek and 0.80 million ounces at Lucky Friday, partly due to lower grades. Lucky Friday also experienced an approximately two-week stoppage for shaft-escape-way repairs.
- Exploration expense increased by $4.6 million in the quarter and $6.9 million in the first half, reflecting increased activity near existing operations and at projects in Mexico and Colorado.
- Interest expense declined by $2.2 million in the quarter and $6.2 million in the first half following repayment of debt used to acquire the Greens Creek interest in October 2009.
- Results benefited from the absence of 2009 debt-related fees, including $5.7 million recorded in the first half of 2009, and from lower investment impairment losses.
- The prior-year first half included a $9.0 million non-cash gain from terminating a post-retirement medical plan and a $6.2 million gain on the sale of the Velardeña mill; neither item recurred in 2010.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2010 silver production of 10 million to 11 million ounces.
- Expected 2010 exploration spending was approximately $20 million, with capital expenditures estimated at $40 million to $50 million. Continuing the Lucky Friday internal shaft project could increase remaining 2010 capital expenditures by approximately $30 million and require significant funding over several years.
- Management believed available cash, operating cash flow, investments and the undrawn revolving facility would be adequate for obligations during the next twelve months, but noted that acquisitions or expansion could require equity or debt financing.
- Second-quarter and first-half revenue included $5.9 million of gains on forward contracts related to unsettled concentrate shipments and a separate $2.0 million gain on contracts for forecast future zinc and lead shipments. These instruments are marked to market and do not qualify for hedge accounting.
- Provisional concentrate sales generated negative price adjustments of $5.7 million in the quarter and $8.7 million in the first half, partly offset by the forward-contract gains. A 1% change in prices for exposed concentrate metals would affect value by approximately $0.5 million, before considering hedges.
- The first-half effective tax result included a $7.7 million discrete benefit from reducing the deferred-tax-asset valuation allowance in the first quarter. A $6.4 million deferred tax provision was recognized in the second quarter as deferred tax assets were utilized.
- Accrued reclamation, closure and environmental liabilities totaled $127.8 million. The company paid $5.3 million in May 2010 for an EPA invoice related to the Bunker Hill Superfund Site.
- For Coeur d’Alene Basin environmental claims, the company accrued $65.6 million, the low end of an estimated $65.6 million to $93.6 million range for remediation and past response costs. Natural-resource-damage claims could not be estimated; plaintiffs have stated potential claims in a range of $2.0 billion to $3.4 billion. The company warned that adverse developments could materially affect financial results or condition.
- Other contingencies include Bunker Hill remediation, insurance coverage litigation, water-permit compliance at Lucky Friday, Superfund inquiries involving former CoCa operations, and a guaranty capped at $2.5 million relating to the San Juan Silver project.
- Management stated that there were no material changes to the risk factors disclosed in the 2009 Form 10-K. Key ongoing risks include volatile metal prices, provisional pricing, environmental liabilities, reserve estimates, operating costs, project funding and litigation outcomes.
Important Facts for Investors to Verify
- Whether higher metal prices and by-product credits continue to offset lower silver grades, production variability and operating-cost inflation.
- The timing, cost and financing plan for the Lucky Friday internal shaft project.
- Progress and potential liability in the Coeur d’Alene Basin and Bunker Hill environmental proceedings, including exposure beyond recorded accruals.
- The sustainability of cash generation after increased exploration and capital spending.
- The effect of provisional concentrate pricing and base-metal derivatives on future revenue and earnings volatility.
- Future dilution from mandatory convertible preferred stock, outstanding warrants and equity-based compensation.