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HL > SEC Filings for HL > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for HECLA MINING CO/DE/

Form 10-Q for HECLA MINING CO/DE/


6-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this Form 10-Q, including in Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, results of litigation, prospects and opportunities, including reserves and other mineralization. We have tried to identify these forward-looking statements by using words such as "may," "will," "expect," "anticipate," "believe," "intend," "feel," "plan," "estimate," "project," "forecast" and similar expressions. These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

These risks, uncertainties and other factors include, but are not limited to, those set forth under Part I, Item 1A - Business - Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2013. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Hecla Mining Company and its subsidiaries have provided precious and base metals to the U.S. and worldwide since 1891. We discover, acquire, develop, and produce silver, gold, lead and zinc.

We produce lead, zinc and bulk concentrates, which we sell to custom smelters, and unrefined bullion bars (dorι) containing gold and silver, which are further refined before sale to precious metals traders. We are organized and managed into three segments that encompass our operating units: the Greens Creek, Lucky Friday, and Casa Berardi. The map below shows the locations of our operating units and our exploration and pre-development projects, as well as our corporate offices located in Coeur d'Alene, Idaho and Vancouver, British Columbia.


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Our current business strategy is to focus our financial and human resources in the following areas:

• operating our properties safely, in an environmentally responsible manner, and cost-effectively;

• optimizing and improving operations at our Casa Berardi unit, which, along with other mineral interests, was obtained as a result of the acquisition of Aurizon Mines Ltd. ("Aurizon") as discussed further below;

• expanding our reserves and production capacity at our operating properties;

• maintaining and investing in exploration and pre-development projects in the vicinities of five mining districts we believe to be under-explored and under-invested: North Idaho's Silver Valley in the historic Coeur d'Alene Mining District; our Greens Creek unit on Alaska's Admiralty Island located near Juneau; the silver-producing district near Durango, Mexico; the Abitibi region of north-western Quebec, Canada; and the Creede district of Southwestern Colorado; and

• continuing to seek opportunities to acquire and invest in mining properties and companies. Examples include our acquisition of Aurizon and the Monte Cristo property in Nevada and investments in Dolly Varden Silver Corporation, Canamex Resources Corp., Brixton Metals Corporation, and Typhoon Exploration Inc. in 2012 and 2013.

A number of key factors may impact the execution of our strategy, including regulatory issues and metals prices. Metals prices can be very volatile. As discussed in the Critical Accounting Estimates section below, metals prices are influenced by a number of factors beyond our control. Average market prices of silver, gold, and lead in the first three months of 2014 were lower than their levels from the comparable period last year, while average zinc prices were substantially the same compared to the first quarter of 2013, as illustrated by the table in Results of Operations below. We believe current global economic and industrial trends could result in demand growth for the metals we produce. However, prices have been volatile over the last five years and there can be no assurance that current prices will continue.


On June 1, 2013, we completed the acquisition of all of the issued and outstanding common shares of Aurizon for total consideration of CAD$740.8 million (US$714.5 million). The acquisition gave us 100% ownership of the producing Casa Berardi gold mine, along with interests in various gold exploration properties in the Abitibi region of north-western Quebec, Canada. The acquisition has significantly increased our gold production and gives us ownership of an operating gold mine with significant gold reserves, and provides access to a large land package with known mineralization. Nonetheless, we are faced with the challenge of continuing the integration of, and the operating responsibility for, Casa Berardi and other Aurizon projects. In addition, as further discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk, the acquisition has increased our exposure to risks associated with exchange fluctuations between the U.S. dollar and Canadian dollar. The acquisition was partially funded by $490 million in net proceeds from our issuance of Senior Notes in April 2013 (see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited)). As discussed in the Financial Liquidity and Capital Resources section below, we believe that we will be able to meet the obligations associated with the acquisition of Aurizon and additional debt; however, a number of factors could impact our ability to meet the debt obligations and fund our other projects.

As further discussed in the Lucky Friday Segment section below, we are in the process of constructing an internal shaft at the Lucky Friday mine ("#4 Shaft"), which, we believe, will significantly increase production and extend the life of the mine. The #4 Shaft project will involve significant additional capital costs during the periods leading up to its expected completion date in 2016. Although we believe that our current capital resources will allow us to complete the #4 Shaft project, there are a number of factors that could affect its completion.

We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; involving employees in the establishment of safety standards; and participating in the National Mining Association's CORESafety program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. See Part I, Item 1A. Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2013 and the Lucky Friday Segment section below for information on accidents and other events that impacted operations at our Lucky Friday unit. We work with the Mine Safety and Health Administration ("MSHA") to address issues outlined in the investigations of these incidents and continue to evaluate our safety practices.

Another challenge is the risk associated with environmental litigation and ongoing reclamation activities. As described in Part I, Item 1A. Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2013 and Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited), it is possible that our estimate of these liabilities (and our ability to estimate liabilities in general) may change in the future, affecting our strategic plans. We are involved in various environmental legal matters with no assurance that the estimate of our environmental liabilities, liquidity needs, or strategic plans will not be significantly impacted as a result of these matters or new matters that may arise. We strive to ensure that our activities are conducted in compliance with applicable laws and regulations and attempt to resolve environmental litigation on as favorable terms as possible.

Results of Operations



Sales of products by metal for the three-month periods ended March 31, 2014 and
2013 were as follows:



                                       Three Months Ended
                                            March 31,
(in thousands)                          2014          2013
Silver                               $   43,883     $ 45,995
Gold                                     57,085       16,186
Lead                                     14,858        9,303
Zinc                                     24,277       14,965
Less: Smelter and refining charges      (14,316 )     (9,999 )
Sales of products                    $  125,787     $ 76,450


For the first quarter of 2014, we recorded income applicable to common stockholders of $11.5 million ($0.03 per basic common share), compared to $11.0 million ($0.04 per basic common share) during the first quarter of 2013. The following factors led to the results for the first three months of 2014 compared to the same period in 2013:

• Decreased average silver, gold, and lead prices for the first quarter of 2014 compared to the same period in 2013. Average zinc prices were substantially the same compared to the same period in the prior year.

                                             Three months ended March 31,
                                              2014               2013
Silver - London PM Fix ($/ounce)          $      20.49       $      30.08
         Realized price per ounce         $      20.04       $      28.86
Gold -   London PM Fix ($/ounce)          $      1,294       $      1,630
         Realized price per ounce         $      1,298       $      1,620
Lead -   LME Final Cash Buyer ($/pound)   $       0.95       $       1.04
         Realized price per pound         $       0.98       $       1.07
Zinc -   LME Final Cash Buyer ($/pound)   $       0.92       $       0.92
         Realized price per pound         $       0.90       $       0.93

Average realized prices differ from average market prices primarily because concentrate sales are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices. Due to the time elapsed between shipment of concentrates and final settlement with the smelters, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metal prices each period through final settlement. For the first quarter of 2014, we recorded net negative price adjustments to provisional settlements of $0.7 million compared to net negative price adjustments to provisional settlements of $2.7 million in the first quarter of 2013. The price adjustments related to zinc and lead contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period. For the first quarter of 2014, the price adjustments related to silver and gold contained in our concentrate shipments were also partially offset by gains and losses on forward contracts for those metals, as we began utilization of forward contracts for those metals in July 2013 (see Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information). The gains and losses on these contracts are included in revenues and impact the realized prices for silver, gold, lead and zinc. Realized prices are calculated by dividing gross revenues for each metal (which include the price adjustments and gains and losses on the forward contracts discussed above) by the payable quantities of each metal included in concentrate and dorι shipped during the period.

• Decreased gross profit at our Greens Creek unit in the first quarter of 2014 by $16.1 million compared to the first quarter of 2013. This was partially offset by increased gross profit at our Lucky Friday unit by $7.0 million and gross profit of $5.7 million in the first quarter of 2014 at our Casa Berardi unit acquired in June 2013. See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment sections below.

• A net gain on base metal derivative contracts of $9.5 million in the first quarter of 2014 compared to a gain of $21.5 million in the same period of 2013.

• Interest expense, net of amount capitalized, of $6.8 million in the first quarter of 2014 compared to $0.7 million in the first quarter of 2013. The increase is due to the issuance of Senior Notes in April 2013, with the net proceeds used to partially fund the acquisition of Aurizon (see Notes 9 of Notes to Condensed Consolidated Financial Statements (Unaudited)).

Other significant variances affecting the comparison of our income applicable to common stockholders for the first quarter of 2014 to the same period in 2013 were as follows:

• Exploration and pre-development expense decreased to $4.6 million in the first quarter of 2014 from $11.3 million in the same period in 2013 as part of a plan to scale down discretionary expenditures to address the recent reduction in metals prices. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves.

• $5.3 million in costs in the first quarter of 2013 related to the acquisition of Aurizon, which was completed on June 1, 2013.

• A net foreign exchange gain in the first quarter of 2014 of $4.1 million versus a net loss of $0.1 million in the same period of 2013, as the acquisition of Aurizon has resulted in increased exposure to exchange fluctuations between the U.S. dollar and Canadian dollar.


• An income tax provision of $3.8 million in the first quarter of 2014 compared to an income tax provision of $7.4 million in the first quarter of 2013, with the variance due to a reduction in the effective tax rate to 25% in the first quarter of 2014 from 40% in the same period of 2013. See the Corporate Matters section below for more information.

• $1.5 million in suspension-related costs at our Lucky Friday unit, including $0.6 million in depreciation, depletion, and amortization, in the first quarter of 2013. The suspension-related costs for the first quarter of 2013 are net of a $1.5 million credit recognized in that period for business interruption insurance proceeds received in April 2013. As discussed further in The Lucky Friday Segment section below, production resumed at the Lucky Friday in February 2013.

The Greens Creek Segment



Dollars are in thousands (except per ounce and per ton
amounts)                                                     Three months ended March 31,
                                                                2014                2013
Sales                                                      $        63,596       $    72,649
Cost of sales and other direct production costs                    (36,737 )         (32,032 )
Depreciation, depletion and amortization                           (15,026 )         (12,679 )
Gross profit                                               $        11,833       $    27,938
Tons of ore milled                                                 202,715           197,823
Production:
Silver (ounces)                                                  1,787,137         1,780,524
Gold (ounces)                                                       15,009            13,689
Zinc (tons)                                                         15,041            14,072
Lead (tons)                                                          4,825             4,835
Payable metal quantities sold:
Silver (ounces)                                                  1,545,623         1,493,297
Gold (ounces)                                                       11,509             9,992
Zinc (tons)                                                         12,108             7,885
Lead (tons)                                                          3,623             3,800
Ore grades:
Silver ounces per ton                                                12.44             12.74
Gold ounces per ton                                                   0.12              0.11
Zinc percent                                                          8.57              8.40
Lead percent                                                          3.14              3.32
Mining cost per ton                                        $         66.89       $     72.14
Milling cost per ton                                       $         27.51       $     37.70
Cash Cost, After By-product Credits, Per Silver Ounce
(1)                                                        $          1.58       $      5.02

(1) A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

The $16.1 million decrease in gross profit during the first quarter of 2014 compared to the same 2013 period was primarily the result of significantly lower average prices for silver, gold, and lead, despite the overall sales volume being higher. Lower silver and lead ore grades and higher staffing levels, partially offset by higher zinc grades also impacted gross profit. In addition, gross profit at Greens Creek was impacted by negative price adjustments to revenues of $0.4 million for the first quarter of 2014 compared to negative price adjustments of $2.7 million for the first quarter of 2013. Price adjustments to revenues result from changes in metals prices between transfer of title of concentrates to buyers and final settlements during the period. The price adjustments related to zinc and lead contained in concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period. The price adjustments related to silver and gold were also offset by gains and losses on forward contracts in the first quarter of 2014, as we initiated a forward contract program for those metals in July 2013 (see Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information). The price adjustments and gains and losses on forward contacts discussed above are included in sales.


Mining and milling costs per ton decreased by 7% and 27%, respectively, in the first quarter of 2014 compared to the same period in 2013. The decrease in milling costs was primarily the result of higher availability of less expensive hydroelectric power, the result of higher precipitation levels in Southeastern Alaska. When weather conditions are favorable to maintain lake water levels, the mine relies less on more expensive diesel generated power. Both mining and milling costs were impacted by a decrease in labor costs despite higher staffing; a result of lower medical costs due to refunds related to medical claims in 2013 and lower hourly labor costs.

Depreciation, depletion and amortization expense was 19% more in the first quarter of 2014 compared to the same 2013 period, due primarily to higher production as described above, as the majority of depreciation is calculated on a units-of-production basis.

The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, Per Silver Ounce for the first quarter of 2014 compared to the same period of 2013:

[[Image Removed]]

As set forth above, Cash Cost, After By-product Credits, per Silver Ounce in the first quarter of 2014 was $1.58, consisting of $26.08 of Cash Cost, Before By-product Credits, per Silver Ounce and $24.50 per ounce of by-product credits, compared to $5.02 in 2013, consisting of $30.27 of Cash Cost, Before By-product Credits, per Silver Ounce and $25.25 per ounce of by-product credits. The decrease in Cash Cost, After By-product Credits, per Silver Ounce was the result of lower mining, milling and treatment costs and slightly lower freight and other costs.

Mining and milling cost per ounce decreased in the first quarter of 2014 compared to 2013 due to a decrease in power and labor costs.

Other cash costs per ounce for the first quarter of 2014 were lower compared to 2013 due to the effect of higher silver production and lower mine license tax.


Treatment costs were lower in the first quarter of 2014 compared to 2013 as a result of lower silver prices, as treatment costs include the value of silver not payable to us through the smelting process.

By-product credits were slightly lower in the first quarter of 2014 compared to 2013 due to lower lead ore grades and lower lead prices. The difference between what we report as "production" and "payable metal quantities sold" is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually payable by our smelter customers according to the terms of the smelter contracts. Differences can also arise from inventory changes incidental to shipping schedules. The increase in payable quantities sold for the first quarter of 2014 compared to the same period in 2013 is due to the timing of concentrate shipments and increased production during the 2014 period.

While revenue from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product of the Greens Creek unit is appropriate because:

• silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;

• we have historically presented Greens Creek as a producer primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;

• metallurgical treatment maximizes silver recovery;

• the Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and

• in most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery.

Likewise, we believe the identification of gold, lead and zinc as by-product credits is appropriate because of their lower economic value compared to silver and due to the fact that silver is the primary product we intend to produce. In addition, we do not receive revenue from any single by-product metal to warrant classification of such as a co-product.

We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce.

In the fourth quarter of 2012, we updated our asset retirement obligation ("ARO") at Greens Creek to reflect a preliminary revised reclamation and closure plan having estimated undiscounted costs of approximately $73.9 million, an increase from the $53.4 million in the previous plan. A Record of Decision was completed in late 2013 for proposed expansion of tailings capacity. In addition, in early 2014 we were engaged in negotiations with the U.S. Forest Service and state agencies on their proposed revisions to our previously-submitted reclamation and closure plan. In the first quarter of 2014, we updated our ARO at Greens Creek to reflect a revised reclamation and closure plan having estimated undiscounted costs of approximately $102.7 million, an increase from the $73.9 million in the previous plan, resulting in an increase to the ARO asset and liability of $8.0 million after discounting the estimated costs to present value. As part of the revised closure plan, we will be required to increase our $30 million reclamation bond and are currently evaluating bonding options. The increase in required bonding will be a material amount, and there can be no assurance that this bonding capacity will be available to us.


The Lucky Friday Segment



Dollars are in thousands (except per ounce and per ton
amounts)                                                      Three Months Ended March 31,
                                                                2014                 2013
Sales                                                      $       20,096       $        3,801
Cost of sales and other direct production costs                   (13,196 )             (4,794 )
Depreciation, depletion and amortization                           (2,196 )             (1,328 )
Gross profit (loss)                                        $        4,704       $       (2,321 )
Tons of ore milled                                                 79,089               13,926
Production:
Silver (ounces)                                                   699,605              120,492
Lead (tons)                                                         4,810                  706
Zinc (tons)                                                         2,050                  200
Payable metal quantities sold:
Silver (ounces)                                                   639,017              100,452
Lead (tons)                                                         3,957                  557
Zinc (tons)                                                         1,395                  150
Ore grades:
Silver ounces per ton                                                9.38                 9.45
Lead percent                                                         6.49                 5.71
Zinc percent                                                         3.00                 2.19
Mining cost per ton                                        $        80.99               122.49
Milling cost per ton                                       $        20.59                58.76
Cash Cost, After By-product Credits, Per Silver Ounce
(1)                                                        $         9.60       $        36.55

(1) A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, . . .

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