Hecla Mining Company (HL)

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Hecla Mining NYSE:HL is a precious metals resource company involved in the extraction, processing and sale of silver, gold, lead and zinc in addition to mineral exploration. In the United States it is a top four silver producer that also has the distinction of being one of the most cost effective (2010 total cash cost (total direct & indirect operating costs) per ounce of silver was -$1.46. In 2008 total cash cost per ounce was $4.20 and in 2009 it lowered that even further to $1.91/oz making it one of the lowest cost producers). It has corporate offices in Vancouver, Canada and Idaho, USA (headquarters) and operates in the USA and Mexico. Operations (silver) are in Alaska (Green's Creek) and Idaho (Lucky Friday); exploration projects are in Colorado (San Juan) and New Mexico (San Sebastian). Though the company is 117 years old only in the last decade (significantly since 2008 because that's when the largest, Green's Creek was acquired,1996-2002 Lucky Friday had 2 producing mines, 2002 San Sebastian begins producing; before that time many of the properties were just exploration projects) has it started to produce at significant levels (previously it took a more balanced approach to exploration and ore processing/production). As of January 2011 only Green's Creek has proved reserves of silver or gold (16.6 million ounces of silver about 12% of 2P reserves), probable reserves were 122.96 million silver (847,400 oz for gold). Total silver production in 2010 was 10.566 million ounces (68.2% at Green's Creek, 31.8% at Lucky Friday) down 3.8% yoy, total gold production in 2010 was 68,838 ounces (all at Green's Creek) up 2.3% yoy.

Contents 1 Operations, production, reserves 1.1 Greens Creek 1.2 Lucky Friday 2 Projects 3 Business and Financials 3.1 2011 3.2 9M2010 3.3 Hedging program reduces cash flow fluctuations 4 Reserves and Resources by mine site 5 Trends and Forces 5.1 Positive pressures affecting silver and gold prices 6 Spring 2011 silver futures/option contracts moved to late June/July 7 Competition 8 References

As of the third quarter of 2010, the company was on track to spend $20 million on exploration activity, produce upwards of 11 million ounces of silver at a cash cost of -50 cents/oz.

In 2011 revenue was up 14% profit +208.6% to $151 million even though silver production declined 10% to 9.5m oz (2.5m in 4Q) and cash costs were up to 1.15/oz from -$1.76 in 2010.^[1]

Operations, production, reserves

In the first three months of 2010 silver production totalled 7.8 million ounces, 9.3% less than the same period in 2009 (8.6 million). Most of the decrease came from Greens Creek where production was 10.2% lower (to 5.3 million ounces). Greens Creek accounted for 68% of total silver production down from 68.6%.^[2]

On February 16, 2012 Hecla Mining updated its reserves and resources. 2011 was the sixth consecutive year the company's reserves and resources increased. 2P reserves +4% to 148 million ounces, resources +13% to 281 million ounces.^[3] Lucky Friday added 7 million oz of silver to reserves in addition to replacing 2011 production. Resource of gold now stands at 597,600 ounces (+33%), lead 1.47 million tons (+21%), zinc 1.05 million tons (+26%).

Greens Creek

Hecla Mining had a minority interest in the property (29.7%) since 1996, until April 2008 when it took over 2 former Rio Tinto subsidiaries which held the other 70.3% (cost of the acquisition was $750 million; as a result of those prior transactions three subsidiaries manage operations, Hecla Alaska (original interest of 29.7% was through them) and the two later acquired (later transformed into Hecla Greens Creek Mining Company). Through subsidiaries the company owns 100% of the silver, zinc, gold and lead property. In the near vicinity is environmentally protected land and so cooperation with the US Forest Service which leases it land, is important (the company had to obtain key mill site claims prior to initial operations). Because it's on an island the project includes a ship loading facility and ferry dock. Mine Specifics - it is an underground mine of a sulfide deposit (pyrite, sphalerite, galena). Federal royalties, imposed during a 1996 land exchange agreement (in which it received exploration licenses to 7,590 acres) are based on the value per ton of the ore mined and max out at 3% (depending on whether the value is over/under $120 a ton). The project's mill refines the ore into lead, zinc or gold; clients include smelters (which purchase the concentrates) and precious metals refiners. In early 2010 the site employed about 330 people.

For Rio Tinto the divesture of Green Creek signalled the beginning of a $15 billion asset divesture plan. The two subsidiaries acquried from Rio Tinto were Kennecott Greens Creek Mining Company and Kennecott Juneau Mining Company.^[4] In 2009 Greens Creek produced 7.46 million ounces of silver representing a 28.0% increases yoy. Gold (70,379 oz), zinc (70,379 tons) and lead (22,254) were all producing at rates more than three times higher than in 2007 (when the company's share was only 30%).^[5] Total production costs range from 7-9 dollars per ounce for silver.

Green's Creek exploration expenditures will be $7.0 million in 2012.

Lucky Friday

Underground silver, zinc and lead mine operated by the company since 1958 (meaning the company is well aware of its geography and potential). In 1991 the discovery of the Gold Hunter property within close proximity of where operations historically took place (Coeur d’Alene) extended the mine's operations (the original area/ore body mined was discontinued in 2001). Total ore processed is about 45% that of the largest (Greens Creek). The smelter used to process the minerals mined there is operated by Teck Resources. In 2009 the mine produced 3.53 million ounces of silver (22.6% increase yoy which is great considering production fell 6.2% the year before), 22,010 tons of lead (20% increases yoy) and 10,616 tons of zinc (13.1% increase yoy). 2P silver reserve replacement was at 0.5% in 2010 (up to 21.9 million ounces). In 2009 total production costs were about the same as at Greens Creek (around $8/oz) but that changed in 2010 when total production costs overall were down to $4.77/oz from $7.77/oz the year before.^[6]

Projects

San Juan, CO is a 70% owned project consisting of silver contained within veins that include amethyst. over 40 million ounces of silver is considered indicated/inferred. It was last operated in 1985 before closing due to low silver prices.

San Sebastian, Mexico - the land just outside of Durango, was purchased in 1999. The numerous high grade silver/gold veins feeding into the area as well as its history (as recently as 2006 it was producing over 2 million ounces annually) makes it a potentially lucrative venture.

Business and Financials

Financials key data (qtrly reports via g.finance)
USD $ mil	2011[3]	9M'10[2]	2009	2008	2007
Revenue	477.634	284.36	312.55	204.66	157.64
Oper.income	197.50	81.00	72.25	(25.73)	53.04
Earnings before taxes underlying	233.142	68.83	60.15	(33.37)	59.65
Net income	151.164	58.71	67.83	(37.17)	68.16
total assets	1,396.09	1,177.58	1,046.78	988.79	650.74
long trm debt	6.26	3.68	3.28	113.65	0
current debt	107.32	73.67	41.73	84.98	52.14
total op expenses	280.13	240.29	230.4	104.6
earnings/share	54c	18c	22c	(34)c	48c

2011

Net income was up 286% to $150.6 million. Cost per ounce of silver mined was $1.15 ($2.28 in the 4q) up from -$1.46 in 2010 (-$0.14 in 4q10).^[3] Though revenue and profits were up production (-10.25%) and sales (-13.25%) of silver were down. In 2011 Hecla sold 8,119,634 ounces of silver (down from 9,360,172), 43,942 ounces of gold (down from 68,838), 33,050 tons of lead (down from 40,434) and 53,901 tons of zinc (down from 62,851).

Hecla produced 9,483,676 oz silver (-10.2%), 56,818 oz gold (-17.5%), 39,150 tons of lead (-16.6%) and 73,355 tons of zinc (-12.4%). Hecla paid out a two cent per share dividend in each of the last two quarters of 2011, the only quarterly dividends ever paid out. Basic earnings per share was $0.54 ($0.47 when adjusted) up 285.7% from $0.14 in 2010. Diluted eps was slightly lower at $0.51 ($0.13 in 2010). Cash provided by operating activities was down 64.7% to $69.891 million.

9M2010

For the first three months of 2010 operating cash flow was 41.9 million (up 30%) on revenue of $115.3 million (up 122%), 70% of third quarter capital expenditure (capex) went to Lucky Friday and Greens Creek ($16.9 of 23.2 million) leaving exploration projects with only about US$6.9 million.

As of the third quarter of 2010, the company was on track to spend $20 million on exploration activity, produce upwards of 11 million ounces of silver at a cash cost of -50 cents/oz.

Due to the large contribution to revenue from silver (about 90%) and the fact that its main hedging program focuses on zinc and lead, silver prices have a big impact on revenue and earnings. Due to the present trend upwards in the commodity prices (2010-2011) Hecla's revenue should continue to record strong growth even when silver production doesn't change significantly (the opposite of that happened around 2008 and 2009 when silver prices were weaker but company production nearly tripled for every mineral type, overall revenue didn't grow as rapidly).

Hedging program reduces cash flow fluctuations

Hecla hedges against volatile commodity prices using its own product specific base metals hedge program. The program reduces risk by hedging 95% of current lead and zinc production and half of future production (2-3 years).^[2]

Reserves and Resources by mine site

Graph shows resources at the end of 2010, table shows data for 2009. Use both to determine changes over the year.

2009 mil oz[7]		Silver mil oz			Gold mil oz			Lead mil T			Zinc mil T
mil oz/tons	% share	2P	ind/infer	resources	2P	ind/infer	resources	2P	ind/infer	resources	2P	ind/infer	resources
Lucky Friday	100%	38.5879	140.2938	178.8817	0	0	0	0.2494	0.9117	1.1611	0.0812	0.4338	0.515
Greens Creek	100%	100.9733	31.1168	132.0901	0.8474	0.2707	1.1181	0.3033	0.0814	0.3847	0.8529	0.1998	1.0527
San Sebastien	100%	0	9.8162	9.8162	0	0.0143	0.0143	0	0.033	0.033	0	0.0499	0.0499
San Juan	70%	0	25.946	25.946	0	0	0	0	0.0362	0.0362	0	0.0286	0.0286
Total	na	139.5612	206.5428	346.104	0.8474	0.285	1.1324	0.5527	0.6123	1.615	0.9341	0.7121	1.6462

Although Lucky Friday is home to the company's only proved reserves, Greens Creek has about 19 times more silver resources (100 million versus 5.3 million). All projects combined account for only 10.3% of silver resources (as of early 2010). Greens Creek is also the site of 98.7% of the company's gold resource (just over one million ounces). The two largest operations are also home to over 90% of all lead and zinc.

In the three years leading up to 2010 Lucky Friday reserves and resources widened in terms of the volume they occupy (thickness) at different depths within the property (as illustrated by a transverse cross section), they were also graded at a higher level. In San Sebastian ore grade was 35% higher in the third quarter of 2010 (up to 14oz/T from 10.4oz/T). Total cash cost is estimated to be $4 per ounce (silver).^[2]

Trends and Forces

Positive pressures affecting silver and gold prices

Gold has few substitutes, many uses, and is seen as a hedge against inflationary pressures (which many international economies are vulnerable to due to economic uncertainty). Its decreasing supply to demand ratio provides much positive pressue on demand and price.^[8]

Silver's uses are rising with the introduction of new technologies. Even though its main source of consumption, photography uses has been waning rising demand for silver consuming technology like RFID tracking devices (tags production expected to double by 2017) could cause silver demand to increase.^[9] The gold to silver ratio has historically been much lower than at present, in times when commodity demand/price is highest the ratio has been lowest.

Spring 2011 silver futures/option contracts moved to late June/July

The move over to mid summer from spring for silver options contracts to end moved spot silver lower especially when compared to gold the price of which was propped up by heavy demand by central banks in Russia, Mexico and Thailand among others (Canada's BNN interview with a silver anaylist from New York), Russia's central bank purchased about 1 million ounces of gold in the first four months of 2011 up from over 400,000 in the second half of 2010; Russia's last major purchase was in May 2010 when it bought 1.1 million ounces of gold during the month which represented 16.6% of global production that month.^[10] Speculators short on silver should boost the price come late June/early July.

Competition

In 2010 silver production for its largest pure play-direct competitors was as follows: Pan American Silver:24.3 mil oz, Silvercorp Metals:4.6 mil oz, Silver Standard Resources:6.302 mil oz (up 48%), First Majestic Silver CP (FR):6.5 mil oz (up 62%) compared to Hecla Mining Company:10.566 mil oz (down); among diversified industry players Rio Tinto (RIO) was down 20% to 6.862 mil oz, BHP Billiton and Fresnillo led the industry at 45 and 38 million ounces respectively, Goldcorp (GG) was the largest silver producer among gold companies (23 million ounces).

References

1. ↑ Hecla Mining 2011 full results (February 21, 2012).
2. ↑ ^{2.0 2.1 2.2 2.3} Heclan 2010 Third Quarter Report (2010).
3. ↑ ^{3.0 3.1 3.2} Hecla Reports Record Silver Reserves & Resources and Advancement on Pre-Development Projects (February 16, 2012).
4. ↑ Rio Tinto reaches agreement to sell interest in Greens Creek mine for US$750 million (2008-02-12).
5. ↑ Hecla Mining Company Greens Creek Production. Retrieved on 2011-02-20.
6. ↑ Hecla Mining Company Overall Production and Reserves. Retrieved on 2011-03-05.
7. ↑ Hecla Mining 2009,2008,2007 Reserves Tables (2009-12-31).
8. ↑ Gold production in the world (2009).
9. ↑ New Uses Give Silver Reasons to Shine (2008-01-23).
10. ↑ Russia's Central Bank Purchases 1.1 Million Ounces of Gold in May