Welcome to the Crystallex HUB on AGORACOM
Crystallex International Corporation is a Canadian-based gold company with a successful record of developing and operating gold mines in Venezuela and elsewhere in South America
Message: hugo......take note....lose the ego and do whats right...
the rest of the world is saying it's better to be out of venezuela than to be tied to venezuela....regardless of your precious resources....it's not too late to change....please listen hugo...
10-K: HECLA MINING CO/DE/
Last update: 2:27 p.m. EST March 2, 2009
(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Established in 1891 in northern Idaho's Silver Valley, Hecla Mining Company has long been well known in the mining world and financial markets as a quality producer of silver and gold. Headquartered in Coeur d'Alene, Idaho, this international, NYSE-traded company is 118 years old. Our production profile includes:
Silver, gold, lead, and zinc contained in concentrates shipped to various smelters
Silver and gold dore
Our operating properties and exploration interests are located in jurisdictions with relatively low political and economic risk in the United States and Mexico, and are contained in historically successful mining districts. We have three business segments for financial reporting purposes: the Greens Creek operating unit on Admiralty Island in Alaska USA, the Lucky Friday operating unit in Idaho USA, and the San Sebastian exploration unit in Durango, Mexico.
Our operating and strategic framework is based on expanding our production and locating and developing new resource potential. To implement this framework in 2008, we
Acquired the remaining 70.3% interest of the Greens Creek Mine near Juneau, Alaska, so that we now control 100% of the world's fifth largest silver mine and have almost doubled our annual silver production.
Acquired the right to earn in to a 70% joint venture interest in a land package in one of Colorado's most prolific silver mining districts.
Acquired substantially all of the assets of Independence Lead Mines, thus consolidating 100% of the future profits of the Lucky Friday mine near Mullan, Idaho.
Sold our subsidiaries engaged in Venezuelan mining operations.
Following the acquisitions in the U.S. and divestiture of our Venezuelan interests, we believe we are positioned as one of the lowest-cost, lowest-risk producers of precious metals.
Subsequent to the acquisitions discussed above we, like many companies, were affected by the global financial crisis. After opening the year at $14.93 per ounce, silver rose as high as $20.92 in the second quarter, but fell at one point as low as $8.88 in the fourth quarter. The same volatility affected our important by-products as well, with lead and zinc at the end of the fourth quarter selling for approximately one-third of their high points in the first quarter. The economic downturn affected not only our earnings, but also our stock price, which fell from its one-day high point of $13.14 in the second quarter to its one-day low of $0.99 in the fourth quarter, rebounding to $2.80 at the end of the year. With a high level of volatility in both our earnings and share price, our ability to raise capital to retire debt was affected.
Nevertheless, of the total $758.5 million purchase price of Greens Creek, we had just $162 million in debt outstanding between our bridge and term loan credit facilities at year-end. We extended, to February 2009, the final $40 million payment of the bridge loan and rescheduled all term loan payments initially scheduled for 2008 and 2009 totaling $121.7 million to 2010 and 2011.
We increased our production of silver to 8.7 million ounces in 2008, up from 5.6 million ounces in 2007. Production of lead and zinc, important by-products at our Lucky Friday and Greens Creek mines, also increased in 2008, with production of lead higher by 43% and zinc by 131% due to our acquisition of the remaining interest in Greens Creek. However, gold production declined in 2008 compared to 2007. While the Greens Creek acquisition increased domestic gold production, this increase was more than offset by the sale of our mining interests in Venezuela, and we no longer operate a primary gold mine as a result of the sale.
Revenues increased by 25% from 2007 to 2008, primarily as a result of the acquisition of the remaining interest in Greens Creek, in spite of lower lead and zinc prices.
We reported a loss of $0.57 in 2008 compared to earnings in 2007 of $0.43 per diluted share. Gross profit from operations declined from $77.8 million in 2007 to $17.9 million in 2008 as a result of lower by-product lead and zinc prices, higher operating costs, and valuation of in-process inventory associated with the Greens Creek Joint Venture acquisition. Our commitment to exploration and pre-development in 2008 was $5.5 million higher than in 2007; however, at the same time,
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we reduced general and administrative expense by $1.3 million. We recorded a gain of $7.7 million on sale of investments versus a gain of $63 million on asset sales in 2007, and while in 2007 we recognized a benefit from a decreased valuation allowance on deferred tax assets, we have recorded a provision in 2008 as a result of declining metals prices. Further affecting earnings per common share, dividends on preferred shares totaled $13.6 million in 2008, up from $1.0 million in 2007 as a result of our December 2007 issuance of 2,012,500 shares of Mandatory Convertible Preferred Stock.
The factors driving metals prices are beyond our control and are difficult to predict. As noted above, prices were highly volatile in 2008. Average prices in 2008 compared to those in 2007 and 2006 are illustrated in the Results of Operations section below.
Key Issues
Our strategy to increase production and expand our proven and probable reserves will be achieved through development and exploration, as well as by future acquisitions. Our strategic plan requires that we overcome several pervasive challenges and risks inherent in conducting mining, development, exploration and metal sales at multiple locations.
One such risk involves metals prices. While the metals mining industry enjoyed continued strength in metals prices from 2006 through mid-2008, we have no control over prices. As noted above, silver, lead and zinc prices in 2008 were highly volatile, and ended the year significantly lower than in the first and second quarters. We must make our strategic plans in the context of significant uncertainty about future revenues, which is a daunting challenge to an industry for which new opportunities can require many years and substantial cost from discovery to production. We approach this challenge by investing exploration and capital in districts with an established history of success, and in managing our operations in a manner that seeks to mitigate the effects of lower prices.
The recent unprecedented volatility in global financial markets poses a significant challenge to our ability to access credit and equity markets and to sell our products at a profit. While we have seen our share price rebound from its lowest levels in 2008 and have been successful in marketing our equity, we have deferred certain loan payments to 2010 and 2011 and the terms of our credit facilities could restrict our current and future operations.
Another challenge is the risk associated with environmental litigation and ongoing reclamation activities. As described in Note 8 of Notes to Consolidated Financial Statements, it is possible that our estimate of these liabilities may change in the future, affecting our strategic plans. In accordance with our environmental policy, our operating activities will be conducted in a manner that attempts to minimize risks to public health and safety. We attempt to design and manage our projects in an attempt to reasonably minimize risk and negative effects on the environment. We intend to continue to strive to ensure that our activities are conducted in compliance with applicable laws and regulations.
Reserve estimation is a major risk inherent in mining. Our reserve estimates, which drive our mining and investment plans and many of our costs, may change based on economic factors and actual production experience. Until ore is actually mined and processed, the volumes and grades of our reserves must be considered as estimates. Our reserves are depleted as we mine. Reserves can also change as a result of changes in economic and operating assumptions.
Results of Operations
For the year ended December 31, 2008, we reported a loss applicable to common shareholders of $80.2 million compared to income applicable to common shareholders of $52.2 million in 2007 and $68.6 million in 2006. The following factors led to the reduced results for the year ended December 31, 2008 compared to 2007 and 2006:
Decreased gross profit at our Greens Creek and Lucky Friday units (see the Greens Creek Segment and Lucky Friday Segment sections below for further discussion of operating results).
A $17.4 million loss from discontinued operations at the La Camorra unit for the year ended December 31, 2008 compared to a loss from discontinued operations of $15.0 million in 2007 and income from discontinued operations of $4.3 million in 2006 (see the Discontinued Operations - La Camorra Unit section below).
A loss on the sale of our interests in Venezuela, net of related income tax effect, of $12.0 million in 2008 (see Note 13 of Notes to Consolidated Financial Statements for more information).
The sale of our interest in the Hollister Development Block gold exploration project in April 2007, which resulted in a pre-tax gain of $63.1 million reported in the second quarter of 2007.
The sale of our investment in Alamos Gold, Inc. in January 2006 for $57.4 million in cash proceeds generating a pre-tax gain of $36.4 million.
The sale of our Noche Buena gold exploration property in Mexico during April 2006 generating a $4.4 million pre-tax gain.
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Interest expense of $19.6 million for the year ended December 31, 2008 in connection with debt incurred for the purchase of the remaining 70.3% interest in the Greens Creek joint venture. See Note 7 of Notes to the Consolidated Financial Statements for more information on our debt facilities.
Valuation allowance adjustments to our deferred tax asset balances resulted in a $3.6 million net income tax provision recognized in 2008 compared to $10.5 million and $11.8 million income tax benefits recognized in 2007 and 2006 resulting from valuation allowance adjustments. We recorded a net increase to our deferred tax assets in 2008 by approximately $16.2 million due the addition of a $23 million net deferred tax asset relating to the purchase of the remaining 70.3% of Greens Creek, partially offset by reductions of $3.2 million due to the sale of our Venezuelan operations and $3.6 million due a decrease in the estimated future utilization of deferred tax assets (see Note 6 of Notes to the Consolidated Financial Statements for further discussion).
Preferred stock dividends of $13.6 million for the year ended December 31, 2008 compared to $1.0 million and $0.6 million, respectively, for 2007 and 2006, due to the issuance of 2,012,500 shares of Mandatory Convertible Preferred Stock in December 2007. The net proceeds from the preferred stock issuance were utilized for the purchase of the remaining interest in the Greens Creek joint venture.
Decreased average prices for zinc produced at our operations in 2008 compared to 2007 and 2006, and decreased average prices for lead produced at our operations in 2008 compared to 2007, as illustrated by the following table:
December 31,
2008 2007 2006
Silver - London PM Fix ($/ounce) $ 15.02 $ 13.39 $ 11.57
Realized price per ounce $ 14.40 $ 13.78 $ 12.10
Gold - London PM Fix ($/ounce) $ 872 $ 697 $ 604
Realized price per ounce $ 865 $ 731 $ 615
Lead - LME Final Cash Buyer ($/pound) $ 0.95 $ 1.17 $ 0.58
Realized price per pound $ 0.83 $ 1.23 $ 0.63
Zinc - LME Final Cash Buyer ($/pound) $ 0.85 $ 1.47 $ 1.49
Realized price per pound $ 0.71 $ 1.24 $ 1.73
The differences between realized metal prices and average market prices are due to the difference between metal prices upon transfer of title of concentrates to the buyer and final settlement. For 2008, we reported negative adjustments to provisional settlements of $25.7 million compared to negative adjustments of to provisional settlements of $3.1 million in 2007 and positive adjustments of $6.5 million in 2006.
Other significant variances affecting the comparison of our 2008 operating results to results for 2007 and 2006 were as follows:
An increase of $44.7 million in 2007 in our estimated liabilities for environmental remediation in Idaho's Coeur d'Alene Basin and the Bunker Hill Superfund Site. During the second quarter of 2007, we finalized a proposed multi-year clean-up plan for the upper portion of the Coeur d'Alene Basin, together with an estimate of related costs to implement the plan. Based on that work and a reassessment of our other potential liabilities in the Basin, we increased our accrual for remediation in the Basin by $42 million. We also accrued an additional $2.7 million for the remaining Bunker Hill Superfund Site work. For additional discussion, see Bunker Hill Superfund Site and Coeur d'Alene River Basin Environmental Claims in Note 8 of Notes to the Consolidated Financial Statements.
We committed to a donation of our common stock valued at $5.1 million in 2007 for the creation of Hecla Charitable Foundation, an organization that will fund charitable contributions in the communities in which Hecla holds mining interests.
Sale of our 8.2 million shares of Great Basin Gold stock in the second quarter of 2008, resulting in an $8.1 million gain, partially offset by $0.4 million in previously unrealized losses recorded in the fourth quarter of 2008 for the impairment of securities held at December 31, 2008.
Differences in the average prices for silver and gold produced at our operations, as illustrated by the table above.
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The Greens Creek Segment
Below is a comparison of the operating results and key production
statistics of our Greens Creek segment, which reflects our 29.7% ownership share
through April 16, 2008 and our 100% ownership thereafter. See Note 19 of Notes
to Consolidated Financial Statements for further discussion of the acquisition
of the 70.3% interest in Greens Creek. Dollars are presented in thousands,
except for per ton and per ounce amounts.
Years Ended December 31,
2008 2007 2006
Sales $ 130,760 $ 72,726 $ 69,208
Cost of sales and other direct production costs $ (100,197 ) $ (27,753 ) $ (24,125 )
Depreciation, depletion and amortization $ (30,022 ) $ (8,440 ) $ (8,191 )
Gross Profit $ 541 $ 36,533 $ 36,892
Tons of ore milled 598,931 217,691 217,676
Silver ounces produced 5,829,253 2,570,701 2,636,083
Gold ounces produced 54,650 20,218 18,713
Zinc tons produced 52,055 18,612 17,670
Lead tons produced 16,630 6,252 6,242
Payable silver ounces sold 5,143,758 2,240,092 2,463,685
Payable gold ounces sold 44,977 15,543 16,502
Payable zinc tons sold 39,433 14,187 12,620
Payable lead tons sold 13,877 4,748 5,297
Silver ounces per ton 13.69 15.45 15.78
Gold ounces per ton 0.14 0.14 0.13
Zinc percent 10.13 9.67 9.36
Lead percent 3.59 3.66 3.66
Total cash cost per silver ounce (1) $ 3.29 $ (5.27 ) $ (3.47 )
(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 in Reconciliation of Total Cash Costs to Costs (non-GAAP) of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).
The decrease in gross profit during 2008 compared to 2007 and 2006 was primarily the result of the following factors:
Higher cost of sales, as a percentage of sales, which increased to 77% in 2008 compared to 38% in 2007 and 35% in 2006. The higher cost of sales in 2008 is primarily due to increased costs of diesel fuel and other consumables, and an adjustment for the fair value of the finished and in-process product inventory acquired upon purchase of the 70.3% ownership interest. Upon the sale of the acquired inventory, the fair market value was expensed, which increased cost of sales and decreased gross profit margin in 2008.
Higher depreciation, depletion and amortization expense, as a percentage of sales, as a result of the fair market valuation of the acquired 70.3% share of property, plant, equipment and mineral interests at the acquisition date.
Lower silver ore grades in 2008 compared to 2007 and 2006.
A decline in average zinc and lead prices. Average zinc prices for 2008 were lower than those for 2007 and 2006, while average lead prices have declined from their 2007 levels.
Negative price adjustments to revenues of $22.9 million in 2008 as a result of declines in metal prices between transfer of title of concentrates to buyers and final settlements during the year.
The Greens Creek operation is partially powered by diesel generators, and production costs have been significantly affected by increasing fuel prices in 2007 and 2008. Infrastructure has been installed that allows hydroelectric power to be supplied to Greens Creek by Alaska Electric Light and Power Company ("AEL&P"), via a submarine cable from North Douglas Island, near Juneau, to Admiralty Island, where Greens Creek is located. It is anticipated that this project will reduce production costs at Greens Creek. AEL&P had agreed to supply surplus power to Greens Creek; however, supply has been hampered by low reservoir water supplies and high power demand in the Juneau vicinity.
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The $8.56 increase in total cash cost per silver ounce in 2008 compared to 2007 is due to lower zinc and lead prices, lower silver ore grades and increased operating costs. The $1.80 improvement in total cash costs per silver ounce in 2007 compared to 2006 is attributable to increased by-product credits, as 2007 lead and gold prices exceeded prices during the same 2006 period, partially offset by higher production costs. While value from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product 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.
We periodically review our proven and probable reserves 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.
The Lucky Friday Segment
The following is a comparison of the operating results and key production
statistics of our Lucky Friday segment (dollars are in thousands, except per
ounce amounts):
Years Ended December 31,
2008 2007 2006
Sales $ 61,895 $ 80,976 $ 52,422
Cost of sales and other direct production costs $ (39,392 ) $ (35,840 ) $ (26,936 )
Depreciation, depletion and amortization $ (5,185 ) $ (3,883 ) $ (3,565 )
Gross profit $ 17,318 $ 41,253 $ 21,921
Tons of ore milled 317,777 323,659 276,393
Silver ounces produced 2,880,264 3,071,857 2,873,663
Lead tons produced 18,393 18,297 16,657
Zinc tons produced 9,386 8,009 6,537
Payable silver ounces sold 2,697,089 2,869,322 2,583,597
Payable lead tons sold 16,915 17,362 15,172
Payable zinc tons sold 6,299 5,076 4,146
Silver ounces per ton 9.70 10.27 11.34
Lead percent 6.23 6.12 6.57
Zinc percent 3.52 3.16 3.34
Total cash cost per silver ounce (1) $ 6.06 $ (0.75 ) $ 3.65
(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 Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).
The $23.9 million decrease in gross profit in 2008 compared to 2007 resulted primarily from lower average lead and zinc prices, higher operating costs, and silver ore grades that decreased by 6%. In addition, negative price adjustments to revenues of $2.8 million impacted results for 2008 due to declines in metals prices between transfer of title of concentrates to buyers and final settlement during the year. The increase in gross profit in 2007 compared to 2006 was due primarily to higher average silver and lead prices and increased production, partially offset by lower ore grades.
The increase in total cash costs per silver ounce in 2008 compared to 2007 and 2006 is attributed to lower silver ore grades, higher mining and milling costs, and declining lead and zinc prices. Mining at longer strike lengths at the Lucky Friday allowed us to take advantage of the high base metals prices experienced in 2007 and the first half of 2008 and the
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mill's ability to recover more zinc due to recent mill upgrades. This resulted in an economic benefit and allowed us to temporarily mine lower silver grade ore that was below anticipated life-of-mine reserve levels, which also delayed some production of metals included in the reserve to later periods. While value from lead and zinc is significant at the Lucky Friday, we believe that identification of silver as the primary product, with zinc and lead as by-products, 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;
the Lucky Friday unit is situated in a mining district long associated with silver production; and
the Lucky Friday unit generally utilizes selective mining methods to target silver production.
We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc and lead to be by-products of our silver production, the values of these metals offset operating costs.
The San Sebastian Segment
We reached the end of the known mine life on the Francine and Don Sergio veins at the San Sebastian unit located in Mexico during the fourth quarter of 2005. However, significant exploration efforts have continued during 2006, 2007, and 2008 at the Hugh Zone and other exploration targets located on or near the San Sebastian property, where we now hold 308 square miles of contiguous concessions. Concessions totaling 166 square miles were added to our land package at the San Sebastian segment during the first quarter of 2008. Additional exploration activity at the San Sebastian unit in 2007 and 2008 has included completion of initial drilling on a number of veins at our Rio Grande project, where our concession holdings cover approximately 5 square miles. We incurred $4.6 million in exploration expenses during 2008 at San Sebastian compared to $7.5 million in 2007 and $5.8 million in 2006. The San Sebastian mine and Velardeña mill have been on care-and-maintenance status as we continue exploration efforts. We are currently involved in litigation concerning our ownership of the Velardeña mill. We are negotiating with the plaintiff who has offered to purchase the mill from us. See the Mexico Litigation section of Note 8of Notes to Consolidated Financial Statements for more information.
Discontinued Operations - The La Camorra Unit
During the second quarter of 2008, we committed to a plan to sell all of the outstanding capital stock of El Callao Gold Mining Company ("El Callao") and Drake-Bering Holdings B.V. ("Drake-Bering"), our wholly owned subsidiaries holding our business and operations of the La Camorra Unit to Rusoro Mining, Ltd. ("Rusoro") for $20 million in cash and 3,595,781 shares of Rusoro common stock valued at $4.5 million at the time of the transaction. The transaction closed on July 8, 2008. Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of our Venezuelan operations have been reported in discontinued operations for all periods presented. See Note 13 of Notes to Consolidated Financial Statements for more information.
The following is a comparison of operating results and key production statistics for our discontinued Venezuelan operations, which included the La Camorra mine, a custom milling business and Mina Isidora (dollars are in thousands, except per ounce amounts):
Years Ended December 31,
2008 2007 2006
Sales $ 23,855 $ 68,920 $ 96,310
Cost of sales and other direct production costs (21,656 ) (52,212 ) (53,235 )
Depreciation, depletion and amortization (4,785 ) (14,557 ) (27,039 )
Gross profit $ (2,586 ) $ 2,151 $ 16,036
Tons of ore milled 25,516 142,927 236,460
. . .
Mar 02, 2009
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