Hecla Mining: Solid 2010 But Settlement Risk Remains

| About: Hecla Mining (HL)

Hecla Mining (NYSE:HL) started in the famous Coeur D’Alene district of Idaho in 1891 and has grown to be the largest silver producer in the U.S. with 10 million ounces of silver mined annually.

During 2010, reserves grew to the highest level in the company’s history with 142 million ounces of Proven and Probable Reserves (P&P) and 248 million ounces of Measured, Indicated and Inferred (MII).

Also, 2010 revenues rose to $418.8 million while EPS was down for the year primarily on a provision for environmental matters which will be discussed below.

The balance sheet is strong with over $284 million in cash and no debt.

Silver production during 2010 totaled 10.6 million ounces at a negative total cash cost of $1.46 per ounce due to strong byproduct prices.

Silver production at the Lucky Friday camp totaled 3.36 million ounces for 2010, a slight decrease over the 3.5 million ounces mined in 2009 due to lower quality ore grades being accessed. Total cash costs at Lucky Friday, net of byproducts, were a $3.76 for 2010.

Lucky Friday held 42.3 million ounces P&P and 157.5 million ounces MII of silver at year end 2010.

There is further upside in the Lucky camp as a fourth shaft is currently being added. The Lucky Friday and Silver Valley deposits are a combined silver-zinc-Lead deposit, with zinc and lead being the primary byproducts. The drivers of the fourth shaft, which will go down to levels almost two miles below ground, are a 30% higher ore grade per ton and greater throughput. This will extend the mine life of Lucky Creek to 2030.

The Greens Creek Alaska mine is one of the highest grade and low cost mines in the world. Greens Creek has mined over 200 million ounces of silver over the last 20 years with a negative total cash cost of $4.61 per ounce. Currently, an underground mine is being developed to increase the deposit as well as additional infill drilling to enhance the 27 square mile land position upon which the deposit sits.

Silver production at the Greens Creek camp totaled 7.2 million ounces for 2010, a slight decrease over the 7.45 million ounces mined in 2009 due to lower quality ore grades being accessed. Total cash costs, net of byproducts, were a negative $3.90 for 2010.

At the end of 2010, P&P reserves at Greens Creek stood at 99.7 million ounces of silver and 757,000 ounces of gold. MII resources totaled 54.5 million ounces of silver and 436,000 ounces of gold.

Exploration is continuing in the San Juan, Colorado, and San Sebastian, Mexico, districts with the hopes of eventually bringing both camps into full production.

Hecla was supposed to report earnings on February 16 but postponed the earnings release due to ongoing negotiations regarding CERCLA litigation stemming from mining activity in the Coeur d’Alene region of Idaho. In the October 27, 2010, 10-Q filing Hecla mentions a possible "material event" due to uncertainties surrounding costs related to a cleanup plan although Hecla had accrued a minimum liability of $65.6 million as of September 30, 2010.

Recently an agreement was reached regarding Hecla’s liabilities regarding the Coeur region causing Hecla to increase the liability by $193.2 million to $262.2 million. While this removes some overhang from the stock with respect to potential liability the number is much higher than expected and according to the press release there are still some terms to be negotiated. It is hopeful that a final agreement will be reached by the end of the second quarter of 2011.

While the numbers represent an understanding between the various parties no single party has agreed to the final terms. The terms of the deal require a payment of $102 million in cash and $55.5 million in cash or stock within 30 days of the agreement being finalized. A $25 million payment is required 30 days after the first anniversary of the agreement. A $15 million dollar payment is required 30 days after the second anniversary.

Finally, $65.9 million is due in quarterly payments from the proceeds of the exercise of outstanding Series 1 and 3 warrants, with the balance due on August 2014.

While the recent move forward in terms of a litigation settlement regarding past mining activities will remove an overhang from the stock, Hecla is not out of the woods concerning the final agreement. No parties have formally agreed to the final terms and the proposed amounts represent an understanding with additional issues outstanding. As indicated so far the settlement will have a huge effect on the cash balance of Hecla making it more difficult for investors to share in rising revenues and profits.

Silver production for 2011 is expected to be flat over 2011 as well with upside limited to a rise in the price of silver and byproduct metals.

Hecla has some nice project extensions in the Lucky Friday and Greens Creek camps. Both projects show significant upside potential and give Hecla the ability to expand internationally by leveraging the cash flow from both projects.

The ability of the Greens Creek camp to produce silver at negative cash cost, inclusive of byproducts, over its lifetime gives investors a leveraged play on silver.

However, the expansion of Hecla’s liability by more than $190 million gives me pause until the final agreement is in place and the total liability can be quantified. Also, $157 million is scheduled to be paid out in a combination of cash and stock exposing investors to some dilution risk.

In addition, Hecla has been cited by the EPA for water discharge violations at the Lucky Friday camp during the 2008 and 2009 periods.

Once that happens and investors get some clarity regarding the impact of the settlement on the balance sheet, cash flows and capital expenditures along with greater clarity surrounding outstanding environmental risks, investors would be well advised to give Hecla a look.

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