The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Bank accepts mine plan and gives silver miner more time to repay $40 million short-term obligation from Greens Creek purchase
Hecla Mining Co. now has until Feb. to pay off the remaining balance on the $240 million bridge loan it took out to purchase Rio Tinto's 70.27 percent of the Greens Creek Mine near Juneau, Alaska.
In April, the Coeur D'Alene-based silver miner agreed to pay $750 million ($700 million in cash and $50 million in Hecla common stock) to its Greens Creek partner, Rio Tinto, for 100 percent ownership of the Southeast Alaska silver mine.
Hecla put about $340 million from its existing cash toward the Greens Creek purchase, and the remainder was funded through a $380 million debt facility provided by Scotia Capital. The debt facility included a $140 million, three-year amortizing term loan and a $240 million bridge loan facility (of which Hecla drew $220 million at closing.)
In her Dec. 3 presentation at the Northwest Mining Association annual meeting in Reno, Hecla spokeswoman Vicki Veltkamp told the audience that the company has paid back about 80 percent of the loan that the silver miner took out to make the Greens Creek purchase.
Bridge loan
When Hecla took out the loan to help buy Rio Tinto's portion of Greens Creek, the company believed that the cash flow generated from silver sales at its two existing mines would provide more than enough cash to cover the short-term loan.
At the time of the purchase, Hecla President and CEO Phillips S. Baker, Jr., said, "Our Greens Creek and Lucky Friday silver mines generate a great deal of cash flow at current metals prices, which is expected to enable us to pay off the debt in less than three years. We have organized this financing to include a bridge facility that allowed us to eliminate a bank requirement to hedge a portion of our future zinc and lead production, and therefore avoid the earnings volatility associated with market-to-market accounting."
Since the deal closed, silver prices dropped from about $18 an ounce to its current price of around $10 per ounce. In addition to falling silver prices, zinc, an important by-product metal at Greens Creek, is also selling for about half the April price. The reduced metals prices left Hecla about $40 million short when it came time to repay the bridge loan.
In Hecla's third-quarter earnings report Baker said, "Over the quarter we have seen a dramatic decline in the price of silver.
The prices of lead and zinc, important by-product metals which impact our cash costs per ounce of silver, have also declined not only over this quarter, but since last year.
At the same time, production costs have increased, which affects our cash margins and lowers our income, cash flow and liquidity.
So, as we have done numerous times in our long history, we are aggressively focusing on reducing costs throughout the company and deferring discretionary capital investments and exploration expenses.
Fortunately, the Greens Creek and Lucky Friday mines are two U.S. operations that are among the world's lowest-cost silver mines.
Both have survived in even tougher price environments, and we will draw upon that experience in these market conditions.
Despite the stress in the financial markets, we have repaid the majority of the bridge loan facility, and are pleased our lenders have extended the maturity date on the $40 million still outstanding.
We are considering all of our options to retire the financing obligations of the bridge and term debt, while reducing our costs to improve liquidity."
When the bridge loan matured in October Hecla reported it had repaid $200 million of the $240 million due and it had asked the bank for more time to repay the remaining balance. The financier agreed to give the silver miner an extension on the bridge loan if certain conditions were met.
On Dec. 10 Hecla said the final condition had been met giving the miner an additional four months to pay back the bridge. The final requirement by the financier was an acceptable mine plan. Accepting the mine plan, according to Hecla, confirmed the bridge loan maturity date of Feb. 16, 2009.
Silver miner raises $21 million
On Dec. 11 Hecla said it had agreed to sell 10.24 million shares of the company's common stock to "selected institutional investors" for $2.05 a share, raising $21 million for the silver miner. In addition to the common stock, the securities in the sale included series-1 warrants to purchase up to about 7.68 million shares of Hecla common stock at an exercise price of $2.45 per share, expiring in five years; and series-2 warrants to purchase up to 7.68 million shares of Hecla common stock at an exercise price of $2.35 per share, expiring on Feb. 28, 2009.
Low-cost silver producer
Veltkamp told the Reno audience, with the 100 percent ownership of Greens Creek, Hecla is now the No. 1 silver producer in the United States The company's silver production for 2009 is expected to be 11 million ounces, or about 30 percent of the silver produced nationwide.
The Hecla spokeswoman also pointed out that Greens Creek Mine is the lowest cash-cost producer of silver in the world. She attributed the low-cost silver production to the significant gold, zinc and lead byproducts. She said the company's other producing mine, Lucky Friday, in northern Idaho is also a low-cost silver producer, ranking about third. She said the low production costs will help Hecla through the tough market conditions.
Rising energy costs and lower metal prices have affected Hecla's bottom line. An average annual change in zinc prices of five cent per pound affects Hecla's annual bottom line by $4.1 billion, and if lead changes by five cents that would affect the company's bottom line by $2.9 million.
Hecla's average cash cost for silver in the third quarter was $4.46 per ounce, about $6 less than the spot price for silver at the end of the quarter.
"Certainly the prices of metals are an upside for us if you believe metals prices are going up in the future," Veltkamp said.
Looking ahead
Veltkamp said Greens Creek has the potential to expand its resources into several ore zones.
"What has happened over the last 20 years is that Greens Creek has basically been able to replace its reserves each year, and so we continue to have an eight-to ten-year reserve life there as we go forward; we continue to have that and would expect to (in the future.)
The 5250 ore zone has been the primary target for underground exploration at the mine. One hole, drilled 1,000 feet above and along strike of the known reserve and resource, intersected silver grades of 30 ounces per ton with 18 percent zinc and lead. According the Hecla spokeswoman, the company expects to expand the 5250 ore zone and anticipates adding resource to this silver-rich ore zone this year.
Veltkamp said the 25-acre property has potential beyond adding resource to the existing mine. She said the company has found contact rocks across the property that are very similar to the rocks found when more ore is found at Greens Creek giving the company several future drill targets.
"The hope is, and the big jackpot would be, to find a whole new Greens Creek in the area. My geologists tell me that is more likely than not," Veltkamp told the listeners.
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
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