The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Hecla emerges from 'near-death' purchase of Greens Creek Mine to post record revenues, profit from acquisition of stellar asset
Hecla Mining Co. has repaid the US$380 million it borrowed to buy out Rio Tinto plc's 70.3 percent interest in the Greens Creek Mine. The purchase, which gave the Idaho-based miner 100 percent interest in the Southeast Alaska silver mine, nearly proved to be the company's undoing.
"It was frankly a near-death experience for the company," Hecla Vice President of Corporate Development Don Poirier told an audience at the Alaska Miners Association 2009 annual convention Nov. 5.
In April 2008, Hecla paid Rio Tinto US$700 million in cash and US$50 million in Hecla common stock to gain 100 percent ownership of Greens Creek. The miner already held a 29.7 percent interest in the mine.
Tapping US$320 million of cash that it had in the bank, Hecla funded the remainder of the purchase with a US$380-million debt facility provided by Scotia Capital. The debt instrument included a US$140 million three-year amortizing term loan and a US$240 million bridge loan.
At the time Hecla made the US$750 million purchase, silver fetched nearly US$18 an ounce and Greens Creek's byproduct metals, alone, were more than paying for production costs. By the end of 2008, all metals combined were barely covering production costs and raising money in the financial markets had become a difficult endeavor.
The dramatic downturn in metals prices and the financial sector caused the silver miner to be short of the funds needed to repay the bridge loan when it came due in October 2008. Working with the banks, Hecla was able to renegotiate the loan and a few weeks ago, the company reported that it completely repaid the money it borrowed to become the sole owner of Greens Creek.
"After the quarter-end, we repaid all of our debt. So now Hecla is debt free with about US$50 million in cash, which is growing daily. This puts us in a strong position for exploration and development plans, and the acquisition of new assets," Hecla President and CEO Phillips S. Baker, Jr. said.
Struggling through 2008
Hecla and its struggles to repay the loan to purchase Greens Creek reflect the struggles that many companies in the mining industry experienced when confidence left the financial markets and the base metal prices dropped by more than 50 percent in just six months.
During the quarter leading up to the purchase of Greens Creek, the average silver price was US$17.68 per ounce, lead was selling for US$1.31 per pound and zinc was bringing US$1.10 per pound. Overall, the gold, lead and silver byproducts produced at Greens Creek paid the company's production costs, plus added US$1.42 per ounce to every ounce of silver produced during the quarter.
Six months later, the situation had taken a dramatic turn. Though the company's silver production was nearly double what it was at the beginning of the year, byproduct metals were no longer covering production costs.
During the third quarter of 2008, the production cost per ounce of silver was US$4.46 and Hecla's margin per ounce of silver produced was US$10.57, nearly a 45 percent decrease from US$19.10 margin realized during the first quarter.
"Over the quarter we have seen a dramatic decline in the price of silver. The prices of lead and zinc, important byproduct 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," Baker said in November 2008.
Though the third quarter was bad, the fourth quarter became dramatically worse. The continuing plummet of base metal and silver prices brought Hecla's margins down to US$2.71 and the company reported a loss of US$36.7 million for the three-month period.
Hecla's stock also plummeted in the months following the Greens Creek purchase. Trading at around US$10 per share in April of 2008, the stock reached a low of US$1.40 in February, 2009.
The silver miner had to raise money by selling stock several times in late 2008 and early 2009, including selling about 42 million shares at US$2.05 per share in order to have the funds needed to repay the bridge loan.
"It was the right thing to do for the company, but we didn't finance necessarily as well as we could have and we got caught with a lot of debt that was due in a very short period of time, essentially in six months," Poirier explained during the Nov. 5 luncheon at the AMA Convention.
Despite the tough financial markets Hecla maintained that the Greens Creek purchase was the right move for the company. Poirier said despite the dilutive effect of going to the markets during the downturn, 100 percent ownership increased the companies silver reserves from 0.43 ounces per share before the acquisition to 0.61 ounces per share after the financing.
"The acquisition of the remainder of the Greens Creek mine in April was an important and accretive transaction for the company. Not only did it enable Hecla to increase silver production and reserves and resources, it also upgraded the quality of our assets and strengthened our competitive position," Baker said in February.
Turn around in 2009
Results from the second and third quarters of 2009 confirmed the optimism expressed by Hecla's president. The company reported record revenue of US$95.2 million for the fourth quarter of 2009, up from a robust US$74.6 million in the third quarter.
"We set a course in early 2009 to optimize our operations and eliminate our debt. We have accomplished that. Our two US operations generated strong cash flow allowing full payment of the remaining portion of our term debt nearly one year ahead of the required schedule," Baker said. "The Greens Creek acquisition is driving Hecla's production and financial performance and should result in record annual operating cash flow, remarkable given our 100-year history. With this cash flow and the new revolving credit facility, we plan to increase exploration, capital investment programs and acquisition activities."
Surviving the tumultuous financial markets and low metals prices of the latter half of 2008 and the first half of 2009, Hecla has eliminated its debt and positioned itself to take advantage of the improved metal markets. The company now ranks as the top producer of silver in the United States, the second largest producer of zinc and the third largest producer of lead.
"We are now seeing the impact of acquiring the Greens Creek Mine 18 months ago, an acquisition that not only doubled our silver production but improved the economics of that production with more byproduct metals. In fact, the most lead and zinc production in our history. We are now not only the largest producer of silver in the US but (also) the second-largest producer of zinc and the third-largest producer of lead," Baker said.
Exploring Greens Creek
With its economic situation improving Hecla increased its total 2009 exploration budget by about 40 percent, to US$9.5 million in September.
"In the late summer this year our businesses were functioning very well, we made the decision to up our exploration and capital spending. We will see more of that next year," Poirier told the AMA crowd. "We are trying to get out there, drill some holes, get that generative exploration going and make a discovery."
An area to the northeast of the current mine infrastructure at Greens Creek is one location the silver miner believes it could make such a discovery.
Hecla Vice President of Exploration Dean McDonald explained that this prospective area, known as the Northeast contact, is related to the same sequence of rocks as the ore bodies currently being mined.
This year, the company is drilling the contact zone from the surface in the north and from underground to the south.
"Recent work has detailed more than 25 miles of mineralized contact. The Northeast contact work is just the start of a methodical approach to fully evaluate Greens Creek's mineral potential, which should result in new discoveries," Baker said.
In addition to seeking out new discoveries, the company continues to replenish its reserves in the immediate Greens Creek deposit.
Baker said, "At the start of production 20 years ago, we had reserves of 2.9 million tons, and since that time we've mined more than 10 million tons of ore and today have an additional 8 million tons in reserves."
The in-mine, underground drill program at Greens Creek is designed to continue replacing as well as adding to the ore reserves. Baker told investors that the exploration group at Greens Creek is most excited about the drilling at Southwest Ore zone, designed to in-fill drill the lower contact of this zone.
This underground drill program has defined multiple folds and repeated mineral contacts with good intercepted widths that support the company's view that bulk mining methods may be used in this zone.
During the second half of the year, in-mine drilling at Greens Creek is targeting the Northwest-West zone.
Underground development in the south portion of the deposit will provide a working platform for drilling the Deep 200 South and the southern extension of 5250 deposit, two other zones that Hecla is excited to investigate.
"Greens Creek is the world's sixth-largest silver mine. It has been operating for about 20 years. It has produced payable metals of about 50 million ounces of silver, (and) a million ounces of gold. We continuously replace reserves at Greens Creek. It is a stellar asset. It represents three-quarters of what Hecla is today," Poirier said.
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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