Hecla restructures debt; raises US$65.6 million in public offering

Hecla Mining (HL-n) is juggling debt and issuing shares to help repay a loan it took to buy out its majority partner Rio Tinto (RTP-n, RIO-L) at their co-owned Greens Creek silver mine near Juneau in Alaska.

Canaccord Capital and Canaccord Adams have agreed to buy 32 million units of Hecla Mining for US$2.05 per unit for total proceeds of US$65.6 million.

Each unit will consist of one Hecla share and one-half share purchase warrant. (Each whole warrant will entitle the holder to purchase one share of the company, exercisable at a price of $2.50 per share, between August 10, 2009 until August 10, 2014.)

The underwriter also has an option to purchase up to 4.8 million additional units to cover over-allotments, if any, until the close of business Feb. 27, 2009. If the over-allotment option is exercised in full, the total gross proceeds to Hecla will be $75.4 million.

Hecla will use the money to fully repay its $40 million bridge loan facility for its acquisition of the Greens Creek underground mine and for general working capital requirements, including debt amortization.

In April 2008, Hecla paid US$700 million in cash and US$50 million in shares for Rio Tinto’s 70.3% interest in Greens Creek. As of Sept. 30 2008, the company reported it still owed about US$161 million on the transaction.

On Feb. 3, the day before Hecla announced news of the public offering, the company said it was amending its loan agreement to reschedule all 2009 term debt payments to 2010 and 2011. To make the amendment effective, Hecla vowed to raise at least US$50 million in an equity, or subordinated debt offering, and repay the US$40 million bridge loan.

“This amendment will provide Hecla with the time to optimize our business and capital structure by moving about US$50 million of debt payments from this year to two years from now and US$16 million into next year,” Hecla’s president and chief executive, Phillips S. Baker, Jr., said in a statement. “We were able to amend our credit facility in these uncertain economic times due to the quality of our mines and people and the support of our banks.”

With no principal amortization payment dates in 2009, Baker said the company will focus on driving down costs and increasing the company’s production and reserve base.

In the third quarter, Hecla reported a net loss of US$3.8 million compared with net income of US$13 million in the same quarter of 2007.

The results were affected by declining prices for silver, lead and zinc, as well as higher charges for smelting, freight and consumable products, especially diesel fuel. Increased interest expenses resulting from the Greens Creek acquisition also contributed to the lower earnings.

For the first nine months of the year, Hecla posted a loss of US$39.5 million, compared with income of US$44.6 million for the first nine months of 2007.

Despite the poor results, management remains upbeat.
“Fortunately, the Greens Creek and Lucky Friday mines are two U.S. operations that are among the world’s lowest-cost silver mines,” Baker said in a statement on Sept. 30.

“Both have survived in even tougher price environments and we will draw upon that experience in these market conditions.” (Hecla has owned and operated the Lucky Friday underground silver, lead, and zinc mine in northern Idaho since 1958.)

The company has yet to release its fourth-quarter results, but says it expects to report a net loss of between US$40 million and US$42 million. (Average prices for silver, lead and zinc declined 32%, 36% and 32%, respectively, in the fourth quarter from the third quarter.)

Management estimates that it produced silver during the fourth quarter at a cash cost of US$7.50 per oz., net of byproduct credits. For the full year it forecasts 2008 cash costs will come in at about US$4.25 per oz. silver, net of byproduct credits.

The Greens Creek ore body contains silver, zinc, gold and lead, and lies adjacent to the Admiralty Island National Monument in the Alaska panhandle.

Headquartered in Coeur d’Alene, Idaho, the 118-year-old mining company says it produced about 8.7 million ounces of silver last year, a 54% year-on-year increase, due to its acquisition of Greens Creek.

At press-time in New York, Hecla was trading at about US$1.81 per share. The company has a 52-week trading range of 99¢-$13.14 and 169.5 million shares outstanding.