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Rating Action:

Moody's rates Hecla's new senior unsecured notes Caa1; outlook stable

10 Feb 2020

New York, February 10, 2020 -- Moody's Investors Service ("Moody's") assigned a Caa1 senior unsecured rating to Hecla Mining Company's (Hecla) proposed $475 million senior unsecured notes due 2028. Proceeds from this issue along with cash on hand will be used to redeem $506.5 million of the existing senior unsecured notes due 2021 and pay for the related transaction fees and expenses. All other ratings for Hecla are unchanged. The Speculative Grade Liquidity Rating remains SGL-3. The outlook is stable. Upon repayment, the rating on the notes maturing in 2021 will be withdrawn.

Assignments:

..Issuer: Hecla Mining Company

....Senior Unsecured Regular Bond/Debenture, Assigned Caa1(LGD4)

RATINGS RATIONALE

Hecla's B3 corporate family rating (CFR) reflects its modest scale, exposure to volatile gold, silver, zinc and lead prices, relatively high cost position and elevated but declining leverage. Hecla's CFR is supported by its adequate liquidity position and favorable geopolitical footprint with assets located in the US, Canada and Mexico, albeit with high asset concentration risk, given that its Greens Creek mine in Alaska currently generates most of the company's operating earnings. The rating also benefits from the long mine life at key operations, significant mineral reserves and geologically attractive portfolio of exploration assets.

The recently ratified agreement between the company and the Lucky Friday mine union put an end to the strike that lasted nearly 3 years. The rating anticipates that, once in full production, Lucky Friday will enhance the company's operational diversity and further improve its credit profile. However, the rating also factors in the relatively high execution risks related to the Lucky Friday ramp-up, an uncertainty around the cost structure post ramp-up as well as the company's efforts to reduce costs at the Casa Berardi mine. The ratings acknowledges that significant mineral reserves and long mine life provide the company with substantial optionality to optimize production and operating costs at these assets.

The initiatives undertaken by Hecla in 2019 to reduce spending, improve liquidity and leverage as well as the continued strong operating performance at the Greens Creek mine and substantially higher gold and silver prices have positioned the company to return to positive free cash flow and higher EBITDA generation from H2 2019. Hecla was able to implement multiple cost-cutting initiatives at Nevada including mining of only developed reserves, lowering development capex and G&A and reducing the mine's all-in sustaining costs (AISC) sharply from $2,347/oz in Q2 to about $1,000/oz in H2 2019. Casa Berardi's costs declined more moderately with lower capital spending driving the improvement in Q4. This allowed the mine to generate positive free cash flow in H2, albeit gold AISC remained relatively high at $1,278/oz in Q4. The company is guiding for a modest improvement of Casa Berardi's AISC in 2020 to $1,225 - $1,275/oz and is currently conducting studies to raise throughput, recovery rates, lower costs and increase cash flows at the mine.

Hecla's leverage, measured as Moody's adjusted debt/EBITDA, improved from 8x in Q2 2019 to 6x at the end of Q3 2019 and about 3.5x as of 2019 year-end, benefitting from higher EBITDA, the exchange of $31m of Ressources Quebec notes and the $49m "At The Market" equity offering completed in Q4, which along with generated cash, enabled the company to fully repay by the year-end the $50 million previously drawn from the revolving credit facility. Using price sensitivities of $1,200-1,300/oz for gold and $15.50-17.00/oz for silver, Moody's expects Hecla to generate moderate free cash flow in 2019 and 2020 and estimates that debt/EBITDA will be in the range of 3.6-4.3x. Leverage is expected to be lower and free cash flow higher if gold and silver prices do not decline materially from the currently high levels.

Hecla faces a number of ESG risks, typical for a mining company, including the risks related to the environmental and asset retirement obligations, water management and water rights, litigation matters associated with Nevada operations and diminished, yet still present, social risks related to the Lucky Friday mine, notwithstanding the ratification of the collective bargaining agreement by the local union.

Hecla's SGL-3 rating reflects the company's adequate liquidity profile with $62 million in cash and cash equivalents as of 2019 year-end with the undrawn $250 million revolving line of credit (RCF) that is currently limited to $150 million. The proposed credit agreement amendment is expected to extend the maturity of the RCF to 2023 and restore the availability to $250 million upon closing of the bond refinancing. The amendment will also permit Hecla to use $100 million of the revolver proceeds to redeem some of the existing notes provided Hecla issues the new notes in an amount of not less than $400 million. The RCF is secured by assets of some of Hecla's Nevada subsidiaries, Casa Berardi mine, the company's assets in the Greens Creek mine JV and equity interests in certain domestic subsidiaries. Financial covenants include a senior leverage ratio (debt secured by liens/EBITDA) of no more than 2.5x, a minimum interest coverage ratio of 3x and a leverage ratio (total debt minus unencumbered cash/EBITDA) of no more than 4.25x for Q1 2020 and Q2 2020, stepping down to 4x for Q3 2020 and thereafter. Moody's expects the company to remain in compliance with the amended covenants. Moody's believes that the refinancing risk for the company's senior unsecured notes has diminished given the benign gold and silver price environment, the improvement in credit profile and the resolution of the Lucky Friday strike.

Under Moody's Loss Given Default Methodology, the Caa1 rating on the senior unsecured notes, one notch below the CFR, reflects their lower priority position in the capital structure and their effective subordination to the RCF (unrated). The notes will be guaranteed on a senior unsecured basis by the majority of the company's subsidiaries. Non-guarantor subsidiaries represented about 8% of Hecla's FY2019 sales and 5% of total assets as of December 31, 2019.

The stable outlook reflects our expectations that Hecla will sustain current performance at Nevada until operations are shut down, increase the profitability at the Casa Berardi mine and ramp up Lucky Friday to full production as planned. The outlook also anticipates that the company will maintain an adequate liquidity position while continuing its investments in capital and exploration projects.

The ratings are unlikely to be upgraded in the near term given the uncertainty around the timing of the ramp-up and the eventual cost structure at Lucky Friday as well as the execution risk with respect to the company's efforts to increase production and reduce operating costs at Casa Berardi. However, an upgrade would be considered if the company maintains a leverage ratio below 3.5x (debt/EBITDA) and sustains a positive EBIT margin of at least 6%.

The ratings could be downgraded if debt/EBITDA is sustained above 4.5x, EBIT margins below negative 5% and cash flow from operations below 10% of outstanding debt. The ratings could also be downgraded if the company's liquidity position weakens materially or if uncertainty increases over its ability to refinance the upcoming unsecured debt maturities.

The principal methodology used in this rating was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Coeur d'Alene, Idaho, Hecla Mining Company ("Hecla") is primarily a gold and silver producer with zinc and lead by-products. The company operates mines in Alaska (Greens Creek), Idaho (Lucky Friday), Quebec Canada (Casa Berardi), Mexico (San Sebastian) and Nevada (former Klondex mines). Hecla also owns several other exploration and pre-development properties, including the geologically attractive Hatter Graben vein system on its Hollister property in Nevada. For the twelve months ended December 31, 2019, Hecla generated revenues of $673 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Botir Sharipov
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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