COEUR D'ALENE, Idaho - The Hecla Mining Co. pension fund has struck the mother lode.
At a time when "employer securities" has become a pejorative, a $5.7 million investment in employer stock has turned out spectacularly well for the $60 million pension fund. Last year, the gold and silver producer's stock shot up more than 400%, the top percentage gainer for any New York Stock Exchange-listed stock.
"One of the things that amazes me is this perception that precious metals are a highly speculative, highly risky investment class relative to other investments," said Phillips S. Baker Jr., Hecla's chief executive officer.
"This risk was a hell of a lot less than the pension plan had in front of it, such as investing in telecom and high-tech and energy, you name it, any other investment class," said Mr. Baker, who on May 9 was promoted from president and chief operating officer of the Coeur d'Alene-based mining company.
Indeed, the pension fund was punished by poor returns in its hefty holdings of large-cap growth stocks. Mr. Baker declined to disclose details, but according to the 2003 Money Market Directory, the larger of the two Hecla plans, had 44% of assets in a large-cap growth portfolio managed by Roger Engemann & Associates Inc., Pasadena, Calif., as of September 2001. The smaller plan had 51% of assets in large-cap growth stocks at that time.
In 2001, the 112-year-old company, "while it had excellent assets to allow it to grow, was frankly short of capital to do that effectively," Mr. Baker said.
Meanwhile, the stock was under threat of being delisted. Ending 2000 at 50 cents a share, the stock didn't crack $1 until May 14, 2001. But the risk of being delisted was mitigated when shareholders authorized a reverse stock split, which, if had been implemented, would have buoyed the stock over the $1 threshold required for an exchange listing. The bigger risk, Mr. Baker said, was loss of value if the reverse split went through, but that fallback measure proved to be unnecessary because the stock price improved.
Pressed for cash, the company's board turned to the pension fund. At the advice of its actuary, David Venuti, president of Venuti & Associates, Los Altos, Calif., the pension fund hired an independent fiduciary, Consulting Fiduciaries Inc., Chicago, to vet the employer stock deal.
Making the analysis easier was the fact the plans were significantly overfunded, Mr. Baker said. At the beginning of 2001, the fund had $67.3 million in assets and $46 million in liabilities, according to the company's annual report. (As the result of a subsidiary being sold in 2001, $4.5 million in pension assets was spun out of the plan.) By the end of 2002, the plan had $60.4 million in assets and $47.1 million in pension obligations.
With the approval of its independent fiduciary, the pension fund for the first time invested nearly 10% of assets in company stock in August 2001, buying 5.75 million unissued shares at a cost of roughly $1 a share.
After dropping as low as 77 cents a share on Nov. 21, 2001, the stock took off in 2002, hitting a high of $5.49 on June 7 before dipping back down to $2.43 on July 26. The stock peaked at $5.86 on Jan. 6, 2003. The reasons: A Mexican mine generated $10 million in cash from a $4 million net equity investment; plus, rising gold and silver prices buoyed the stock price.
Last fall, the pension fund started taking profits, selling 1.7 million shares. In January, the pension fund sold another 2 million shares as part of a 23-million-share public offering, reaping net proceeds of $8 million.
On average, the shares were sold between $4 and $4.25, net of fees.
Mr. Baker said fund officials plan to hire a consultant to conduct an asset allocation study, and the fund might move into international stocks primarily to further diversify the fund. Milliman USA, Boise, Idaho, is the current consultant and would be considered for the assignment.
But he says the plan officials "definitely want to keep an element of precious metals, in the 5% to 10% range," and probably through a more diversified portfolio.
"Our plan is to see the Hecla position reduced over time but then to reinvest a portion back into a diversified precious-metals fund. There are too many geologic risks you could have" from exposure to a single company, he said.
Mr. Baker said he can't offer up mathematical proofs for investing in precious metals, but Hecla officials are "more convinced than ever" that they belong in the pension fund.
"I'm a miner, not a pension plan manager. I can give you only what we've accomplished," he said. n