HECLA MINING CO annual report, FY2022

Hecla Mining Company — FY2022 Form 10-K Summary

Business context and reporting period

Hecla Mining Company is a North American precious- and base-metals producer focused primarily on silver, with gold, lead and zinc by-products. Its operating segments are Greens Creek in Alaska, Lucky Friday in Idaho, Casa Berardi in Quebec and the developing Keno Hill project in Yukon; Nevada Operations remained largely suspended and in care and maintenance. This filing covers the fiscal year ended December 31, 2022. The filing does not provide a clear standalone fourth-quarter 2022 income statement or cash-flow presentation.

2022 sales mix: Greens Creek 46.6%, Casa Berardi 32.7%, Lucky Friday 20.6% and Nevada Operations 0.1%.
Hecla completed its acquisition of the remaining 90.1% of Alexco Resource Corp. on September 7, 2022, adding Keno Hill and an environmental services business.
Approximately 1,850 employees were reported at year-end; approximately 15% were covered by collective bargaining agreements.

Financial performance and key metrics

Metric	2022	2021	Change
Sales	$718.9 million	$807.5 million	Down $88.6 million
Gross profit	$116.2 million	$217.8 million	Down $101.6 million
Gross margin	16.2%	27.0%	Down 10.8 percentage points
Loss from operations	$12.4 million	Income of $83.4 million	Reduced by $95.9 million
Net loss	$37.3 million	Net income of $35.1 million	Decline of $72.4 million
Loss applicable to common stockholders	$37.9 million	Income of $34.5 million	Decline of $72.4 million
Basic and diluted EPS	$(0.07)	$0.06	Declined
Cash flow from operations	$89.9 million	$220.3 million	Down $130.4 million
Capital expenditures	$149.4 million	$109.0 million	Up $40.3 million

Sales declined primarily because of lower realized silver, lead and zinc prices, lower gold sales volumes and unfavorable provisional settlement adjustments. Average realized prices were $21.53 per silver ounce, $1,803 per gold ounce, $1.01 per pound of lead and $1.41 per pound of zinc. The filing reports a $20.8 million net negative adjustment to provisional concentrate sales in 2022, compared with positive adjustments in 2021 and 2020.

Silver production increased 10.1% to 14.2 million ounces; payable silver sold increased 5.8% to 12.3 million ounces.
Gold production decreased 12.7% to 175,807 ounces; payable gold sold decreased 17.8% to 165,818 ounces.
Lead production increased 13.3% to 48,713 tons, while zinc production increased 1.8% to 64,748 tons.
Consolidated after-by-product-credit cash cost was $2.06 per silver ounce and consolidated AISC was $11.25 per silver ounce. These are non-GAAP measures.
Greens Creek gross profit was $102.3 million, down from $171.7 million; Lucky Friday gross profit was $31.2 million, down from $34.0 million; Casa Berardi generated a $13.8 million gross loss versus $15.3 million of gross profit; and Nevada Operations generated a $3.7 million gross loss.
General and administrative expense rose to $43.4 million from $34.6 million, while exploration and pre-development expense was $46.0 million.

Liquidity, debt and capital structure

Cash and cash equivalents were $104.7 million at December 31, 2022, down from $210.0 million. Cash, cash equivalents and marketable investments totaled $128.7 million.
The company had approximately $527.2 million of total indebtedness, primarily $475.0 million of 7.25% Senior Notes due February 2028 and approximately $35.6 million of IQ Notes due July 2025, plus finance leases.
The new senior secured revolving credit facility provides $150 million of capacity, with an option to increase capacity by up to $75 million. Approximately $142.2 million was available at year-end after $7.8 million of letters of credit.
Total contractual cash obligations were approximately $772.6 million, including debt, leases, purchase commitments and credit-facility fees.
Common and preferred dividends paid totaled $12.9 million. The common dividend policy includes a silver-price-linked component and a stated minimum annual dividend, but payments remain subject to board approval.
The company sold 3.86 million shares through its ATM program for net proceeds of $17.3 million during 2022. The Alexco acquisition and settlement of an acquired silver stream required issuance of approximately 52.8 million common shares in aggregate, materially increasing the share count.

Material changes versus the prior comparable period

Revenue, gross profit, operating results, net income and operating cash flow deteriorated materially from 2021, despite higher silver and lead production.
Greens Creek and Lucky Friday experienced inflationary increases in production costs. Casa Berardi was affected by lower gold production, lower grades and higher labor, consumables, contractor and maintenance costs.
Lucky Friday silver production increased 24% to 4.4 million ounces, with the Underhand Closed Bench mining method used for approximately 88% of tons mined.
Keno Hill was added through the Alexco acquisition. The project incurred approximately $19.7 million of capital expenditures and had no revenue after acquisition because it remained in development.
Nevada Operations produced only limited revenue in 2022 from remnant refractory ore and remained subject to care-and-maintenance and development uncertainty.
Fair value adjustment losses declined to $4.7 million from $35.8 million, primarily because 2021 included significant derivative losses. Foreign exchange gains increased to $7.2 million from $0.4 million.
The pension position improved from a $6.0 million underfunded status to a $27.0 million funded status, principally because of a higher discount rate.

Guidance, outlook, risks and unusual items

Management expects Keno Hill to begin production in the third quarter of 2023, subject to development, permitting and operational execution. Keno Hill’s water license and updated operating-plan approvals remained outstanding or in process.
2023 capital expenditures were estimated at approximately $190 million to $200 million before lease financing, and exploration and pre-development expenditures at approximately $33 million.
Management stated that existing cash, expected operating performance, potential ATM proceeds and credit-facility availability should support obligations and other cash requirements for the next 12 months; however, this assessment depends on metal prices, operating performance and access to liquidity.
Key risks include sustained declines in silver, gold, lead or zinc prices; cost inflation; mine accidents, ground instability and production interruptions; labor disruptions; smelter and refining availability; foreign exchange exposure; cybersecurity; and uncertainty in reserve and resource estimates.
Environmental, permitting and legal exposures are significant. Accrued environmental and reclamation obligations totaled approximately $117.0 million, supported in part by $192.7 million of surety bonds and $7.8 million of letters of credit.
Greens Creek and Lucky Friday received EPA notices of violation in 2022 concerning alleged RCRA and Clean Water Act violations. The company could not reasonably estimate potential penalties or settlement terms.
Montana projects remain subject to litigation, permitting delays and potential opposition. Development of Rock Creek and Montanore is uncertain; the company had narrowed its Montanore plan to underground exploration and evaluation.
The filing states that no impairment was recorded for 2022 triggering events, including those affecting Nevada Operations and Casa Berardi, but future impairment charges remain possible.
Metals-price and foreign-currency derivatives reduce certain exposures but can limit upside and create counterparty, mark-to-market and cross-default risks.

Most important facts for an investor to verify

Whether Keno Hill achieved the targeted 2023 production start, including the status of water-license and operating-plan approvals, capital spending and ramp-up costs.
Current silver, gold, lead and zinc prices versus the company’s reserve assumptions and forward-contract prices.
Actual 2023 capital expenditures, exploration spending, operating cash flow and available revolver capacity relative to the stated outlook.
Production costs and AISC trends at Greens Creek, Lucky Friday and Casa Berardi, particularly the impact of inflation and lower grades.
Any developments in EPA matters, Montana litigation, reclamation obligations or other environmental contingencies that could require additional cash payments or impair assets.
Debt maturities, covenant compliance, interest costs and the company’s ability to fund the 2025 IQ Notes and 2028 Senior Notes.
The effect of Alexco-related share issuance, ATM sales and other equity compensation on future per-share results and dilution.
Whether reserve replacement and resource conversion offset depletion and changes in cutoff grades at the operating mines.