Hecla Mining Company — Q2 2020 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company produces and sells silver, gold, lead and zinc concentrates, carbon material and doré from Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales of products | $166.4 million | $134.2 million | $303.3 million | $286.8 million |
| Gross profit (loss) | $34.1 million | $(20.2) million | $45.5 million | $(16.8) million |
| Gross margin | 20.5% | (15.1%) | 15.0% | (5.9%) |
| Income (loss) from operations | $9.9 million | $(43.5) million | $(5.1) million | $(59.6) million |
| Net loss | $(14.0) million | $(46.5) million | $(31.2) million | $(72.1) million |
| Loss applicable to common shareholders | $(14.2) million | $(46.7) million | $(31.5) million | $(72.3) million |
| Loss per diluted share | $(0.03) | $(0.10) | $(0.06) | $(0.15) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $42.5 million | $8.7 million |
Sales growth reflected higher silver and gold prices, increased silver, lead and zinc volumes, and positive provisional concentrate price adjustments. These benefits were partly offset by lower lead and zinc prices, higher smelter and refining charges, and lower gold volumes.
- Q2 sales by segment were Greens Creek $84.9 million, Casa Berardi $50.0 million, Nevada Operations $15.1 million, Lucky Friday $11.5 million and San Sebastian $4.9 million.
- Q2 income from operations benefited from improved results at Greens Creek, Casa Berardi and Nevada Operations. Lucky Friday was approximately break-even at the gross-profit level during its production ramp-up.
- Q2 other expense included a $14.0 million loss on derivative contracts, partly offset by a $6.4 million unrealized investment gain. Six-month derivative losses totaled $6.1 million.
- Cash and cash equivalents were $75.9 million at June 30, 2020, compared with $62.5 million at December 31, 2019. Cash, cash equivalents and investments totaled $88.1 million.
- Six-month investing cash outflows were $31.1 million, including $30.7 million of capital expenditures. Financing cash flow was positive $4.0 million after debt refinancing, debt repayments, dividends and lease payments.
Debt, liquidity and balance sheet
- Total assets were $2.60 billion and total liabilities were $944.7 million at June 30, 2020. Stockholders’ equity was $1.66 billion.
- The company issued $475.0 million of 7.25% Senior Notes due 2028. Net proceeds of $469.5 million, together with cash on hand, were used to redeem $506.5 million of 6.875% notes due 2021.
- $50.0 million was outstanding under the $250.0 million revolving credit facility at June 30, 2020. Hecla drew $210.0 million during the first quarter and repaid $160.0 million during the second quarter.
- Hecla stated that it was in compliance with its credit-facility covenants at quarter-end and believed available liquidity would support obligations for the next 12 months.
- After quarter-end, Hecla agreed to issue CAD$50.0 million of 6.515% Investissement Québec senior notes due 2025 in four installments. Proceeds are intended for general corporate purposes, potential purchases of Senior Notes and Casa Berardi capital expenditures. The agreement requires aggregate investment of CAD$100.0 million in Casa Berardi and other Quebec projects over four years, subject to force majeure.
Material changes versus the prior comparable period
- Revenue increased 24% in Q2 and 6% for the first six months, while gross profit improved from losses in both 2019 comparison periods.
- Silver production increased to 3.40 million ounces in Q2 and 6.65 million ounces for the first half, from 3.02 million and 5.94 million ounces, respectively. Gold production was broadly stable in Q2 but declined for the first half.
- Lucky Friday production resumed following the union strike that ended January 7, 2020. Production is expected to reach full levels by year-end, but ramp-up costs were $2.9 million in Q2 and $9.3 million for the first half.
- Greens Creek gross profit rose $17.5 million in Q2 but declined $3.9 million for the first half because of higher treatment costs and lower lead and zinc prices. Greens Creek treatment costs increased $6.3 million in Q2 and $14.9 million for the first half.
- Casa Berardi returned to operations after a Quebec COVID-19 suspension from March 24 to April 15. The suspension reduced expected gold production by approximately 5,200 ounces in March and 6,500 ounces in April; suspension costs were $1.6 million.
- San Sebastian was suspended under Mexican COVID-19 restrictions until May 30, incurring $1.0 million of suspension costs. Production is currently expected to end in the fourth quarter of 2020, absent a successful expansion or restart plan.
- Nevada Operations improved substantially versus 2019, when inventory write-downs and other costs were significant. Midas, Hollister and Aurora remained on care-and-maintenance, generating $6.7 million of suspension-related costs in the first half.
Outlook, risks and unusual items
- Management estimated approximately $90 million of 2020 capital expenditures, including $33.8 million incurred in the first half, and approximately $13.2 million of exploration and pre-development expenditures, including $5.6 million incurred.
- COVID-19 remains a material uncertainty. Further restrictions, quarantines, deferred production, staffing constraints or added operating costs could adversely affect operations and 2020 results. Greens Creek quarantine-related costs were approximately $0.2 million per week beginning in late March.
- Management expects Lucky Friday to return to full production by year-end, but acknowledges that ramp-up could take longer or cost more than anticipated.
- San Sebastian is expected to reach the end of its current mine life in Q4 2020. A potential restart in 2021 or 2022 depends on establishing a third saleable concentrate from the Hugh Zone or advancing El Toro.
- Nevada asset recoverability depends on grades, recoveries, third-party processing, funding, drilling, hydrology and permitting. The carrying value of Nevada properties, equipment and mineral interests was $483.9 million; a future impairment could be material if expected cash flows deteriorate.
- Environmental and reclamation liabilities totaled approximately $104.6 million. The company accrued $6.1 million for the Johnny M remediation matter, but disclosed that potential liabilities at Johnny M and other Superfund sites could exceed recorded amounts and cannot be reliably estimated in several cases.
- Hecla has $182.6 million of surety bonds and $20.4 million of letters of credit supporting reclamation, self-insurance and employee benefit obligations.
- The company contributed $0.4 million of common stock to pension plans and expects approximately $10.0 million of additional 2020 pension contributions, including $4.8 million to satisfy the remaining minimum funding requirement.
- Hecla gifted 650,000 treasury shares valued at approximately $2.0 million to its charitable foundation and recorded the amount as second-quarter expense.
Important facts for investors to verify
- Whether COVID-19 restrictions, quarantine requirements or operational protocols caused additional production shortfalls or costs after June 30, 2020.
- Lucky Friday’s progress toward full production and the ultimate cost and timing of the ramp-up.
- San Sebastian’s remaining mine life and the feasibility of a 2021 or 2022 restart.
- Nevada Operations’ ability to resolve operating issues and avoid a material impairment of its $483.9 million carrying value.
- Available liquidity after issuance of the Investissement Québec notes, debt service, required Quebec investment commitments and planned capital expenditures.
- Exposure to silver, gold, lead and zinc prices, derivatives losses, foreign-exchange movements and provisional concentrate settlement adjustments.
- Potential changes in environmental, reclamation and Superfund liabilities, including the Johnny M matter and other unresolved legal proceedings.
- The company’s non-GAAP cash cost and all-in sustaining cost measures, including the treatment of ramp-up, suspension and care-and-maintenance costs excluded from those metrics.