Hecla Mining Company — Q3 2020 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company discovers, develops and operates precious- and base-metal mines. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The interim financial statements are unaudited.
Operations were affected by COVID-19 restrictions, including temporary suspensions at Casa Berardi and San Sebastian and staffing-related restrictions at Greens Creek. Lucky Friday resumed production following a union strike that ended January 7, 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Sales of products | $199.7 million | $161.5 million | $503.0 million | $448.3 million |
| Gross profit | $53.5 million | $14.9 million | $98.9 million | $(1.9) million |
| Income (loss) from operations | $31.3 million | $(5.1) million | $26.2 million | $(64.7) million |
| Net income (loss) | $13.6 million | $(19.5) million | $(17.6) million | $(91.6) million |
| Income (loss) applicable to common shareholders | $13.5 million | $(19.7) million | $(18.0) million | $(92.0) million |
| Diluted EPS | $0.03 | $(0.04) | $(0.03) | $(0.19) |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $115.9 million | $63.6 million |
Gross margin was approximately 26.8% in Q3 2020 versus 9.2% in Q3 2019, and approximately 19.7% for the first nine months of 2020 versus negative 0.4% in the comparable 2019 period.
- Revenue drivers: Higher silver and gold prices and higher silver, lead and zinc sales volumes more than offset lower gold volumes. Q3 realized prices were $25.32 per silver ounce, $1,929 per gold ounce, $0.86 per lead pound and $1.04 per zinc pound.
- Production: Nine-month production totaled 10.2 million ounces of silver, 159,948 ounces of gold, 24,620 tons of lead and 48,699 tons of zinc. Silver, lead and zinc production increased year over year, while gold production declined.
- Operating costs: Nine-month cost of sales declined to $404.0 million from $450.2 million. Depreciation, depletion and amortization declined to $119.3 million from $139.0 million.
- Derivative losses: The company recognized $6.7 million of derivative losses in Q3 and $12.8 million in the first nine months in other expense. An additional $12.9 million of derivative losses related to provisional concentrate sales was included in sales for the nine-month period.
- Investment gains: Unrealized gains on mining-industry investments were $4.0 million in Q3 and $9.4 million for the first nine months, compared with losses in the 2019 periods.
Balance sheet, debt and liquidity
| Balance-sheet item | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $98.7 million | $62.5 million |
| Cash, cash equivalents and investments | $116.1 million | $68.7 million |
| Total assets | $2.615 billion | $2.637 billion |
| Total liabilities | $921.5 million | $944.9 million |
| Shareholders’ equity | $1.694 billion | $1.692 billion |
| Long-term notes and other long-term debt | $512.1 million | $522.8 million |
- On February 19, 2020, Hecla issued $475.0 million of 7.25% Senior Notes due 2028. The net proceeds were used with cash on hand to redeem $506.5 million of 6.875% notes due 2021.
- Hecla issued CAD$50 million of 6.515% Series 2020-A Senior Notes to Investissement Québec, maturing in July 2025. The September 30 carrying value was $27.5 million; the final CAD$12.5 million installment was received on October 9, 2020.
- The $250 million revolving credit facility had no borrowings outstanding at September 30, 2020. Hecla drew and repaid $210.0 million during the first nine months as a COVID-19 liquidity precaution. The company reported compliance with all credit covenants.
- Letters of credit totaled $20.3 million, and surety bonds supporting reclamation, self-insurance and employee benefits totaled $182.6 million.
- Total contractual cash obligations were approximately $834.5 million, including debt service, leases, purchase obligations and retirement-plan commitments.
Cash flow and capital allocation
- Operating cash flow increased $52.3 million year over year to $115.9 million, supported by improved operating results and non-cash adjustments.
- Investing cash outflow was $55.7 million, including $54.4 million of capital expenditures, versus $95.9 million in 2019.
- Financing cash outflow was $22.0 million, reflecting debt refinancing and repayment activity, dividends, lease repayments and treasury-share purchases.
- Management estimated 2020 capital expenditures of approximately $90 million, including $59.7 million incurred through September 30, and exploration and pre-development expenditures of approximately $16.2 million, including $9.8 million incurred.
- Common and preferred dividends paid during the first nine months totaled $4.0 million and $0.4 million, respectively. The amended common dividend policy raised the minimum annual dividend to $0.015 per share and reduced the silver-price threshold for the price-linked component to $25 per ounce.
Material changes versus the prior comparable period
- Revenue increased 24% in Q3 and 12% for the first nine months, primarily due to higher precious-metal prices and stronger silver, lead and zinc volumes.
- Operations moved from a Q3 2019 loss to a Q3 2020 profit. The nine-month net loss narrowed materially from $91.6 million to $17.6 million.
- Greens Creek remained the largest contributor, with nine-month sales of $232.2 million and operating income of $72.4 million, compared with $194.5 million and $52.1 million in 2019.
- Lucky Friday sales increased to $35.1 million from $11.2 million as production ramped after the strike, although the segment recorded a $12.4 million nine-month operating loss due principally to ramp-up costs.
- Casa Berardi generated $2.0 million of nine-month operating income versus a $26.3 million loss in 2019, despite lower gold production and COVID-19-related disruption.
- Nevada Operations improved to $6.1 million of nine-month operating income from a $43.8 million loss. However, no ore was milled and no production was reported there in Q3 2020; mined ore was stockpiled.
- San Sebastian’s nine-month sales declined to $24.0 million from $39.0 million. Mining was completed in Q3, and milling was expected to finish in Q4 2020.
Guidance, outlook, risks and unusual items
- Management expected Lucky Friday to reach full production beginning in Q4 2020 and expected higher Casa Berardi gold production from higher-grade underground stopes in Q4.
- San Sebastian was expected to end production in Q4 2020, with no assurance that operations would continue beyond that time.
- At Nevada Operations, non-refractory mining at Fire Creek was expected to be completed in Q4. A third-party processing test of refractory ore was expected to begin in Q4, with potential refractory mining in 2021 if successful.
- COVID-19 caused approximately $1.6 million of Casa Berardi suspension costs, $1.1 million of San Sebastian suspension costs and approximately $1.9 million of Greens Creek quarantine-related costs during the first nine months. Further restrictions could materially affect production, costs and liquidity.
- Environmental and reclamation liabilities totaled approximately $106.0 million. The Johnny M Mine remediation accrual was $6.1 million, but the company stated that potential liabilities for the broader San Mateo Creek Basin and other Superfund matters could be materially greater and could not be reasonably estimated.
- Pending litigation includes environmental claims, a claim related to the Klondex acquisition, securities class actions and a shareholder derivative action. The company generally disputes the claims; several potential losses cannot be estimated.
- Metal-price exposure remains significant. At September 30, concentrate sales subject to future price changes included approximately 1.2 million silver ounces, 3,436 gold ounces, 17,097 tons of zinc and 3,207 tons of lead. A 10% change in the price of each metal would have changed the aggregate value by approximately $7.8 million before hedging.
- Management stated that available cash, expected operating performance, metals prices, potential equity sales and the revolving facility should be sufficient to meet obligations for the next 12 months, while noting that adverse metals prices, operating costs, COVID-19 restrictions or unavailable financing could alter that assessment.
Most important facts for investors to verify
- Whether Lucky Friday achieves the expected full-production ramp-up and whether associated costs normalize.
- Casa Berardi’s Q4 production recovery, mill throughput, underground-stope availability and COVID-19 operating costs.
- The timing and economics of San Sebastian’s closure and any replacement production or development activity.
- Whether Nevada’s refractory-ore test supports future production and whether the $478.9 million Nevada asset carrying value remains recoverable.
- Future silver, gold, lead and zinc prices, together with the effect of outstanding forward contracts and put options on realized revenue and cash flow.
- Compliance with debt covenants, the 2028 Senior Notes and 2025 IQ Notes obligations, and the company’s ability to fund the required CAD$100 million Quebec investment over four years.
- Potential changes in environmental, reclamation and litigation liabilities, particularly Johnny M, San Mateo Creek Basin, Carpenter Snow Creek and Barker-Hughesville.
- Whether COVID-19 restrictions, mine closures, labor issues or supply-chain constraints create additional production delays or liquidity needs.