Hecla Mining Company — Q1 2019 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, produces and markets silver, gold, lead and zinc concentrates and doré. The company operated five segments during the quarter: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations, the latter acquired through the July 2018 Klondex acquisition. Results cover the three months ended March 31, 2019 and are unaudited.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales of products | $152.6 million | $139.7 million |
| Gross profit | $3.4 million | $38.8 million |
| Gross margin | 2.3% | 27.8% |
| Operating income (loss) | $(16.1) million | $11.9 million |
| Net income (loss) | $(25.5) million | $8.2 million |
| Loss/income applicable to common stockholders | $(25.7) million | $8.1 million |
| Basic and diluted EPS | $(0.05) | $0.02 |
| Cash provided by operating activities | $20.0 million | $16.4 million |
| Capital expenditures | $33.1 million | $17.6 million |
Sales increased 9% year over year, but gross margin declined sharply because of higher production costs, depreciation, lower realized metal prices and operating losses at Nevada Operations. Silver represented $45.5 million of sales, gold $79.7 million, lead $9.0 million and zinc $24.8 million, before $6.3 million of smelter and refining charges.
Production increased for silver to 2.9 million ounces, gold to 60,021 ounces and lead to 5,784 tons, while zinc production declined to 13,944 tons. Average realized prices decreased to $15.70 per silver ounce, $1,308 per gold ounce, $0.93 per lead pound and $1.30 per zinc pound.
Cash, cash equivalents and investments totaled $18.6 million at March 31, 2019, compared with $34.0 million at December 31, 2018. Cash and cash equivalents were $11.8 million, down from $27.4 million. Total assets were $2.69 billion and stockholders’ equity was $1.67 billion.
Long-term debt was $533.7 million, consisting primarily of $506.5 million principal amount of 6.875% Senior Notes and CAD$40 million principal amount of 4.68% Ressources Québec Notes, both due in 2021. The company had no revolving credit borrowings at March 31, 2019, although it drew and repaid $58.0 million during the quarter; $85.0 million was outstanding as of the filing date. The revolving facility had $250 million of capacity and $3.0 million of letters of credit outstanding at quarter end.
Material changes versus the prior comparable period
- Revenue rose $12.9 million, primarily from higher quantities of silver, gold and lead sold and the addition of Nevada Operations, partly offset by lower zinc volume and lower metal prices.
- Gross profit fell $35.3 million, and the company shifted from operating income to a $16.1 million operating loss.
- Nevada Operations reported a $13.8 million gross loss, including $9.7 million of inventory write-downs to net realizable value. Its cash cost and all-in sustaining cost were $1,782 and $3,056 per gold ounce, respectively.
- Casa Berardi gross profit declined from $6.4 million to a $9.0 million gross loss because of lower gold production, reduced throughput, lower recoveries and lower grades. Management expected lost production to be made up during the remainder of 2019.
- San Sebastian gross profit declined from $7.6 million to $0.2 million as the operation transitioned from open-pit to lower-grade underground mining.
- Greens Creek gross profit increased $2.0 million to $26.0 million, primarily because of higher sales volumes, despite lower metal prices and higher unit costs.
- Lucky Friday remained affected by the labor strike that began in March 2017. Limited production continued, and suspension-related costs declined to $1.9 million from $4.1 million.
- Interest expense increased to $10.7 million from $9.8 million. Foreign exchange results changed from a $2.6 million gain to a $3.1 million loss, and derivative results changed from a $4.0 million gain to a $1.8 million loss.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing approximately $22.4 million of operating lease assets and liabilities.
Guidance, outlook, commentary and risks
Management estimated approximately $150 million of 2019 capital expenditures, including $33.1 million incurred in the first quarter, and approximately $28 million of exploration and pre-development expenditures, including $5.3 million incurred through March 31. Management expected to borrow under the revolving credit facility during the remainder of 2019 and stated that current liquidity, operating performance, potential at-the-market equity sales and credit availability should fund obligations for the next 12 months.
Management was reviewing Nevada Operations, particularly Fire Creek, because capital and production costs exceeded revenue. Potential outcomes included reduced capital spending, limiting development, or temporarily ceasing Fire Creek operations. The review was expected to conclude in the second quarter of 2019 and could trigger an impairment assessment; any impairment could be material.
Management could not predict the duration or outcome of the Lucky Friday strike. It expected approximately $1.0 million to $1.5 million per month for engineering, infrastructure and restart activities, in addition to limited-production costs.
Key risks include volatile silver, gold, lead and zinc prices; foreign exchange exposure; the $536.4 million principal debt obligation due in 2021; limited cash balances; operational underperformance at Nevada Operations; potential impairment of Fire Creek or Lucky Friday assets; environmental and reclamation liabilities; labor disruption; and permitting and litigation risks affecting the Rock Creek and Montanore projects.
Recorded reclamation and closure liabilities totaled $109.5 million, and surety bonds totaled $185.3 million. The company accrued $5.6 million for the Johnny M environmental matter but disclosed that costs could be higher. Other environmental matters, including Superfund sites, could not be reasonably estimated.
The Montanore project was subject to a $3.325 million trespass verdict under appeal, and the Montana Department of Environmental Quality questioned the validity of an operating permit after the verdict. The company had accrued $1.1 million for estimated future Montanore reclamation costs.
Most important facts for an investor to verify
- Whether Nevada Operations produced sustainable positive margins after the second-quarter operational review and whether a material Fire Creek impairment was recorded.
- Actual 2019 capital spending, exploration spending and borrowing activity compared with management’s estimates.
- Liquidity, covenant compliance and the company’s refinancing or repayment plan for the Senior Notes and Ressources Québec Notes due in 2021.
- The duration and financial impact of the Lucky Friday strike and any restart or labor-resolution developments.
- Changes in silver, gold, lead and zinc prices, realized prices, provisional sales adjustments and derivative losses.
- Developments in the Rock Creek and Montanore permitting litigation, environmental proceedings and reclamation obligations.
- Whether the company maintains its common-stock dividend given its low cash balance, negative earnings and expected borrowing needs.