Hecla Mining Company: FY2015 Form 10-K Summary
Business context and reporting period
Hecla Mining Company discovers, develops and produces silver, gold, lead and zinc. Its operating segments were Greens Creek in Alaska, Lucky Friday in Idaho, Casa Berardi in Quebec, Canada, and San Sebastian in Mexico. The filing covers the fiscal year ended December 31, 2015; quarterly data indicates fourth-quarter 2015 results.
San Sebastian commenced open-pit production in the fourth quarter, but had no product sales by year-end because December production remained in inventory. Hecla also acquired Revett Mining Company in June 2015, adding the Troy mine and the undeveloped Rock Creek project in Montana.
Financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales of products | $443.6 million | $500.8 million | Down 11.4% |
| Gross profit | $38.5 million | $85.2 million | Down 54.8% |
| Gross margin | 8.7% | 17.0% | Down 8.3 percentage points |
| Net income (loss) | $(87.0) million | $17.8 million | Declined $104.8 million |
| Loss applicable to common stockholders | $(87.5) million | $17.3 million | Declined $104.8 million |
| Basic loss per share | $(0.23) | $0.05 | Unfavorable change |
| EBITDA | $107.3 million | $151.5 million | Down 29.2% |
| Cash flow from operations | $106.4 million | $83.1 million | Up 28.0% |
| Capital expenditures | $137.4 million | $122.5 million | Up 12.2% |
Sales decreased primarily because average realized prices declined: silver to $15.57 per ounce from $18.46, gold to $1,150 from $1,262, lead to $0.83 per pound from $0.98, and zinc to $0.86 per pound from $0.99. Production nevertheless increased to 11.6 million ounces of silver and 189,327 ounces of gold, compared with 11.1 million and 187,000 ounces, respectively, in 2014. Lead production was 39,965 tons and zinc production was 70,073 tons.
Consolidated cash cost after by-product credits was $5.85 per silver ounce for the silver operations, compared with $4.81 in 2014. Segment cash costs were $3.91 per silver ounce at Greens Creek, $11.23 at Lucky Friday, $771.54 per gold ounce at Casa Berardi and $6.71 per silver ounce at San Sebastian. These are non-GAAP measures.
At December 31, 2015, cash and cash equivalents were $155.2 million, down from $209.7 million. Total debt was approximately $520.5 million, including $500.2 million of long-term debt and $17.6 million of capital-lease obligations. The company had no borrowings under its $100 million revolving credit facility. Senior notes totaled $506.5 million principal, bear interest at 6.875% and mature May 1, 2021.
Total assets were $2.22 billion and stockholders’ equity was $1.34 billion. Accrued reclamation and closure obligations increased to $95.5 million from $57.3 million, primarily due to the Revett acquisition, revised Lucky Friday closure estimates and San Sebastian development.
Fourth-quarter 2015 results
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Sales of products | $115.3 million | $122.0 million |
| Gross profit | $11.7 million | $22.2 million |
| Net income (loss) | $(63.0) million | $16.9 million |
| Loss applicable to common stockholders | $(63.1) million | $16.8 million |
| Basic loss per share | $(0.17) | $0.05 |
The fourth-quarter loss was heavily affected by the 2015 income-tax provision and other year-end items; the filing does not provide a single clear Q4 reconciliation for all unusual items.
Material changes versus the prior comparable period
- Lower metal prices reduced revenue and segment profitability despite record silver production.
- Greens Creek gross profit declined to $32.6 million from $45.5 million, while Lucky Friday gross profit declined to $1.1 million from $21.9 million.
- Casa Berardi gross profit declined to $4.9 million from $17.8 million, primarily because of lower gold prices and lower first-half recoveries related to ore from the 118 Zone.
- Lucky Friday production was disrupted by an underground booster-fan failure, temporary closure of a high-grade stope and 16 days of planned hoist maintenance.
- The income-tax provision increased to $56.3 million from a $5.2 million benefit in 2014, principally because of a substantially higher valuation allowance on U.S. deferred tax assets. The valuation allowance increased by approximately $83.7 million.
- Net foreign-exchange gains increased to $24.6 million from $11.5 million, primarily because of the stronger U.S. dollar relative to the Canadian dollar.
- Exploration and pre-development expense increased to $22.0 million from $19.7 million, and the provision for closed operations and environmental matters increased to $12.2 million from $10.1 million.
- Capital additions, including non-cash items, were approximately $160.7 million. Significant spending included $60.0 million at Lucky Friday, $46.0 million at Greens Creek and $35.3 million at Casa Berardi.
Guidance, outlook, commentary and risks
Management expected approximately $150 million of 2016 capital expenditures and approximately $15 million of exploration and pre-development spending. The Lucky Friday #4 Shaft was expected to be completed in late 2016 at a total project cost of approximately $225 million, of which approximately $205 million had been spent by year-end. San Sebastian was expected to require approximately $2.0 million of additional development spending in the first half of 2016 and, subject to prices and costs, generate positive cash flow in 2016 and 2017.
Hecla decided in early 2016 to proceed with the East Mine Crown Pillar open pit at Casa Berardi. The project was expected to produce ore by year-end 2016, require approximately $39 million of life-of-mine capital and support increased mill throughput toward 3,100 tons per day from 2017.
Management stated that cash, projected operating cash flow, investments and available financing were expected to be adequate for the next twelve months. This assessment depends on metal prices, production, operating costs, capital requirements, access to financing and the company’s ability to comply with debt covenants.
- Metal-price volatility is the principal financial risk; a sustained decline could reduce revenue, reserves, liquidity and asset values.
- Debt service, capital commitments and restrictive covenants could limit financial flexibility. Senior notes are effectively subordinated to secured debt and liabilities of non-guarantor subsidiaries.
- Environmental, reclamation and closure obligations may exceed recorded accruals. Material matters include the Johnny M site, the Gilt Edge and Nelson Tunnel/Commodore sites, the Carpenter Snow Creek site and Troy mine reclamation.
- Lucky Friday faced mine-safety, ventilation, ground-control, water-permit and labor risks; its collective bargaining agreement expired April 30, 2016.
- Rock Creek development remains subject to environmental litigation, permitting and financing uncertainty.
- Reserve estimates depend on metal prices, grades, recoveries, costs, permitting and geological assumptions and may change materially.
- Provisional concentrate sales and derivative contracts create exposure to settlement-price changes, counterparty risk and the possibility of foregoing upside prices.
Most important facts for an investor to verify
- Reconcile the $56.3 million tax provision and the approximately $83.7 million increase in deferred-tax valuation allowances.
- Assess whether cash flow can support the $150 million 2016 capital program, Senior Notes interest, lease payments and environmental obligations.
- Review completion cost, schedule and production benefits for the Lucky Friday #4 Shaft.
- Verify San Sebastian throughput, grades, recoveries, sales timing and cash-flow performance after the initial December 2015 start-up.
- Evaluate the sustainability of reserves under lower metal-price assumptions and the effect of depletion at Greens Creek, Lucky Friday and Casa Berardi.
- Review pending environmental, legal and regulatory matters and compare potential liabilities with the $95.5 million recorded reclamation and closure accrual.
- Confirm compliance with revolving-credit and Senior Note covenants and the refinancing or repayment plan for the 2021 maturity.
- Distinguish GAAP earnings, cash flow and margins from management’s non-GAAP cash-cost and EBITDA measures.