Hecla Mining Company — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013. Hecla explores, develops and produces silver, gold, lead and zinc through the Greens Creek, Lucky Friday and Casa Berardi segments. The June 1, 2013 acquisition of Aurizon Mines Ltd. added 100% ownership of the Casa Berardi gold mine and related Quebec mineral interests; its results are included from the acquisition date.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales of products | $85.3 million | $67.0 million | $161.8 million | $158.2 million |
| Gross profit | $5.1 million | $24.0 million | $30.7 million | $72.2 million |
| Gross margin | 6.0% | 35.8% | 19.0% | 45.6% |
| Income (loss) from operations | $(32.6) million | $(2.5) million | $(34.8) million | $23.0 million |
| Net income (loss) | $(24.9) million | $2.5 million | $(13.8) million | $15.1 million |
| Loss applicable to common shareholders | $(25.0) million; $(0.08) per share | $2.4 million; $0.01 per share | $(14.0) million; $(0.05) per share | $14.8 million; $0.05 per share |
| Cash provided by operating activities | Not separately provided | Not separately provided | $10.3 million | $31.2 million |
Cash and cash equivalents were $296.4 million at June 30, 2013, compared with $191.0 million at December 31, 2012. Total cash, cash equivalents and investments were $306.3 million. Cash flow from investing activities was $(385.2) million, primarily reflecting the $321.1 million net cash cost of the Aurizon acquisition and $60.3 million of capital additions. Financing activities provided $480.3 million, principally from $490.0 million of net senior-note proceeds.
Total assets increased to $2.27 billion from $1.38 billion at year-end 2012, principally due to the Aurizon acquisition. Long-term debt was $490.1 million, consisting primarily of $500 million of senior notes due May 1, 2021, bearing 6.875% interest. Capital lease liabilities totaled $20.8 million. The company had a $100 million undrawn senior secured revolving credit facility and was in compliance with its covenants at June 30, 2013.
Material changes versus the prior comparable period
- Sales increased 27% in the second quarter but only 2% for the first six months, while profitability declined sharply because of lower precious-metal and zinc prices, unfavorable provisional-settlement adjustments, higher costs and acquisition-related charges.
- Q2 and first-half 2013 included $20.3 million and $25.6 million, respectively, of Aurizon acquisition costs; no comparable costs were recorded in 2012.
- Interest expense increased to $6.5 million in Q2 and $7.2 million in the first half, from $0.5 million and $1.0 million, respectively, due largely to the April 2013 senior-note issuance.
- Greens Creek gross profit declined to $12.1 million in Q2 and $40.0 million for the first half, from $24.0 million and $71.9 million, respectively, despite higher silver production. Lower metal prices, negative settlement adjustments and higher mining and milling costs were significant factors.
- Lucky Friday resumed limited production in February 2013 after its 2012 suspension. It generated $5.1 million of Q2 sales and a $5.6 million gross loss; business-interruption insurance produced $2.8 million of suspension-related income in Q2.
- Casa Berardi contributed $10.1 million of sales and a $1.4 million gross loss for the month of June. Management attributed the loss and high unit costs partly to lower-than-anticipated gold grades.
- Base-metal derivative contracts generated a $28.1 million gain in the first half of 2013, compared with a $0.9 million gain in the prior-year period. The gain was largely associated with declining lead and zinc prices and materially benefited reported pre-tax results.
- Average realized silver and gold prices declined to $21.41 per ounce and $1,362 per ounce, respectively, in the first half of 2013, from $32.37 and $1,675. Realized zinc prices also declined, while realized lead prices increased.
Guidance, outlook, commentary and risks
- Management estimated 2013 capital expenditures of approximately $178 million and exploration and pre-development expenditures of approximately $38 million, subject to operating performance, metal prices and liquidity.
- The Lucky Friday #4 Shaft project is expected to cost approximately $200 million, with $109 million spent through June 30, 2013 and completion expected in 2016. Lucky Friday production was expected to return to pre-suspension output during the second half of 2013.
- Casa Berardi’s shaft deepening project was expected to be completed in the first quarter of 2014. Management expected average gold grades to improve in the second half of 2013.
- Management believed available cash, operating cash flow, investments and the undrawn revolver would be adequate for the next 12 months. This assessment depends on metal prices, operating results, cost control and successful Aurizon integration.
- Remaining Coeur d’Alene Basin settlement obligations included $15.0 million due by October 8, 2013 and approximately $55.4 million due by August 2014, with the latter substantially expected to be funded by warrant proceeds if exercised. If warrants are not exercised, the company remains responsible for the payment.
- Accrued reclamation and closure liabilities totaled $125.3 million. Greens Creek’s revised closure plan indicated estimated undiscounted closure costs of approximately $73.9 million and a likely material increase in the required reclamation bond from its existing $30 million.
- Significant unresolved matters included Lucky Friday water-permit issues, environmental claims involving historic sites, shareholder litigation, a wrongful-death lawsuit and a union claim estimated at $0 to $10 million. The company stated that certain potential liabilities could not be reasonably estimated and therefore were not accrued.
- Key market risks include volatile silver, gold, lead and zinc prices, provisional concentrate pricing, derivative-counterparty exposure, Canadian-dollar fluctuations, mine-safety and regulatory requirements, environmental obligations and the integration of Aurizon.
- The company reported effective disclosure controls as of June 30, 2013. Internal-control assessment of the newly acquired Aurizon operations was still in process and was planned for completion as of December 31, 2013.
Important facts for investors to verify
- Whether Casa Berardi achieves the expected grade, production and cost improvements and whether Aurizon integration delivers the anticipated growth.
- The sustainability of cash generation after the acquisition, senior-note interest payments, capital spending and settlement obligations.
- Exposure to further declines in precious-metal and base-metal prices, including the effect of provisional pricing and derivative gains that may not recur.
- Progress, cost and completion timing for the Lucky Friday #4 Shaft and the Greens Creek reclamation-bond requirements.
- Developments in Lucky Friday regulatory matters, environmental proceedings, shareholder litigation and other contingencies for which ultimate losses remain uncertain.
- The company’s ability to maintain compliance with credit-facility covenants and to fund the $15.0 million and approximately $55.4 million Coeur d’Alene Basin payments.