Hecla Mining Company — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company is a U.S.-focused precious-metals producer operating the Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations segments. The company produces silver, gold, lead and zinc. This unaudited Form 10-Q covers the three months ended March 31, 2022, with comparison to the three months ended March 31, 2021.
Financial and Operating Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales of products | $186.5 million | $210.9 million | Down $24.4 million |
| Gross profit | $45.4 million | $67.4 million | Down $22.0 million |
| Gross margin | 24.4% | 32.0% | Down 7.6 points |
| Income from operations | $14.8 million | $41.0 million | Down $26.3 million |
| Operating margin | 7.9% | 19.5% | Down 11.6 points |
| Net income | $4.2 million | $21.5 million | Down $17.3 million |
| Income applicable to common stockholders | $4.0 million | $21.3 million | Down $17.3 million |
| Diluted earnings per share | $0.01 | $0.04 | Down $0.03 |
| Cash provided by operating activities | $37.9 million | $37.9 million | Essentially unchanged |
| Free cash flow | $16.4 million | $16.5 million | Down $0.1 million |
Silver production was 3.3 million ounces and gold production was 41,642 ounces. Realized prices were $24.68 per silver ounce, $1,880 per gold ounce, $1.08 per pound of lead and $1.79 per pound of zinc.
- Cash and cash equivalents were $212.0 million at March 31, 2022, compared with $210.0 million at December 31, 2021.
- Total cash, cash equivalents and investments were $241.2 million, including $29.2 million of marketable equity securities.
- Capital expenditures were $21.5 million; exploration and pre-development spending was $12.8 million.
- Total assets were $2.74 billion and stockholders’ equity was $1.73 billion.
- Long-term debt was $508.9 million carrying value, consisting primarily of $475.0 million of 7.25% Senior Notes due 2028 and IQ Notes due 2025. Principal debt totaled $513.6 million.
- The $250 million revolving credit facility had no borrowings outstanding, with $17.3 million of letters of credit issued and approximately $232.7 million available. Management reported compliance with applicable covenants.
- The effective income and mining tax rate was 57.6%, compared with 18.1% in Q1 2021.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower silver and gold sales volumes, partly offset by higher lead and zinc prices and higher realized gold prices.
- Greens Creek gross profit declined $8.8 million because of lower sales volumes, lower ore grades and lower silver prices. AISC increased to $1.90 per silver ounce from $1.59.
- Lucky Friday gross profit increased $2.4 million, supported by higher sales volumes and lead and zinc prices. AISC improved to $13.15 per silver ounce from $14.24.
- Casa Berardi shifted from $13.0 million of gross profit to a $0.1 million gross loss. Gold production fell to 30,240 ounces from 36,190 ounces, while cash cost increased to $1,516 per ounce from $1,027 and AISC increased to $1,810 from $1,272.
- Nevada Operations was largely inactive, with only $0.3 million of sales versus $10.2 million in Q1 2021. Care-and-maintenance expense increased to $5.7 million from $3.6 million.
- Exploration and pre-development expense increased $6.1 million to $12.8 million, and care-and-maintenance expense increased $1.9 million to $6.2 million.
- Fair value adjustments changed from a $1.9 million loss to a $6.0 million gain, partly offsetting operating deterioration.
- Comprehensive income changed to a $29.0 million loss from $23.3 million of comprehensive income, primarily because of a $33.2 million decline in the fair value of derivative contracts designated as hedges.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated approximately $135 million of 2022 capital expenditures and approximately $45 million of exploration and pre-development expenditures, including $21.5 million and $12.8 million incurred through March 31, respectively.
- Management stated that available cash, operating performance, potential ATM equity sales and the revolving credit facility should support obligations and cash requirements for the next 12 months, while noting that this depends on metals prices, operating costs, liquidity access and other factors.
- Key risks include volatile silver, gold, lead and zinc prices; inflation in labor, equipment maintenance, contractors and consumables; mine operating and development risks; COVID-19 impacts; foreign exchange exposure; regulatory and mine-safety requirements; environmental reclamation obligations; and litigation.
- Metal forward contracts produced a $4.8 million net loss included in sales in Q1 2022, compared with a $2.8 million net gain in Q1 2021. Net unrealized metal-hedge losses in accumulated other comprehensive loss were approximately $63.0 million, with approximately $28.0 million expected to be reclassified to earnings over the next 12 months.
- Derivative liabilities totaled $82.4 million at March 31, 2022. Certain contracts had cross-default provisions; a breach could have required settlement of approximately $83.2 million.
- Environmental and reclamation liabilities totaled $114.2 million. The Johnny M Mine accrual was $9.0 million, but the company stated that potential liabilities at the San Mateo Creek Basin and other Superfund sites cannot be estimated with reasonable certainty and could exceed recorded amounts.
- On May 2, 2022, after quarter-end, Hecla received notice that certain parties intend to seek CERCLA cost recovery and contribution relating to investigatory work at the San Mateo Creek Basin.
- A shareholder derivative lawsuit was filed in Delaware Chancery Court on May 4, 2022 in connection with the previously disclosed Klondex-related securities litigation. The company cannot predict the outcome or estimate potential damages.
- Hecla invested approximately $10 million in mining-company securities during April 2022.
- COVID-19 mitigation costs were $0.4 million in Q1 2022 versus $1.6 million in Q1 2021. Management cautioned that future restrictions could defer production or increase costs.
Important Facts for Investors to Verify
- Whether Casa Berardi can restore gold production and reduce its materially higher cash cost and AISC.
- The timing and economics of any restart or further development at Nevada Operations, including Hollister-related work.
- Exposure to metal prices, hedging losses and the approximately $63.0 million of unrealized metal-hedge losses in accumulated other comprehensive loss.
- The adequacy of liquidity relative to approximately $778.7 million of contractual cash obligations, including debt, leases and purchase commitments.
- Potential increases in environmental, reclamation and CERCLA liabilities beyond the $114.2 million recorded liability and $9.0 million Johnny M accrual.
- Progress against the 2022 capital expenditure and exploration plans and the company’s ability to maintain positive free cash flow.
- The outcomes and potential financial effects of the Klondex-related securities and derivative litigation.