Hecla Mining Company: Q2 2019 Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company is a precious- and base-metals producer of silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations, the latter acquired through the July 2018 Klondex acquisition. The filing covers the three and six months ended June 30, 2019, compared with the same periods in 2018. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Sales of products | $134.2 million | $147.3 million | $286.8 million | $287.0 million |
| Gross profit (loss) | $(20.2) million | $35.0 million | $(16.8) million | $73.8 million |
| Income (loss) from operations | $(43.5) million | $3.8 million | $(59.6) million | $15.7 million |
| Net income (loss) | $(46.5) million | $12.1 million | $(72.1) million | $20.3 million |
| Loss (income) applicable to common shareholders | $(46.7) million | $11.9 million | $(72.3) million | $20.0 million |
| Basic and diluted EPS | $(0.10) | $0.03 | $(0.15) | $0.05 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $8.7 million | $47.0 million |
Gross margin was approximately negative 15.1% in Q2 2019 versus 23.8% in Q2 2018, and negative 5.9% for the first half versus 25.7% in the prior-year period. Operating margin was approximately negative 32.4% in Q2 and negative 20.8% for the first half.
- Cash and cash equivalents were $9.4 million at June 30, 2019, down from $27.4 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $10.5 million.
- Total current assets were $145.4 million versus current liabilities of $117.9 million. Marketable equity investments were $5.8 million, resulting in cash and investments of approximately $15.2 million.
- Long-term debt was reported at $586.7 million, while total debt obligations including current amounts and lease liabilities were higher. Senior Notes had $506.5 million of principal outstanding and the Ressources Québec Notes had approximately $30.6 million of U.S.-dollar-equivalent principal.
- The revolving credit facility had $52.0 million drawn at June 30, 2019, with $3.0 million of letters of credit outstanding. Subsequent to quarter-end, letters of credit increased to $23.0 million.
- Capital expenditures were $71.2 million in the first half, compared with $43.3 million in the prior-year period. The company estimated approximately $138 million of 2019 capital expenditures and $17.5 million of exploration and pre-development expenditures.
- Total liabilities were $1.03 billion and stockholders’ equity was $1.64 billion at June 30, 2019. Reclamation and closure liabilities totaled approximately $110.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 8.9% in Q2, while first-half revenue was broadly unchanged. Lower silver, lead and zinc prices were the principal adverse factor; gold prices were slightly higher in Q2 but slightly lower for the first half.
- Cost of sales rose to $154.4 million in Q2 from $112.3 million and to $303.6 million for the first half from $213.2 million. Depreciation, depletion and amortization increased substantially, primarily reflecting the Nevada Operations acquired in 2018 and other operating factors.
- Nevada Operations generated sales of $17.3 million in Q2 and $35.0 million in the first half, but operating losses were $21.5 million and $35.5 million, respectively. The segment recorded inventory write-downs of approximately $18.6 million in Q2 and $28.3 million in the first half.
- Casa Berardi shifted from gross profit of $4.4 million in Q2 2018 to a gross loss of $9.7 million in Q2 2019, primarily because of lower gold production, throughput and grades. Management stated that lost production was expected to be recovered later in 2019.
- Greens Creek gross profit declined $17.1 million in Q2 and $15.1 million in the first half, driven principally by lower by-product prices and higher mining and milling costs.
- San Sebastian moved from gross profit of $2.2 million in Q2 2018 to a gross loss of $0.2 million and generated only $0.1 million of gross profit for the first half, reflecting lower grades and the transition from open-pit to underground mining.
- Lucky Friday remained affected by the labor strike that began in March 2017. Limited production continued, and suspension-related costs were $3.0 million in the first half of 2019 versus $9.4 million in the prior-year period.
- Operating cash flow fell $38.3 million year over year to $8.7 million, while investing cash use increased by $56.1 million to $71.3 million. Financing activities provided $44.2 million, including $170.0 million of borrowings and $118.0 million of debt repayments.
Guidance, Outlook, Commentary and Risks
- The filing does not provide a formal production or earnings guidance range. Management estimated 2019 capital expenditures of approximately $138 million and exploration and pre-development spending of approximately $17.5 million, subject to changes in financial position, metals prices and operating conditions.
- Management expected to meet obligations for the next 12 months based on cash balances, expected operating performance, metals prices, potential at-the-market equity sales and revolving-credit availability, but noted that liquidity could be affected by lower metals prices, higher operating or capital costs, litigation, environmental requirements or reduced access to financing.
- In the second quarter, the company curtailed near-term development and mining at Fire Creek and suspended production and Hatter Graben development at Hollister. Management assumed a gradual resumption of previously anticipated Nevada production in the first part of 2021, contingent on grade control, mill recoveries, possible third-party processing and adequate funding and resources.
- The Nevada carrying-value assessment indicated no impairment at June 30, 2019, but the Nevada asset carrying value was $545.4 million, including $382.2 million attributable to value beyond proven and probable reserves. The assessment was sensitive to gold prices; a weighted-average gold price below approximately $1,280 per ounce would have resulted in estimated undiscounted cash flows below carrying value, all else equal.
- The company entered into additional silver and gold put contracts in July 2019 covering up to approximately 8.6 million ounces of silver and 194,000 ounces of gold, with minimum prices of $15.13 and $1,400 per ounce, respectively, and premiums of approximately $12.0 million.
- The Senior Notes and Ressources Québec Notes mature in May 2021. The revolving-credit facility was amended in July 2019 to reduce availability to $150 million temporarily and relax the leverage covenant on a step-down schedule. The company must refinance the Senior Notes by November 1, 2020 to preserve the facility’s later maturity.
- Material contingencies include the Lucky Friday strike, environmental and reclamation matters, CERCLA-related sites, Montanore litigation and permitting, and shareholder and acquisition-related lawsuits. The company accrued $5.6 million for Johnny M remediation, while other environmental liabilities could exceed recorded amounts.
- After quarter-end, a Montana court vacated Montanore’s water discharge permit renewal and remanded the matter to the Montana Department of Environmental Quality. The filing states that the company cannot predict the ultimate effect.
- Commodity prices, foreign exchange rates, operating performance, mine safety, permitting, environmental obligations and reserve estimates remain significant risks. A 10% change in the Canadian-dollar exchange rate would have affected reported foreign-exchange gain or loss by approximately $11.1 million based on June 30, 2019 exposures.
Most Important Facts for Investors to Verify
- Whether Nevada Operations can resolve operational issues and resume anticipated production in early 2021 without a material impairment charge.
- Liquidity and refinancing plans for the May 2021 debt maturities, including compliance with the amended revolving-credit covenants.
- Actual 2019 capital spending, operating cash flow and borrowing needs relative to management’s estimates.
- Production recovery and cost performance at Casa Berardi, Greens Creek and San Sebastian, and the status of the Lucky Friday labor dispute.
- Potential cash exposure from environmental claims, reclamation obligations, Montanore permitting, shareholder litigation and other contingencies.
- The effect of metal prices, foreign exchange movements and derivative contracts on realized revenue, earnings and future cash flow.
- The company’s non-GAAP Cash Cost and All-In Sustaining Cost measures, including definitions and reconciliation to GAAP results.