Hecla Mining Company — Q2 2023 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious-metals producer focused primarily on silver, with gold, lead and zinc by-products. Its operating segments are Greens Creek, Lucky Friday, Keno Hill, Casa Berardi and Nevada Operations. The filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Hecla began ramping up the Keno Hill mill during the second quarter following its 2022 Alexco acquisition. Management expects full production levels by year-end and 2.5 million ounces of Keno Hill silver production in 2023.
Key financial and operating metrics
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Sales | $178.1 million | $191.2 million | $377.6 million | $377.7 million |
| Gross profit | $37.7 million | $37.3 million | $72.6 million | $82.7 million |
| Income from operations | $4.8 million | $7.7 million | $10.4 million | $22.5 million |
| Net loss | $15.7 million | $13.5 million | $18.9 million | $9.4 million |
| Net loss applicable to common stockholders | $15.8 million | $13.7 million | $19.1 million | $9.6 million |
| Loss per diluted share | $0.03 | $0.03 | $0.03 | $0.02 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $64.4 million | $78.1 million |
Q2 gross margin was approximately 21.1%, operating margin was approximately 2.7% and net margin was approximately negative 8.8%. H1 gross margin was approximately 19.2%, operating margin approximately 2.7% and net margin approximately negative 5.0%.
- Q2 production totaled 3.8 million ounces of silver and 35,251 ounces of gold. H1 production totaled 7.9 million ounces of silver and 74,822 ounces of gold.
- Silver sales increased to $79.5 million in Q2 from $70.1 million, while gold sales declined to $62.9 million from $82.0 million. Zinc sales declined to $25.9 million from $31.2 million.
- Consolidated Q2 silver Cash Cost after by-product credits was $3.32 per ounce and AISC was $11.63 per ounce. H1 amounts were $2.70 and $10.21 per ounce, respectively. These are non-GAAP measures.
- Cash and cash equivalents were $106.8 million at June 30, 2023, compared with $104.7 million at December 31, 2022. Including investments, liquid assets totaled $127.6 million.
- Six-month capital expenditures were $105.9 million, compared with $55.8 million in the prior-year period. The company estimates 2023 capital expenditures of approximately $225 million to $235 million and exploration and pre-development spending of approximately $33.0 million.
- Long-term debt, including finance leases, was $559.8 million at June 30, 2023. Principal debt consisted of $475.0 million of 7.25% Senior Notes due 2028 and approximately $36.4 million of IQ Notes due 2025. The company had $31.0 million drawn under its $150 million revolving credit facility and $6.8 million of letters of credit outstanding.
- Hecla paid $7.8 million of common and preferred dividends during the first six months and declared a Q2 common dividend of $0.00625 per share.
Material changes versus prior comparable periods
- Q2 sales declined 6.9%, primarily because lower gold sales volumes outweighed higher silver and gold realized prices. H1 sales were essentially unchanged.
- H1 gross profit declined $10.1 million, and net loss applicable to common stockholders doubled to $19.1 million. Higher operating costs, lower by-product credits and increased Keno Hill ramp-up costs were significant contributors.
- Ramp-up and suspension costs increased to $16.3 million in Q2 and $27.7 million in H1, including $9.4 million and $15.3 million, respectively, for Keno Hill. Casa Berardi also incurred $2.2 million of suspension costs after Quebec forest fires forced a 20-day shutdown.
- Casa Berardi sales declined to $36.9 million in Q2 from $62.6 million and generated a $5.6 million gross loss. H1 sales declined to $87.9 million from $124.7 million, with a $17.6 million gross loss.
- Lucky Friday gross profit increased to $10.5 million in Q2 from $5.5 million and to $25.0 million in H1 from $14.3 million, supported by higher silver production and realized prices. Its Q2 silver production increased 5% year over year.
- Keno Hill generated $1.6 million of sales in Q2 and recorded no gross profit because production remained in the ramp-up phase.
- Operating cash flow declined $13.7 million in H1, while investing cash use increased $31.3 million, primarily due to higher capital spending. Financing activities provided $42.3 million, including $25.9 million of ATM equity proceeds and net revolving-credit borrowings.
Guidance, outlook, commentary and risks
Management stated that medium- and long-term precious-metals fundamentals are favorable but emphasized significant commodity-price volatility and cost inflation affecting energy, consumables, labor and contractors. The filing does not provide a consolidated production or earnings forecast beyond the stated Keno Hill expectations and 2023 spending estimates.
- Casa Berardi underground mining is expected to stop in mid-2024. Production from the 160 pit is expected to end in 2027, followed by an anticipated 2028–2030 production gap while Hecla invests in infrastructure, stripping and permitting. Management expects mining to resume in 2030.
- Hecla believes available cash, operating performance, potential ATM proceeds and revolving-credit availability will fund obligations for the next 12 months and beyond. However, it may defer capital or exploration spending, sell assets or seek additional financing if conditions deteriorate.
- Commodity-price, foreign-exchange and operating risks remain material. A 10% change in relevant metals prices on provisional concentrate sales would affect value by approximately $10.7 million; a 10% change in the USD/CAD exchange rate would affect net foreign-exchange gain or loss by approximately $9.9 million.
- Environmental and legal contingencies include a $10.1 million accrual for the Johnny M Mine remediation, potential additional liabilities at the San Mateo Creek Basin, Carpenter Snow Creek and Barker-Hughesville sites, and unresolved EPA matters involving Lucky Friday.
- Reclamation and environmental liabilities totaled $119.9 million. Surety bonds of $193.2 million and letters of credit of $6.8 million supported reclamation, closure, self-insurance and employee-benefit obligations.
- On July 10, 2023, after quarter-end, Hecla completed the approximately $18.8 million acquisition of ATAC Resources through the issuance of 3,676,904 Hecla shares and obtained a 19.9% interest in Cascadia Minerals.
Most important facts for investors to verify
- Progress, production rates, costs and funding requirements for the Keno Hill ramp-up.
- Casa Berardi’s declining production profile, 2024 underground shutdown, 2028–2030 expected production gap and associated capital needs.
- Whether operating cash flow can support the company’s $225 million–$235 million 2023 capital program without additional debt or equity issuance.
- Commodity prices, by-product credits and the effect of hedging arrangements on realized prices, liquidity and future earnings.
- Liquidity headroom under the revolving credit facility, upcoming 2025 IQ Note maturity and 2028 Senior Note maturity.
- Potential changes to the $10.1 million Johnny M remediation accrual and other unresolved environmental, regulatory and litigation exposures.
- The dilution impact of the ATM program and the 3.7 million shares issued for the ATAC acquisition.