Hecla Mining Company: 2022 Q3 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious-metals mining company producing silver, gold, lead and zinc through Greens Creek, Lucky Friday and Casa Berardi. Nevada Operations remained largely in care and maintenance. The unaudited filing covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.
On September 7, 2022, Hecla acquired the remaining 90.1% of Alexco Resource Corp. for $81.5 million of total consideration, primarily adding the Keno Hill development property. Hecla also settled the acquired $135 million silver stream liability by issuing 34.8 million common shares.
Financial and operating metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Sales | $146.3 million | $193.6 million | $524.1 million | $622.4 million |
| Gross profit | $8.4 million | $35.2 million | $91.1 million | $164.6 million |
| Gross margin | 5.8% | 18.2% | 17.4% | 26.4% |
| Income (loss) from operations | $(25.5) million | $(8.6) million | $(3.0) million | $61.6 million |
| Net income (loss) | $(23.5) million | $(1.0) million | $(32.9) million | $23.2 million |
| Loss applicable to common stockholders | $(23.7) million | $(1.1) million | $(33.3) million | $22.8 million |
| Basic loss/income per share | $(0.04) | Nil | $(0.06) | $0.04 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $53.8 million | $167.0 million |
Third-quarter production was 3.5 million ounces of silver and 44,747 ounces of gold. Nine-month production was 10.5 million ounces of silver and 132,173 ounces of gold. Consolidated silver AISC, after by-product credits, was $14.20 per ounce in Q3 and $10.17 per ounce for the first nine months, compared with $12.82 and $8.88, respectively, in the prior-year periods. Consolidated gold AISC was $1,738 per ounce in Q3 and $1,729 per ounce year to date, compared with $1,476 and $1,387, respectively.
- Cash, cash equivalents and restricted cash were $145.9 million at September 30, 2022, down from $211.1 million at December 31, 2021. Cash and cash equivalents alone were $144.7 million.
- Total assets were $2.93 billion and stockholders’ equity was $1.95 billion at September 30, 2022.
- Long-term debt was $530.7 million, excluding current liabilities; principal debt totaled $510.2 million, consisting primarily of $475.0 million of 7.25% Senior Notes due 2028 and $35.2 million of IQ Notes.
- Hecla had drawn $25.0 million under its new $150 million secured revolving credit facility and had $7.8 million of letters of credit outstanding, leaving approximately $117.2 million of borrowing availability.
- Capital expenditures were $93.2 million through September 30, 2022. Exploration and pre-development spending was $39.1 million.
Material changes versus the prior comparable period
- Sales declined 24% in Q3 and 16% for the first nine months, primarily from lower metal prices, lower payable sales volumes and the absence of Nevada refractory-ore processing revenue recorded in 2021.
- Lower silver, gold and lead prices in Q3, together with negative provisional pricing adjustments, reduced revenue. Nine-month revenue also benefited from higher zinc and gold prices, but this was insufficient to offset lower volumes and silver prices.
- Operating results were pressured by inflation in energy, consumables, labor and contractor costs. Greens Creek gross profit fell $21.2 million in Q3 and $56.1 million year to date; Casa Berardi reported gross losses of $2.6 million in Q3 and $1.9 million year to date.
- Fair-value adjustments shifted to a $4.2 million loss in Q3 from a $9.3 million gain in the prior-year quarter, while nine-month fair-value losses increased to $14.7 million. Equity-security losses and derivative-accounting changes were significant contributors.
- Operating cash flow fell $113.2 million year to date, reflecting the net loss and working-capital outflows from higher inventories, a deferred Greens Creek shipment and changes in receivables and hedges.
- Capital spending increased year to date, particularly at Lucky Friday and Greens Creek. Common and preferred dividends paid declined to $10.5 million from $17.2 million in the prior-year period.
- Common shares outstanding increased materially because of the Alexco acquisition and settlement of the silver stream. Hecla also sold 1.2 million shares under its ATM program for $4.5 million of net proceeds.
Guidance, outlook, commentary and risks
- Management expects Keno Hill production to commence before the end of 2023 and is advancing mine development following the Alexco acquisition.
- Management estimated 2022 capital expenditures of approximately $150 million to $165 million, including $93.2 million incurred through September 30, and exploration and pre-development spending of approximately $45 million, including $39.1 million incurred.
- Management stated that available cash, expected operating performance, potential ATM proceeds and revolving-credit availability should fund obligations and expected cash requirements for the following 12 months. This assessment depends on metals prices, operating costs, production, liquidity access and other factors.
- Key risks include volatile silver, gold, lead and zinc prices; inflationary pressures; mine operating and development performance; COVID-19-related disruptions; foreign-exchange movements; permitting and regulatory requirements; environmental remediation; mine safety; litigation; and the need for future financing.
- Environmental and regulatory matters include EPA notices of violation involving Greens Creek and Lucky Friday, Superfund-related matters, and an accrued $9.0 million Johnny M Mine liability that could increase. Total recorded closure, reclamation and environmental liabilities were $116.3 million.
- Other contingencies include a shareholder class action and derivative litigation related to the Klondex acquisition. The filing states that potential losses cannot currently be estimated.
- Derivative positions provide exposure management but also create counterparty, liquidity and mark-to-market risks. A 10% change in relevant metal prices would affect the value of provisional concentrate sales by approximately $8.2 million; a 10% USD/CAD movement would affect net foreign-exchange gain or loss by approximately $7.2 million.
- An immaterial out-of-period tax adjustment increased accumulated other comprehensive loss by $12.6 million and had no effect on net loss applicable to common stockholders.
Most important facts for investors to verify
- Whether Keno Hill development remains on schedule and within expected capital requirements for production before the end of 2023.
- Revised production, cost and capital-spending expectations in light of lower metal prices and inflation.
- Greens Creek and Casa Berardi cost performance, including the sustainability of higher AISC.
- Liquidity after capital spending, the $25 million revolving-credit draw, debt service and potential acquisition or development expenditures.
- Potential dilution from the Alexco and silver-stream share issuances, the ATM program and any further equity financing.
- Developments in EPA enforcement, Superfund matters, reclamation obligations and shareholder litigation.
- The impact of provisional pricing adjustments, derivative contracts, foreign-exchange movements and accumulated other comprehensive income or loss on future earnings and cash flow.