Hecla Mining Company — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone Q4 filing; quarterly data are included. Hecla operates five segments producing silver, gold, lead and zinc: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations.
Business Context
- Hecla completed the acquisition of Klondex Mines on July 20, 2018 for approximately $414.2 million, adding the Fire Creek, Hollister and Midas mines, the Midas and Aurora mills, and related Nevada exploration assets.
- Sales contributions were Greens Creek 46.7%, Casa Berardi 37.1%, San Sebastian 8.9%, Nevada Operations 5.5% and Lucky Friday 1.8%.
- Lucky Friday production remained limited by a union strike that began in March 2017. Nevada Operations was consolidated only from July 20, 2018.
Financial and Operating Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales of products | $567.1 million | $577.8 million | Down 1.8% |
| Gross profit | $79.1 million | $152.4 million | Down $73.4 million |
| Net loss | $26.6 million | $28.5 million | Improved $2.0 million |
| Loss applicable to common stockholders | $27.1 million | $29.1 million | Improved $2.0 million |
| Loss per common share | $0.06 | $0.07 | Improved |
| EBITDA, non-GAAP | $148.6 million | $156.9 million | Down 5.3% |
| Cash flow from operations | $94.2 million | $115.9 million | Down $21.7 million |
| Capital expenditures | $136.9 million | $98.0 million | Up $38.9 million |
| Cash and cash equivalents | $27.4 million | $186.1 million | Down $158.7 million |
| Total assets | $2.704 billion | $2.345 billion | Up $358.8 million |
Gross margin was approximately 14.0% in 2018 versus 26.4% in 2017. The decline reflected higher direct production costs, increased depreciation, the addition of Nevada Operations, lower San Sebastian profitability and continued Lucky Friday disruption.
- Production: Silver was 10.37 million ounces, gold 262,103 ounces, lead 20,091 tons and zinc 56,023 tons. Compared with 2017, silver production declined 16.9%, while gold production increased 12.7%; lead declined 11.6% and zinc increased 1.7%.
- Realized prices: Silver $15.63 per ounce, gold $1,265 per ounce, lead $1.04 per pound and zinc $1.27 per pound. Silver, lead and zinc prices declined from 2017, while gold increased slightly.
- Segment performance: Greens Creek gross profit was $75.6 million; Casa Berardi gross profit was $10.9 million; San Sebastian gross profit was $8.4 million; Lucky Friday generated no gross profit; and Nevada Operations recorded a $15.8 million gross loss after acquisition.
- Non-GAAP costs: Consolidated silver-property cash cost after by-product credits was $1.08 per ounce and AISC after by-product credits was $11.44 per ounce. Gold-property cash cost was $871 per ounce and AISC was $1,226 per ounce.
Liquidity, Debt and Capital Resources
- Cash, cash equivalents and investments totaled $34.0 million at year-end, including $27.4 million of cash and $6.6 million of non-current equity investments.
- Total debt and capital leases were approximately $545.9 million. Principal debt consisted primarily of $506.5 million of 6.875% Senior Notes due May 1, 2021 and approximately $29.3 million of RQ Notes due May 1, 2021.
- The company had a $250 million secured revolving credit facility. No borrowings were outstanding at December 31, 2018, other than $3.0 million of letters of credit; $48.0 million was drawn as of the filing date.
- Management expected approximately $150 million of 2019 capital expenditures and $28 million of exploration and pre-development spending. Management also anticipated borrowing under the revolving facility during 2019.
- Total contractual cash obligations were $689.6 million, including debt service, leases, purchase obligations, pension funding and other commitments.
Material Changes Versus Prior Period
- The Klondex acquisition materially expanded the company’s gold exposure and increased total assets, capital spending and reclamation liabilities, but contributed a $15.8 million gross loss for the ownership period and included $10.0 million of acquisition costs.
- Cash declined sharply because of the Klondex transaction, including $139.3 million of net cash used for the acquisition, higher capital spending and ongoing operating requirements.
- San Sebastian transitioned from higher-grade open-pit production to lower-grade, higher-cost underground production. Its gross profit fell from $62.1 million in 2017 to $8.4 million in 2018.
- Lucky Friday generated only $9.8 million of sales versus $21.6 million in 2017 and incurred $14.6 million of strike-related suspension costs plus $5.0 million of depreciation.
- Base-metal forward contracts produced a $40.3 million gain in 2018 versus a $21.3 million loss in 2017. The company settled forecasted zinc and lead contracts for approximately $32.8 million of cash proceeds and had no forecasted production committed under those contracts at year-end.
- Exploration and pre-development expense increased to $40.6 million from $29.0 million. Proven and probable reserves increased 8% for silver, 26% for gold, 11% for zinc and 5% for lead.
- Prior-period financial statements were revised for Casa Berardi depreciation, depletion and amortization errors. The company concluded the errors were not material to previously issued financial statements; the revisions reduced previously reported 2017 net income by $5.0 million and 2016 net income by $8.0 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available cash, expected operating performance, potential at-the-market equity sales and the revolving facility should support obligations for the next 12 months, but acknowledged dependence on metals prices, operating performance and continued credit access.
- Key 2019 priorities include integrating and improving Nevada Operations, advancing Fire Creek and Hollister development, continuing San Sebastian exploration and underground production, investing in existing mines, and advancing permitting for the Rock Creek and Montanore projects.
- The Lucky Friday strike remained unresolved. Management expected monthly cash expenditures of approximately $1.5 million to $2.0 million for restart engineering and infrastructure, in addition to limited production costs.
- Rock Creek and Montanore face significant permitting and litigation risk. Montanore was subject to a $3.325 million trespass verdict, which the company planned to appeal; regulatory litigation could delay or prevent development of either project.
- Environmental, reclamation and closure liabilities totaled $108.4 million. Surety bonds totaled $185.3 million. The company disclosed potential additional exposure from Superfund sites, water permits, environmental claims and other legal proceedings.
- Commodity prices, foreign exchange rates, labor disruptions, mine safety, ground instability, permitting, environmental compliance, reserve estimates and acquisition integration are material risks.
- Nevada Operations had no forward contracts protecting future gold prices, increasing exposure to gold-price volatility.
- At December 31, 2018, management concluded that all assets reviewed for recoverability exceeded carrying value on an undiscounted cash-flow basis; however, future price declines, cost increases or operational disruptions could cause impairment charges.
Important Facts for Investors to Verify
- Verify the company’s ability to refinance or repay the Senior Notes and RQ Notes due in 2021, including compliance with revolving-credit covenants.
- Monitor cash usage, revolving-facility borrowings, capital expenditures and the planned $150 million 2019 capital program.
- Assess whether Lucky Friday resumes full production and whether the labor dispute creates impairment risk for its approximately $435.6 million carrying value.
- Evaluate Nevada Operations’ ability to improve from its 2018 gross loss and reduce cash cost and AISC, particularly at Fire Creek and Hollister.
- Track San Sebastian grades, underground mining costs and the potential Hugh Zone bulk sample results.
- Review environmental accruals, surety-bond requirements and unresolved EPA, CERCLA, Montanore and other legal matters.
- Distinguish GAAP results from non-GAAP cash cost, AISC and EBITDA measures, and consider the substantial contribution of by-product credits to reported silver economics.
- Consider dilution from the 75.3 million shares issued for Klondex, additional at-the-market equity issuance and outstanding warrants.