Hecla Mining Company — Q1 2017 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious- and base-metals producer operating the Greens Creek, Lucky Friday, Casa Berardi and San Sebastian segments. The filing covers the three months ended March 31, 2017, with comparative results for the three months ended March 31, 2016. The unaudited interim results may not be indicative of full-year performance.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Sales of products | $142.5 million | $131.0 million | Up $11.5 million |
| Gross profit | $34.9 million | $30.8 million | Up $4.1 million |
| Gross margin | 24.5% | 23.5% | Up 1.0 percentage point |
| Income from operations | $15.9 million | $15.6 million | Up $0.3 million |
| Operating margin | 11.1% | 11.9% | Down 0.8 percentage point |
| Net income attributable to common stockholders | $26.7 million | $(0.8) million | Improved $27.5 million |
| Diluted earnings per share | $0.07 | Not meaningful due to loss | |
| Cash provided by operating activities | $38.3 million | $18.7 million | Up $19.6 million |
Net income benefited from a $29.1 million income-tax benefit, primarily from an IRS-approved change in the timing of deductions for Lucky Friday #4 Shaft development costs and a related valuation allowance release. Pre-tax results declined to a $2.2 million loss from $1.0 million of pre-tax income, reflecting derivative losses and higher interest expense.
- Cash and cash equivalents were $176.8 million at March 31, 2017, versus $169.8 million at December 31, 2016.
- Total cash, cash equivalents and investments were $218.4 million, including $36.5 million of current marketable debt securities and $5.1 million of non-current equity investments.
- Capital expenditures were $21.7 million, compared with $34.7 million in Q1 2016; the decrease primarily reflected completion of the Lucky Friday #4 Shaft project in January 2017.
- Net cash used in investing activities was $29.1 million; net cash used in financing activities was $4.0 million.
- Senior Notes had a principal balance of $506.5 million, bear interest at 6.875% and mature May 1, 2021. Carrying value was $501.3 million.
- The $100 million revolving credit facility had no borrowings outstanding; $2.6 million of letters of credit were outstanding. Management stated that the company was substantially in compliance with its covenants.
- Total liabilities were $892.2 million and stockholders’ equity was $1.514 billion at March 31, 2017.
- Accrued reclamation and closure liabilities totaled $86.8 million, including $79.3 million classified as non-current.
Material changes versus the prior comparable period
- Higher average realized prices supported revenue growth: silver $17.90 per ounce versus $14.93, gold $1,221 versus $1,187, lead $1.06 per pound versus $0.78 and zinc $1.26 versus $0.79.
- Sales increased despite lower silver production at Greens Creek and San Sebastian and reduced Lucky Friday production before its strike-related suspension.
- Greens Creek gross profit increased to $14.9 million from $9.0 million, while its after-by-product-credit AISC declined to $3.86 per silver ounce from $7.03.
- Lucky Friday gross profit increased to $5.5 million from $2.7 million, but production was suspended after unionized employees began a strike on March 13, 2017. Care-and-maintenance costs were $1.6 million in Q1 2017.
- Casa Berardi reported a gross loss of $0.8 million versus gross profit of $3.0 million, primarily due to East Mine Crown Pillar stripping costs and lower ore grades.
- San Sebastian gross profit declined to $15.3 million from $16.0 million because of lower grades and metal production.
- Exploration and pre-development expense increased by $2.4 million to $5.8 million, including $1.3 million of pre-development expense for the Montanore and Rock Creek projects.
- Interest expense increased by $2.8 million to $8.5 million, partly because less interest was capitalized after completion of the #4 Shaft project.
- Base-metal derivative losses totaled $7.8 million in Q1 2017, compared with no comparable loss in Q1 2016. Foreign-exchange loss improved to $2.3 million from $8.2 million.
Guidance, outlook, commentary and risks
- Management expects San Sebastian to continue generating positive cash flow in 2017 and 2018, subject to metals prices, costs and operating performance.
- Underground development and rehabilitation at San Sebastian began in Q1 2017. Capital costs are expected to total approximately $5.0 million, with underground ore production anticipated in late 2017.
- Management estimated 2017 exploration and pre-development expenditures of $25 million to $30 million, including $5.8 million incurred through March 31. No full-year 2017 capital-expenditure estimate was provided because of uncertainty surrounding the Lucky Friday strike.
- The Lucky Friday strike and production suspension could continue for an uncertain period and may adversely affect production, cash flow and results.
- Rock Creek and Montanore remain subject to permitting challenges and legal challenges by conservation groups; development is not assured.
- Metals prices, foreign-exchange rates, reserve estimates, operating costs and provisional concentrate settlements remain material sources of earnings volatility. The filing estimates that a 10% change in the CAD/USD rate could affect foreign-exchange gain or loss by approximately $13.7 million, and a 10% change in the MXN/USD rate by approximately $0.9 million.
- Environmental and legal matters include the Johnny M Mine remediation, for which a $5.6 million liability was accrued; the potential Carpenter Snow Creek liability cannot be reasonably estimated; and other litigation and regulatory matters could exceed recorded accruals.
- Surety bonds totaling $112.8 million supported reclamation, closure, self-insurance and employee-benefit obligations.
- Management stated that available cash, investments, operating cash flow and financing availability are expected to be adequate for obligations and other potential cash requirements over the next 12 months, although this depends on metals prices, operations and access to financing.
Most important facts for investors to verify
- Duration and economic impact of the Lucky Friday strike, including the timing and cost of any restart.
- Sustainability of operating cash flow excluding the $29.1 million tax benefit and other non-recurring or market-driven items.
- Exposure to the $506.5 million Senior Notes maturity in 2021, capital-lease obligations and ongoing interest costs.
- Actual production, grades, recoveries and unit costs at Greens Creek, Casa Berardi and San Sebastian.
- Progress, cost and permitting status of San Sebastian underground development, Rock Creek and Montanore.
- Potential changes to environmental, reclamation and litigation liabilities, especially Johnny M and Carpenter Snow Creek.
- Effect of metal-price and foreign-exchange derivative positions, including the $7.8 million Q1 derivative loss and future contractual exposures.
- Realizability of deferred tax assets, which depends on future taxable income and retained valuation allowances of approximately $81 million at March 31, 2017.