Hecla Mining Company 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company is a precious- and base-metals producer focused on silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday and Casa Berardi. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods.
On June 15, 2015, Hecla acquired Revett Mining Company for approximately $20.1 million, consisting of $0.9 million in cash and $19.1 million in Hecla common stock. The acquisition added the Rock Creek project and the Troy mine, which is on care-and-maintenance and is expected to be reclaimed and closed.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Sales of products | $104.2 million | $117.5 million | $223.3 million | $243.3 million |
| Gross profit | $9.5 million | $18.7 million | $29.3 million | $41.0 million |
| Gross margin | 9.1% | 15.9% | 13.1% | 16.8% |
| Income (loss) from operations | $(17.3) million | $5.0 million | $(12.4) million | $12.9 million |
| Net loss | $(26.7) million | $(14.4) million | $(14.1) million | $(2.8) million |
| Loss applicable to common shareholders | $(26.8) million | $(14.5) million | $(14.4) million | $(3.0) million |
| Basic loss per share | $(0.07) | $(0.04) | $(0.04) | $(0.01) |
| Cash provided by operating activities | Not separately reported | Not separately reported | $52.2 million | $57.0 million |
At June 30, 2015, cash and cash equivalents were $191.6 million, compared with $209.7 million at December 31, 2014. Total current assets were $299.1 million and current liabilities were $109.2 million. Total assets were $2.29 billion and shareholders’ equity was $1.41 billion.
Debt included $501.4 million of long-term debt, $1.8 million of current debt and $20.1 million of capital lease liabilities. The principal debt consists of 6.875% senior notes due May 1, 2021. Hecla had no borrowings outstanding under its $100 million revolving credit facility and was in compliance with all covenants.
Capital expenditures were $58.3 million during the first six months, while cash used in investing activities was $59.9 million. Cash used in financing activities was $8.1 million, producing a net decrease in cash of $18.1 million.
Material Changes Versus the Prior Comparable Period
- Sales declined 11.3% in the second quarter and 8.2% in the first six months, primarily reflecting lower silver, gold and lead prices, lower Lucky Friday production and weaker Casa Berardi results.
- Gross margin declined to 9.1% in the second quarter from 15.9% and to 13.1% for the first half from 16.8%.
- Lucky Friday sales decreased to $14.6 million from $23.8 million in the quarter, and its operating result declined to a $0.6 million loss from $6.4 million of income. A failed underground booster fan restricted ventilation and prevented access to a higher-grade stope.
- Casa Berardi sales decreased to $35.6 million from $38.3 million in the quarter and to $67.4 million from $80.4 million for the first half. Lower gold prices and recoveries led to an operating loss.
- Greens Creek was a relative bright spot: first-half sales increased to $121.4 million from $119.0 million and operating income increased to $24.6 million from $19.9 million, supported by higher silver production, grades and recovery.
- Operating results included $9.8 million of first-half provisions for closed operations and environmental matters, including an $8.7 million second-quarter charge related to the Gilt Edge and Nelson Tunnel/Commodore sites.
- Exploration and pre-development expense increased to $11.3 million from $8.1 million for the first half, and Revett acquisition costs added $2.1 million.
- Base-metal derivative results improved compared with 2014, producing a $4.9 million gain in the first half of 2015 versus a $2.1 million loss in the prior-year period. The 2015 gain included proceeds from monetizing favorable contracts.
Guidance, Outlook, Risks and Unusual Items
- Management expected to make a development decision during the third quarter of 2015 for near-surface, high-grade deposits at San Sebastian in Mexico. Production was targeted for late 2015, with processing expected to begin in early 2016. Planned development and pre-production costs were approximately $10 million.
- Management estimated 2015 capital expenditures of approximately $150 million and exploration and pre-development expenditures of approximately $24 million.
- The Lucky Friday #4 Shaft project was expected to cost approximately $225 million in total, of which approximately $184 million had been spent by June 30, 2015. Completion was expected in 2016, subject to metals prices, liquidity, regulatory requirements and cost changes.
- Management stated that available cash, operating cash flow and the undrawn revolving facility were expected to be adequate for the next 12 months, but noted that a sustained metals-price downturn, higher operating or capital costs, litigation, regulatory matters or other cash uses could affect liquidity.
- Environmental and reclamation liabilities totaled approximately $91.9 million. The Troy mine acquisition added an estimated $18.8 million reclamation obligation, partially supported by a $16.8 million insurance asset; recovery under the policy is not assured.
- Hecla accrued an estimated $5.6 million liability for remediation at the Johnny M Mine Area. It also accrued a $9.9 million estimated net liability relating to the Gilt Edge and Nelson Tunnel/Commodore Superfund sites, although the final amount could change materially.
- Hecla settled Lucky Friday water-permit matters with the United States for a $0.6 million civil penalty. A related groundwater investigation remained incomplete.
- The company remains exposed to volatility in silver, gold, zinc and lead prices, provisional concentrate settlement adjustments, Canadian-dollar exchange rates and derivative counterparty and market risks.
- The second-quarter common dividend was $0.0025 per share under the minimum dividend policy; no price-linked dividend was declared because the average realized silver price was $16.32 per ounce, below the policy threshold.
Most Important Facts for Investors to Verify
- Whether Lucky Friday ventilation repairs restore access to the higher-grade stope and improve production in the fourth quarter of 2015.
- Progress, remaining cost and completion timing for the #4 Shaft project.
- San Sebastian permitting, development spending and the timing and economics of initial production.
- Realized metals prices, derivative gains or losses and the sensitivity of cash flow to further price declines.
- The final remediation obligations for the Johnny M, Gilt Edge, Nelson Tunnel/Commodore and Troy mine sites, including insurance recoveries.
- Whether Casa Berardi recovery improvements occur as expected after mill adjustments for the 118 Zone ore.
- Liquidity after capital expenditures, reclamation spending, debt service and the $500 million-plus senior-notes obligation.
- The company’s reported financial controls were deemed effective as of June 30, 2015, but the filing states that interim results may not be indicative of full-year results.