Hecla Mining Company: FY2014 Form 10-K 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 in Alaska, Lucky Friday in Idaho and Casa Berardi in Quebec, Canada. The filing covers the fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter information.
Casa Berardi was owned for a full year in 2014 versus seven months in 2013 following the June 2013 acquisition of Aurizon Mines. Lucky Friday operated at full historical production rates throughout 2014 after its prior suspension.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Sales of products | $500.8 million | $382.6 million |
| Gross profit | $85.2 million | $66.1 million |
| Gross margin | 17.0% | 17.3% |
| Income from operations | $21.6 million | $(32.4) million |
| Operating margin | 4.3% | (8.5)% |
| Net income | $17.8 million | $(25.1) million |
| Income applicable to common stockholders | $17.3 million | $(25.7) million |
| Diluted EPS | $0.05 | $(0.08) |
| EBITDA | $151.5 million | $69.1 million |
| Cash flow from operating activities | $83.1 million | $26.6 million |
| Capital expenditures | $122.5 million | $150.7 million |
| Cash and cash equivalents | $209.7 million | $212.2 million |
| Total assets | $2.26 billion | $2.23 billion |
Fourth-quarter 2014 sales were $122.0 million, gross profit was $22.2 million and net income was $16.9 million, or $0.05 diluted EPS. Fourth-quarter 2013 sales were $114.2 million, gross profit was $14.7 million and net income was a $2.9 million loss.
Production increased to 11.1 million ounces of silver, 187,000 ounces of gold, 40,255 tons of lead and 67,969 tons of zinc. Compared with 2013, silver production increased 24%, gold 56%, lead 33% and zinc 11%.
- Greens Creek sales were $245.2 million, with gross profit of $45.5 million and cash cost after by-product credits of $2.89 per silver ounce.
- Lucky Friday sales were $89.8 million, with gross profit of $21.9 million and cash cost after by-product credits of $9.44 per silver ounce.
- Casa Berardi sales were $165.8 million, with gross profit of $17.8 million and cash cost after by-product credits of $826 per gold ounce.
Material changes versus the prior comparable period
- Revenue increased 31%, primarily due to a full year of Casa Berardi ownership and a full year of Lucky Friday production, partly offset by lower silver and gold prices.
- Hecla returned to profitability, with operating income of $21.6 million versus a $32.4 million operating loss in 2013.
- Operating cash flow increased 212% to $83.1 million, despite $55.4 million of payments related to the Coeur d’Alene Basin environmental settlement.
- Silver and gold average market prices declined to $19.08 per ounce and $1,266 per ounce, respectively, from $23.83 and $1,411 in 2013. Average zinc prices increased to $0.98 per pound from $0.87; lead prices were broadly stable.
- Greens Creek gross profit fell to $45.5 million from $69.7 million because of lower precious-metals prices, timing of sales and higher depreciation, depletion and amortization.
- Lucky Friday gross profit improved from a $4.9 million loss to $21.9 million as production resumed at historical levels.
- Exploration and pre-development expense declined to $19.7 million from $37.7 million as management scaled back discretionary spending.
- Debt increased following the Aurizon transaction. Total indebtedness was approximately $521.6 million, including the 6.875% Senior Notes due 2021 and capital leases.
- Accrued reclamation and closure liabilities declined to $57.3 million from $105.2 million, primarily after final payments under the Coeur d’Alene Basin settlement.
Liquidity, outlook, risks and unusual items
Hecla had $209.7 million of cash and $4.9 million of non-current investments at year-end. Its $100 million revolving credit facility was undrawn, available through November 2018, and all financial covenants were satisfied. Management stated that available cash, projected operating cash flow and financing capacity should be adequate for the next 12 months.
Management estimated 2015 capital expenditures of approximately $145 million and exploration and pre-development expenditures of approximately $18 million. The Lucky Friday #4 Shaft project was expected to be completed in 2016 at a total cost of approximately $215 million, with approximately $165 million spent by year-end 2014 and about $50 million remaining.
- Commodity-price exposure remains significant. Forward contracts covered portions of provisional sales of silver, gold, zinc and lead and forecast zinc and lead production. These contracts produced a $9.1 million gain on forecasted shipments and a $1.5 million gain related to provisional sales in 2014.
- Mining, safety, ground-control, equipment, labor, power, transportation and permitting risks could reduce production or increase costs.
- Environmental and reclamation obligations are material. Greens Creek's revised closure plan included perpetual water treatment, increasing estimated undiscounted closure costs to approximately $96.7 million and reclamation bonding to approximately $68.9 million.
- Legal and regulatory contingencies include Lucky Friday water-permit matters, Superfund-related claims and personal-injury litigation. The filing states that some potential liabilities cannot be reasonably estimated.
- The Johnny M site liability was increased by $5.6 million; remediation alternatives discussed with the EPA ranged from zero to $221 million, with Hecla's recommended alternative estimated at $5.6 million.
- The U.S. defined-benefit pension plan was underfunded by $43.7 million at year-end, compared with $32.1 million at year-end 2013.
- No material off-balance-sheet arrangements were reported. BDO USA, LLP issued an unqualified audit opinion and an unqualified opinion on internal control over financial reporting.
Most important facts for an investor to verify
- Whether lower precious-metals prices or higher operating and capital costs could impair reserves, mine economics or asset carrying values.
- The remaining cost, schedule and expected production benefits of the Lucky Friday #4 Shaft project.
- Actual 2015 production, cash costs and operating cash flow at all three mines, particularly Casa Berardi and Lucky Friday.
- The status and possible monetary exposure from Lucky Friday water-permit matters, Superfund sites and other environmental claims.
- Debt-service capacity under the $498.5 million carrying value of Senior Notes and the approximately $23.8 million of capital-lease commitments.
- The sustainability of dividends, share repurchases and exploration spending while funding capital projects and reclamation obligations.
- The effect of provisional pricing, derivative gains and Canadian-dollar movements on reported revenue and earnings.