HECLA MINING CO quarterly report, Q1 FY2023

Hecla Mining Company: Q1 2023 Form 10-Q Summary

Business Context and Reporting Period

Hecla Mining Company is a precious-metals producer focused on silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday, Keno Hill, Casa Berardi and Nevada Operations. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022.

Hecla produced 4.0 million ounces of silver and 39,717 ounces of gold during the quarter. Keno Hill remained in development, with production expected to begin in the third quarter of 2023.

Financial and Operating Metrics

Metric	Q1 2023	Q1 2022	Change
Sales	$199.5 million	$186.5 million	Up 7.0%
Gross profit	$34.9 million	$45.4 million	Down $10.5 million
Income from operations	$5.6 million	$14.8 million	Down $9.2 million
Net income applicable to common stockholders	$(3.3) million	$4.0 million	Declined to a loss
Diluted earnings per share	$(0.01)	$0.01	Declined
Cash provided by operating activities	$40.6 million	$37.9 million	Up $2.7 million
Capital expenditures	$54.4 million	$21.5 million	Up $33.0 million
Cash, cash equivalents and restricted cash	$97.3 million	$213.1 million	Down $115.8 million year over year

Gross margin was approximately 17.5%, compared with 24.4% in the prior-year quarter. Operating margin was approximately 2.8%, compared with 7.9%; net margin applicable to common stockholders was approximately negative 1.7%, compared with positive 2.2%.

Silver production increased 22% to 4.04 million ounces, while payable silver sales increased 34% to 3.60 million ounces.
Gold production decreased 5% to 39,717 ounces, and payable gold sales decreased 4% to 39,473 ounces.
Lucky Friday sales increased to $49.1 million from $38.0 million, and gross profit increased to $14.6 million from $8.8 million.
Greens Creek sales increased to $98.6 million from $86.1 million, but gross profit declined to $32.3 million from $36.5 million due to lower realized prices and higher costs.
Casa Berardi sales declined to $51.0 million from $62.1 million and reported a $12.0 million gross loss, compared with a $0.1 million gross loss in Q1 2022.
Keno Hill generated no revenue and incurred approximately $5.9 million of site-specific ramp-up costs.
Consolidated silver Cash Cost After By-product Credits was $2.14 per ounce, compared with $1.09; consolidated silver AISC After By-product Credits was $8.96 per ounce, compared with $7.37. These are non-GAAP measures.

Liquidity, Debt and Capital Resources

At March 31, 2023, Hecla had $95.9 million of cash and cash equivalents, $26.4 million of marketable equity securities and $122.3 million of total cash, cash equivalents and investments. Total liabilities were $933.5 million and stockholders’ equity was $2.0 billion.

Long-term debt, including finance leases, was $517.0 million. Principal debt consisted primarily of $475.0 million of 7.25% Senior Notes due 2028 and approximately $35.6 million of IQ Notes due 2025.
The company had a $150 million senior secured revolving credit facility, expandable by up to $75 million, with $6.7 million of outstanding letters of credit and no reported revolving borrowings at quarter-end.
Management stated that the company was in compliance with credit-agreement covenants and believed available liquidity was sufficient to meet obligations for the next 12 months.
Operating cash flow of $40.6 million was insufficient to fund $54.4 million of capital expenditures; financing activities provided $5.0 million, including $11.9 million of net proceeds from ATM share issuances.
Common and preferred dividends paid totaled $3.9 million, including a common dividend of $0.00625 per share.

Material Changes Versus the Prior Comparable Period

Revenue increased because higher production and sales volumes, particularly at Greens Creek and Lucky Friday, more than offset lower realized prices for silver, lead and zinc.
Production costs increased due to inflation in energy, consumables, labor, maintenance and contractor expenses.
Casa Berardi experienced lower gold production and higher operating and sustaining-capital costs, materially worsening its gross loss.
General and administrative expense increased by $3.8 million, primarily reflecting personnel from the Alexco acquisition and compensation adjustments.
Ramp-up and suspension costs increased by $5.1 million, primarily due to Keno Hill development and ramp-up activities.
Exploration and pre-development expense declined by $7.8 million, while capital spending increased substantially because of Keno Hill and higher spending at Casa Berardi, Greens Creek and Lucky Friday.
The company issued 2.17 million common shares under its ATM program for $11.9 million net proceeds, increasing dilution risk.
Fair value gains declined to $3.2 million from $6.0 million, principally because of lower unrealized gains on marketable equity securities.

Outlook, Commentary, Risks and Unusual Items

Management described the medium- and long-term precious-metals outlook as favorable but emphasized that results remain highly sensitive to silver, gold, lead and zinc prices, foreign-exchange rates, inflation and operating performance. The filing does not provide a full-year production or earnings guidance target.

Management estimated 2023 capital expenditures of approximately $190 million to $200 million, including $54.4 million incurred through March 31, 2023.
Management estimated 2023 exploration and pre-development expenditures of approximately $33.0 million, including $5.0 million incurred through March 31.
Keno Hill is expected to begin producing silver in Q3 2023, but remains exposed to development, ramp-up, cost and timing risks.
The effective tax rate was unusually high at 4,699%, primarily because losses at Alexco subsidiaries and Nevada Operations did not generate recognized tax benefits. The filing cautions that quarterly tax rates may fluctuate significantly.
Environmental and reclamation liabilities totaled $118.3 million. The company accrued $9.0 million for the Johnny M Mine remediation, but stated that liability could be higher.
Potential environmental liabilities relating to the San Mateo Creek Basin and Carpenter Snow Creek and Barker-Hughesville sites cannot currently be estimated with reasonable certainty. The filing notes that remediation costs at Carpenter Snow Creek could exceed $100 million in total, although Hecla’s share is undetermined.
EPA notices of violation remain outstanding for Greens Creek under RCRA and Lucky Friday under the Clean Water Act. Potential penalties and settlement terms cannot be reasonably estimated.
A putative shareholder class action and related derivative litigation concerning Nevada Operations remain unresolved. The company disputes the claims and cannot predict the outcome or potential damages.
Commodity and foreign-exchange exposures remain material. A 10% change in relevant metal prices could change the value of provisional concentrate sales by approximately $12.8 million, while a 10% change in the USD/CAD exchange rate could affect net foreign-exchange gain or loss by approximately $10.7 million.
After quarter-end, Hecla announced an agreement for Alexco to acquire ATAC Resources and its Yukon projects for total consideration described as approximately CAD$39 million, including an investment in Cascadia Minerals.

Important Facts for Investors to Verify

Progress, commissioning date, production ramp-up and capital requirements for Keno Hill.
Whether Casa Berardi’s lower production and elevated costs improve during the remainder of 2023.
Actual metal prices, by-product credits, realized prices and the effect of hedging contracts on revenue and cash flow.
Execution of the $190 million to $200 million 2023 capital-spending plan and its funding relative to operating cash flow.
Cash levels, ATM share issuance and potential dilution, particularly if metal prices or operating results weaken.
Environmental remediation exposure, EPA proceedings, reclamation obligations and unresolved litigation.
Debt maturities, including the IQ Notes due in 2025 and Senior Notes due in 2028, together with credit-facility availability and covenant compliance.
Reconciliations and comparability of the company’s non-GAAP Cash Cost and AISC measures with those reported by other mining companies.