Hecla Mining Company — 2021 Third-Quarter Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious-metals producer of silver, gold, lead and zinc, with operating segments at Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations. The filing covers the three and nine months ended September 30, 2021; financial statements are unaudited.
Hecla reported that San Sebastian mining was completed in the third quarter of 2020 and milling in the fourth quarter of 2020. Lucky Friday returned to full production in the fourth quarter of 2020 after the prior labor strike.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales of products | $193.6 million | $199.7 million | $622.4 million | $503.0 million |
| Gross profit | $35.2 million | $58.7 million | $164.6 million | $110.2 million |
| Gross margin | 18.2% | 29.4% | 26.4% | 21.9% |
| Income (loss) from operations | $(8.6) million | $36.5 million | $61.6 million | $38.1 million |
| Net income (loss) | $(1.0) million | $15.3 million | $23.2 million | $(12.6) million |
| Income (loss) applicable to common shareholders | $(1.1) million | $15.1 million | $22.8 million | $(13.0) million |
| Basic earnings per share | $(0.002) | $0.029 | $0.043 | $(0.025) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $167.0 million | $115.9 million |
Q3 operating results included $43.8 million of other operating expenses, including exploration and pre-development, environmental and closed-operation provisions, and ramp-up or suspension costs. Q3 other income included a $12.1 million derivative gain, partly offset by a $2.9 million unrealized investment loss and $10.5 million of interest expense.
At September 30, 2021, cash and cash equivalents were $190.9 million, restricted cash was $1.1 million, and total cash, cash equivalents and investments were approximately $198.9 million. Current assets were $310.3 million versus current liabilities of $126.2 million.
Long-term debt was $507.7 million, consisting primarily of $475.0 million principal of 7.25% Senior Notes due 2028 and approximately $37.9 million principal of IQ Notes due 2025. No borrowings were outstanding under the $250 million revolving credit facility; $21.0 million of letters of credit were outstanding, leaving approximately $229.0 million available for borrowing. Management stated that the company was in compliance with applicable credit-facility covenants.
Nine-month cash flow included $80.2 million of property, plant, equipment and mineral-interest additions, $16.8 million of common dividends, $0.4 million of preferred dividends, and $5.6 million of finance-lease repayments. Cash, cash equivalents and restricted cash increased by $61.1 million to $192.0 million.
Material changes versus the prior comparable period
- Q3 sales decreased 3.1%, primarily because lower silver and gold prices and lower silver and zinc volumes offset higher lead and zinc prices and higher gold and lead volumes. Nine-month sales increased 23.7%, reflecting higher realized prices for all four metals and stronger Lucky Friday production.
- Q3 gross profit declined $23.5 million and the company reported an operating loss, while nine-month gross profit increased $54.4 million and operating income increased $23.5 million.
- Q3 silver production decreased 24.4% to 2.7 million ounces, principally due to lower grades and mine sequencing at Greens Creek. Nine-month silver production declined 5.2% to 9.7 million ounces.
- Q3 gold production increased 2.5% to 42,207 ounces; nine-month production decreased 4.1% to 153,350 ounces. Lead production increased materially, while zinc production was lower in Q3 and broadly stable for the nine-month period.
- Lucky Friday benefited from its return to full production: nine-month sales increased to $98.6 million from $35.1 million, and the segment generated $24.3 million of operating income versus a $12.4 million operating loss in 2020.
- San Sebastian contributed virtually no Q3 sales as production had ended; suspension-related costs were $0.6 million in Q3 and $2.0 million for the first nine months.
- Nevada Operations generated an operating loss of $35.6 million for the first nine months, including increased suspension costs and approximately $9.7 million of stockpile write-downs.
- Exploration and pre-development expense increased by $12.9 million in Q3 and $25.3 million for the nine-month period. Total exploration and pre-development spending was $35.0 million through September 30.
- Interest expense decreased $7.4 million for the first nine months because 2021 debt refinancing reduced overlapping debt and no revolving-credit borrowings were used in 2021.
- Common dividends increased to $16.8 million in the first nine months from $4.0 million, reflecting higher realized silver prices and changes to the silver-linked dividend policy.
Guidance, outlook, commentary and unusual items
- Management estimated approximately $120 million of 2021 capital expenditures, including $75.2 million incurred through September 30, excluding $9.1 million for acquired royalty interests and land.
- Management estimated approximately $48.5 million of 2021 exploration and pre-development expenditures, including $35.0 million incurred through September 30.
- Limited ore production from the Casa Berardi 160 Zone open pit was expected to begin in the fourth quarter of 2021. Approximately 2,200 tons of previously stockpiled Nevada material were also expected to generate production and sales in Q4.
- COVID-19 and labor availability continued to affect operations. Greens Creek silver production was 30% lower year over year in Q3 due to lower grades associated with mine sequencing and manpower challenges. Management expected to mitigate labor constraints through schedule changes, but anticipated continued COVID-related costs at Casa Berardi and potential manpower challenges at Greens Creek in Q4.
- The company identified errors in Casa Berardi depreciation, depletion and amortization calculations covering June 2013 through June 2021. Aggregate DDA was overstated by approximately $38.2 million. Management concluded the errors were not material to previously issued financial statements and revised prior-period information. The revisions did not affect sales or operating cash flow.
- Q3 included a $6.5 million settlement of a historical lawsuit and increased environmental provisions, including a $2.9 million increase in the Johnny M Mine accrual. The Johnny M accrual totaled $9.0 million at September 30.
- Environmental and reclamation liabilities totaled $119.7 million. The company also had $182.6 million of surety bonds and $21.0 million of letters of credit supporting reclamation, self-insurance and employee-benefit obligations.
- Management stated that current cash, expected operating performance, metals prices and available revolving-credit capacity should be sufficient to meet obligations for the next 12 months, but noted that this assessment depends on metals prices, operating costs, COVID-19 impacts and continued access to financing.
- The company’s common dividend includes a minimum component and a silver-linked component. On November 3, 2021, the board declared a quarterly dividend of 0.625 cent per common share; future dividends remain subject to board discretion and silver prices.
Most important facts for an investor to verify
- Reconcile the reported Q3 operating loss and lower gross margin with the derivative gain, environmental provisions, exploration spending and segment performance.
- Assess Greens Creek’s grade, labor and COVID-19 exposure, including whether deferred higher-grade production is recovered as management expects.
- Monitor Casa Berardi’s 160 Zone ramp-up, production costs and the effect of the disclosed historical DDA revisions.
- Evaluate Nevada Operations’ suspension strategy, stockpile recoverability and future carrying-value or impairment risk.
- Review exposure to silver, gold, lead and zinc prices, including forward contracts and the approximately $8.3 million estimated revenue sensitivity to a 10% change in the relevant provisional-sales prices.
- Review liquidity against approximately $800.5 million of disclosed contractual cash obligations, $507.7 million of long-term debt, environmental liabilities and planned capital and exploration spending.
- Track unresolved environmental matters, including Johnny M, San Mateo Creek Basin, Carpenter Snow Creek and Barker-Hughesville, as potential liabilities may exceed recorded accruals.
- Confirm the accounting and control implications of the Casa Berardi error revisions; management concluded disclosure controls were effective as of September 30, 2021.