Hecla Mining Company: FY2021 Form 10-K Summary
Business context and reporting period
Hecla Mining Company filed its Form 10-K for the fiscal year ended December 31, 2021. The company operates Greens Creek and Lucky Friday silver mines, Casa Berardi gold mine, and Nevada Operations, with additional exploration and pre-development projects in North America. Revenue is primarily derived from silver, gold, lead and zinc concentrates, doré and related products.
Sales contribution in 2021 was 48% Greens Creek, 30% Casa Berardi, 16% Lucky Friday and 6% Nevada Operations. Nevada production was suspended during the second half of 2021, while San Sebastian production had ceased in 2020.
Financial and operating metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales of products | $807.5 million | $691.9 million | +16.7% |
| Gross profit | $217.8 million | $161.1 million | +35.2% |
| Income from operations | $83.4 million | $67.0 million | +24.5% |
| Net income | $35.1 million | $(9.5) million | Improved |
| Income applicable to common stockholders | $34.5 million | $(10.0) million | Improved |
| Basic and diluted EPS | $0.06 | $(0.02) | Improved |
| Cash provided by operating activities | $220.3 million | $180.8 million | +21.9% |
| Free cash flow | $111.3 million | $89.8 million | +24.0% |
Gross margin was approximately 27.0% in 2021 versus 23.3% in 2020, and operating margin was approximately 10.3% versus 9.7%. Net margin was approximately 4.3%, compared with a net loss margin of approximately 1.4% in 2020. The 2021 tax benefit of $29.6 million included a $58.4 million release of valuation allowance on U.S. deferred tax assets; the reported effective tax rate was therefore not representative of a normal operating tax rate.
- Silver production was 12.9 million ounces, compared with 13.5 million in 2020; gold production was 201,327 ounces, compared with 208,962.
- Lead production increased to 43,010 tons from 34,127 tons, while zinc production increased modestly to 63,617 tons from 63,112 tons.
- Average realized prices increased to $25.24 per ounce for silver and $1,796 per ounce for gold, from $21.15 and $1,757, respectively, in 2020. Realized lead and zinc prices were $1.03 and $1.44 per pound.
- Cash and cash equivalents were $210.0 million at year-end, up $80.2 million from 2020. Cash, cash equivalents and investments totaled $224.4 million.
- Long-term debt was $508.1 million at carrying value, consisting primarily of $475 million of 7.25% Senior Notes due 2028 and the IQ Notes due 2025. The company also disclosed approximately $521.5 million of total indebtedness.
- The $250 million revolving credit facility had no borrowings outstanding, but $17.3 million was used for letters of credit, leaving approximately $233 million available, subject to covenants and borrowing conditions.
- Capital expenditures were $109.0 million, including $49.6 million at Casa Berardi, $29.9 million at Lucky Friday and $23.9 million at Greens Creek. Exploration and pre-development spending was $47.9 million.
Material changes versus the prior comparable period
- Revenue increased primarily because of higher metal prices, full-year production at Lucky Friday and improved smelter terms. Price effects increased revenue by approximately $99.0 million, partially offset by lower silver and gold volumes.
- Lucky Friday returned to full production after the 2017-to-January 2020 strike. Silver production increased 75% in 2021, sales increased to $131.5 million from $63.0 million, and AISC after by-product credits declined to $14.34 per silver ounce from $18.22 in the comparable 2020 production period.
- Casa Berardi achieved record throughput and increased gold production to 134,511 ounces from 121,492 ounces. The 160 zone open pit began producing in the fourth quarter of 2021.
- Greens Creek generated higher gross profit because of stronger realized metal prices and favorable smelter terms, although silver production declined because of lower grades and labor-related challenges.
- Nevada Operations generated a $3.1 million gross loss versus a $14.1 million gross profit in 2020. Production was suspended at Fire Creek in 2021, and the company continues studies and exploration at the Nevada properties. Management concluded that no impairment was required despite the suspension-triggered recoverability assessment.
- Provision for closed operations and environmental matters increased to $14.6 million from $3.9 million, including a $6.5 million lawsuit settlement and higher reclamation estimates.
- The company revised prior-period financial statements for immaterial Casa Berardi depreciation, depletion and amortization errors and related tax classification matters. The filing states that the revisions did not affect sales or operating cash flow.
Guidance, outlook, commentary and risks
- Management estimated approximately $135 million of 2022 capital expenditures and approximately $45 million of exploration and pre-development expenditures. The filing does not provide a clear consolidated 2022 production or revenue guidance figure.
- Management expects to meet obligations over the next 12 months using cash balances, operating cash flow, potential ATM equity sales and the revolving credit facility, but notes that plans could change with metal prices, operating costs, liquidity and other factors.
- Environmental and reclamation liabilities totaled $113.2 million at year-end. The company expects approximately $6 million of 2022 idle-property and environmental compliance spending, plus approximately $2 million for reclamation work at the former Troy Mine. Surety bonds totaled $182.5 million and letters of credit totaled $17.3 million.
- COVID-19 resulted in approximately $3.4 million of incremental costs in 2021 and contributed to labor and production challenges, particularly at Greens Creek and Casa Berardi.
- Metal-price exposure remains significant. The company had forward contracts covering future zinc and lead sales and provisional concentrate settlements; 2021 included a $32.9 million loss on certain forecast-sales derivatives before hedge designation and a $35.8 million total net fair-value loss.
- Major risks include silver, gold, lead and zinc price volatility; high debt and interest expense; mine accidents, ground instability and labor disruptions; permitting and environmental obligations; reclamation liabilities; customer and smelter concentration; foreign exchange exposure; COVID-19 and labor availability; and possible impairment of Nevada or other long-lived assets.
- Rock Creek and Montanore permitting remains delayed by litigation and regulatory decisions. The company states that these projects may never be fully permitted or developed.
- The filing identifies ongoing environmental matters and legal proceedings, including Johnny M remediation exposure, historical Montana Superfund matters and a putative securities class action related to Nevada Operations. Some potential liabilities cannot be reasonably estimated.
Important facts for investors to verify
- Reconcile the reported $35.1 million net income and $29.6 million tax benefit, including the $58.4 million deferred-tax valuation allowance release, to assess underlying earnings quality.
- Review the full debt, covenant and maturity disclosures, including the 7.25% Senior Notes, IQ Notes, secured revolving facility and derivative cross-default provisions.
- Evaluate whether Nevada Operations can resume economically viable production and whether future impairment charges may be required.
- Assess the sustainability of production and costs at Greens Creek, Lucky Friday and Casa Berardi, including Lucky Friday’s new Underhand Closed Bench mining method.
- Review 2022 capital and exploration spending plans against expected operating cash flow and metal-price assumptions.
- Examine environmental accruals, surety requirements and unresolved legal matters for potential cash obligations beyond recorded liabilities.
- Confirm the impact of the Casa Berardi accounting revisions on historical comparisons and the company’s reserve-based depreciation assumptions.