Business Context and Reporting Period
Hecla Mining Company filed its Form 10-K for the fiscal year ended December 31, 2020. The company operates five mining segments in the United States, Canada, and Mexico: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian, and Nevada Operations. It produces silver, gold, lead, and zinc concentrates, doré, and carbon material.
2020 was materially affected by COVID-19, the restart of Lucky Friday after a strike that ended in January 2020, and continued reductions or suspensions at parts of Nevada Operations. Fourth-quarter supplementary data is included, but this is an annual filing rather than a quarterly filing.
Financial and Operating Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Sales of products | $691.9 million | $673.3 million | Up 2.8% |
| Gross profit | $145.7 million | $23.4 million | Up $122.3 million |
| Income (loss) from operations | $51.6 million | $(57.1) million | Improved $108.7 million |
| Net loss | $(16.8) million | $(99.6) million | Improved $82.8 million |
| Loss applicable to common stockholders | $(17.3) million | $(100.1) million | Improved $82.8 million |
| Basic and diluted loss per share | $(0.03) | $(0.20) | Improved |
| EBITDA | $196.9 million | $129.3 million | Up 52.7% |
| Cash flow from operations | $180.8 million | $120.9 million | Up $59.9 million |
| Capital expenditures | $91.0 million cash; approximately $99.9 million including non-cash items | $121.4 million cash | Lower cash spending |
| Cash and cash equivalents | $129.8 million | $62.5 million | Up $67.3 million |
Approximate 2020 margins were 21.1% gross, 7.5% operating, negative 2.4% net, and 28.5% EBITDA. The filing does not present a consolidated GAAP cash-cost or AISC margin; reported consolidated non-GAAP AISC after by-product credits was $11.89 per silver ounce and $1,302 per gold ounce.
- Silver produced increased to 13.5 million ounces from 12.6 million; payable silver sold increased to 12.3 million ounces from 11.5 million.
- Gold production declined to 209,000 ounces from 273,000 ounces, primarily reflecting lower Casa Berardi and Nevada production.
- Lead production increased to 34,127 tons from 24,210 tons, and zinc production increased to 63,112 tons from 58,857 tons.
- Average realized prices were $21.15 per ounce for silver and $1,757 per ounce for gold, compared with $16.65 and $1,413 in 2019. Realized lead and zinc prices declined to $0.84 and $1.03 per pound from $0.91 and $1.14.
- Sales were concentrated by segment: Greens Creek 47.4%, Casa Berardi 30.2%, Lucky Friday 9.1%, Nevada Operations 8.5%, and San Sebastian 4.8%.
Debt, Liquidity, and Capital Resources
- Long-term debt was $507.2 million at December 31, 2020, excluding finance leases; total debt and finance leases were approximately $523.0 million.
- Debt consisted primarily of $475.0 million of 7.25% Senior Notes due February 2028 and approximately CAD$48.2 million of Investissement Québec notes due July 2025 bearing interest at 6.515%.
- Hecla refinanced its $506.5 million 2021 Notes in 2020 using proceeds from the new Senior Notes and cash on hand.
- The $250 million revolving credit facility had no borrowings outstanding at year-end, although $20.3 million was used for letters of credit, leaving approximately $229.7 million available. Hecla temporarily drew $210.0 million during the first quarter because of COVID-19 uncertainty and repaid it during the second and third quarters.
- Total cash, cash equivalents, and investments were approximately $149.1 million at year-end. Reclamation and closure liabilities totaled $116.0 million, supported in part by $183.0 million of surety bonds and $20.3 million of letters of credit.
- Financing cash flow was an outflow of $19.4 million, reflecting debt refinancing and repayment, dividends, finance lease payments, and other financing items.
Material Changes Versus Prior Comparable Period
- Profitability improved substantially because of higher silver and gold prices, higher silver production, increased Greens Creek gross profit, the Lucky Friday restart, and lower Nevada costs and inventory write-downs.
- Greens Creek gross profit rose to $110.7 million from $88.0 million, with record silver production since Hecla obtained 100% ownership; however, higher treatment charges and lower base-metal by-product credits increased silver unit costs.
- Lucky Friday returned to full production in the fourth quarter following the 2017–2020 strike. The segment generated $6.3 million of gross profit versus no gross profit in 2019, but reported 2020 ramp-up costs of approximately $8.0 million.
- Casa Berardi returned to a small gross profit of $5.8 million from a $24.7 million gross loss. Gold production declined 9.6% because of mill downtime, lower throughput and COVID-19-related disruption; the company estimates COVID-19 reduced production by approximately 11,700 ounces.
- San Sebastian mining ended in the third quarter and milling of remaining ore ended in the fourth quarter. The unit was placed into care and maintenance, with exploration continuing.
- Nevada Operations improved to $14.1 million of gross profit from a $45.6 million gross loss, primarily because of higher gold prices, reduced costs, and lower inventory write-downs. No ore was milled during the second half of 2020, and most Nevada properties remained suspended or inactive.
- Net derivative losses increased to $22.1 million from $4.0 million, principally because rising metal prices reduced the value of contracts intended to protect future prices. A $10.3 million unrealized gain on mining-industry investments partially offset these losses.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management estimated approximately $110 million of 2021 capital expenditures and $34.5 million of exploration and pre-development spending. The filing does not provide clear consolidated 2021 production or earnings guidance.
- Management stated that cash balances, expected operating performance, metals prices, potential equity sales, and revolver availability should fund obligations and expected cash requirements for the next 12 months, while noting that this outlook depends on metals prices, costs, operations, financing access, litigation, and COVID-19 developments.
- Fire Creek’s developed oxide resource was expected to be depleted in the first quarter of 2021, with the operation expected to enter care and maintenance in the second quarter absent an alternative processor for refractory ore. The Midas mill was expected to process stockpiled Fire Creek ore and then enter care and maintenance.
- Nevada Operations had $474.3 million of carrying value, including $382.2 million attributed to value beyond proven and probable reserves. Although no impairment was recorded at year-end, future impairment remains a significant risk.
- The company’s 2021–2024 Canadian-dollar operating costs were partly hedged through forward contracts covering CAD$293.8 million of notional exposure. Metal-price contracts included silver and gold puts with average floor prices of $16.50 and $1,650 per ounce, respectively.
- Key risks include metal-price volatility, substantial leverage, mine accidents and ground instability, COVID-19 disruptions, permitting and environmental obligations, uncertain reserve estimates, customer and smelter concentration, foreign exchange exposure, and litigation.
- Material contingencies include EPA and Superfund-related matters, Lucky Friday groundwater monitoring, litigation related to the Klondex acquisition and Nevada Operations, and challenges affecting the Rock Creek and Montanore projects.
- 2020 included $24.9 million of ramp-up and suspension costs, $22.1 million of losses on forecast-metal derivatives, $4.6 million of foreign-exchange losses, a $2.0 million charitable stock gift, and higher reclamation accruals. The Casa Berardi asset retirement obligation was increased by $6.7 million and Lucky Friday’s by $1.5 million.
Most Important Facts for Investors to Verify
- Whether Lucky Friday’s post-strike production and cost levels are sustainable beyond the fourth quarter of 2020.
- The results of the Nevada refractory bulk-sample processing, the availability of a new processor, and the potential for impairment of the $474.3 million Nevada asset base.
- 2021 production, capital spending, exploration spending, and cash-flow performance relative to management’s stated plans.
- The sensitivity of cash flow and debt service capacity to silver, gold, lead, zinc, fuel, and foreign-exchange prices.
- The status and ultimate cost of environmental, reclamation, EPA, Superfund, Nevada, Rock Creek, Montanore, and Klondex-related matters.
- The terms, covenant compliance, collateral requirements, and refinancing risk associated with the 2028 Senior Notes, 2025 IQ Notes, and 2023 revolving credit facility.
- The effect of COVID-19 protocols or future public-health restrictions on production, staffing, exploration drilling, reserves, and permitting.