Hecla Mining Company — FY2017 Form 10-K Summary
Business context and reporting period
Hecla Mining Company explores, develops and produces silver, gold, lead and zinc from four operating units: Greens Creek in Alaska, Lucky Friday in Idaho, Casa Berardi in Quebec and San Sebastian in Mexico. The filing covers the fiscal year ended December 31, 2017, with quarterly information including the fourth quarter of 2017.
Financial performance and key metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales of products | $577.8 million | $646.0 million | Down 10.6% |
| Gross profit | $157.0 million | $191.5 million | Down 18.0% |
| Gross margin | 27.2% | 29.6% | Down 2.4 points |
| Net income (loss) | $(23.5) million | $69.5 million | Declined to a loss |
| Loss applicable to common stockholders | $(24.1) million | $69.0 million | Declined to a loss |
| Basic and diluted EPS | $(0.06) | $0.18 | Down $0.24 |
| EBITDA | $156.3 million | $236.2 million | Down 33.8% |
| Operating cash flow | $115.9 million | $225.3 million | Down 48.6% |
| Capital expenditures | $98.0 million | $164.8 million | Down 40.5% |
FY2017 net margin was approximately negative 4.1% and EBITDA margin was approximately 27.1%. Fourth-quarter 2017 sales were $160.1 million, gross profit was $47.2 million and net loss was $27.7 million, compared with fourth-quarter 2016 sales of $164.2 million, gross profit of $43.5 million and net income of $20.3 million.
Production totaled 12.5 million ounces of silver, 232,684 ounces of gold, 22,733 tons of lead and 55,107 tons of zinc. Compared with 2016, silver production decreased 27%, lead decreased 46%, zinc decreased 20% and gold decreased slightly. Realized prices increased for gold, lead and zinc and were slightly higher for silver: $17.23 per ounce, $1,261 per ounce, $1.06 per pound and $1.32 per pound, respectively.
Cash, cash equivalents and investments totaled $227.5 million at year-end, including $186.1 million of cash and cash equivalents. A $100 million revolving credit facility had approximately $97 million available at the filing date, with no borrowings outstanding other than $2.6 million of letters of credit. Total indebtedness was approximately $514.0 million, including $506.5 million principal amount of 6.875% Senior Notes due May 1, 2021. Total assets were $2.365 billion and total stockholders’ equity was $1.484 billion.
Material changes versus the prior comparable period
- Lucky Friday union employees went on strike on March 13, 2017. Production was suspended initially and resumed only on a limited basis in July. The company recorded $17.1 million of suspension costs and $4.2 million of related non-cash depreciation; annual production and sales fell sharply.
- Greens Creek sales increased to $278.3 million from $260.4 million, and gross profit increased to $76.5 million from $69.1 million, primarily because of higher realized metal prices despite lower grades and production.
- Casa Berardi throughput and gold production reached record levels since Hecla’s acquisition, but gross profit decreased to $12.0 million from $21.4 million because of lower grades, stripping costs and higher depreciation.
- San Sebastian sales and gross profit decreased to $85.8 million and $62.1 million from $113.9 million and $82.7 million, respectively, as open-pit ore grades declined. Existing open-pit production ended in December 2017.
- A net loss of $21.3 million on base-metal forward contracts, compared with a $4.4 million gain in 2016, materially reduced earnings. Foreign-exchange losses increased to $10.3 million from $2.9 million.
- Interest expense increased to $38.0 million from $21.8 million, primarily because the Lucky Friday #4 Shaft project was completed and less interest was capitalized.
- The company recorded a $19.9 million tax provision. The Tax Cuts and Jobs Act resulted in approximately $30 million of incremental tax expense and a full valuation allowance on U.S. net deferred tax assets.
- Proven and probable reserves increased 3% for silver, 12% for gold, 15% for zinc and 8% for lead compared with 2016.
Outlook, commentary, risks and unusual items
Management expected 2018 capital expenditures of approximately $95 million to $105 million, exploration and pre-development expenditures of $35 million to $42 million, and research and development expenditures of $13 million to $18 million. Management stated that available liquidity, expected operating cash flow and financing capacity should be adequate for the next 12 months, subject to metal prices, operating performance and other risks.
Limited underground production at San Sebastian began in January 2018, with management expecting the operation to generate positive cash flow until early or mid-2020. The company also planned to resume production from an extension of the North Vein open pit in mid-2018. At Lucky Friday, the company reached an agreement in February 2018 for binding third-party arbitration, subject to union ratification; the outcome and timing of a return to full production remained uncertain.
- Metal prices are the primary earnings and cash-flow driver. Sustained declines could reduce reserves, trigger asset impairments, delay projects or cause mine closures.
- Rock Creek and Montanore remain subject to permitting and litigation risk. In 2017, court orders vacated approvals for Montanore, requiring further agency review.
- Environmental, reclamation and closure liabilities totaled $86.0 million, supported in part by $117.4 million of surety bonds. Certain environmental claims have potentially material and uncertain exposure, including the Carpenter Snow Creek and Johnny M matters.
- Labor disruption, ground instability, mine safety events, equipment failures, permitting delays and transportation interruptions could reduce production.
- Forward contracts reduced exposure to metal-price movements but generated significant losses in 2017 and can limit upside if market prices rise.
- The company had an underfunded defined benefit pension position of $47.1 million at year-end and expected 2018 pension contributions of approximately $3.8 million.
Important facts for investors to verify
- Progress, arbitration outcome and restart economics at Lucky Friday.
- 2018 production, grades, costs and cash flow at San Sebastian following the transition from open-pit to underground mining.
- Actual metal prices versus reserve assumptions and the effect on reserves, impairments and liquidity.
- Refinancing or repayment plans for the $506.5 million Senior Notes due in 2021.
- Changes in environmental, reclamation, permitting and litigation obligations, particularly at Montanore, Rock Creek, Greens Creek and historical sites.
- Reconciliation of non-GAAP cash-cost and all-in sustaining-cost measures to GAAP results.
- Cash generation after sustaining capital, exploration, pension contributions and dividends.