Hecla Mining Company — Q3 2016 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious- and base-metals producer focused on silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi and San Sebastian. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Commercial production at San Sebastian began in late 2015. Hecla also completed the acquisition of Mines Management on September 13, 2016, acquiring the Montanore silver and copper project for $52.1 million, consisting of $4.0 million in cash and $48.1 million in Hecla common stock.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Sales of products | $179.4 million | $104.9 million | $481.7 million | $328.2 million |
| Gross profit | $58.7 million | $(2.6) million | $148.0 million | $26.8 million |
| Gross margin | 32.7% | (2.4)% | 30.7% | 8.2% |
| Income from operations | $38.2 million | $(21.2) million | $95.4 million | $(33.6) million |
| Operating margin | 21.3% | (20.2)% | 19.8% | (10.2)% |
| Net income | $25.8 million | $(9.9) million | $49.3 million | $(24.0) million |
| Income applicable to common shareholders | $25.7 million | $(10.0) million | $48.9 million | $(24.4) million |
| Basic EPS | $0.07 | $(0.03) | $0.13 | $(0.07) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $173.1 million | $79.0 million |
Sales increased 71% in the third quarter and 47% year to date. Silver revenue increased to $211.8 million from $117.5 million year to date, while gold revenue increased to $203.5 million from $147.0 million. The reported results include a $15.9 million net loss on metal forward contracts during the first nine months, recorded within sales.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $167.8 million at September 30, 2016, compared with $155.2 million at December 31, 2015.
- Total cash, cash equivalents and investments were $198.7 million, compared with $156.7 million at year-end 2015.
- Total assets were $2.36 billion and shareholders’ equity was $1.46 billion.
- Senior Notes had a principal balance of $506.5 million, bear interest at 6.875% and mature May 1, 2021. Carrying value was $500.7 million and estimated fair value was $518.3 million.
- Hecla had no borrowings under its $100 million senior secured revolving credit facility and reported compliance with its covenants. Letters of credit outstanding totaled $2.6 million.
- Capital lease liabilities totaled $13.7 million, including $7.2 million current and $6.5 million non-current.
- Accrued reclamation and closure liabilities totaled $101.5 million. Surety bonds supporting reclamation, closure, self-insurance and employee benefits totaled $105.3 million.
Cash flow and capital allocation
- Operating cash flow increased by $94.1 million year over year to $173.1 million, primarily due to improved operating income, San Sebastian production, higher production at other mines and stronger precious-metals prices.
- Investing cash outflow was $153.3 million, including $120.2 million of capital expenditures, $3.9 million for the Mines Management acquisition, and increased investments in marketable debt securities.
- Financing cash outflow was $7.8 million, including $6.3 million of capital lease repayments, $1.8 million of debt repayments, $3.3 million of dividends and $4.4 million of treasury-share purchases.
- Management estimated 2016 capital expenditures of approximately $150 million and exploration and pre-development expenditures of approximately $19 million.
Material changes versus the prior comparable period
- San Sebastian generated $26.3 million of Q3 sales and $85.7 million of nine-month sales, compared with no comparable 2015 segment sales. Its gross profit was $19.8 million in Q3 and $62.3 million year to date.
- Greens Creek gross profit increased by $25.3 million in Q3 and $23.3 million year to date, supported by higher silver grades, improved recoveries, higher silver prices and increased silver production.
- Lucky Friday returned to profitability, with Q3 gross profit of $6.7 million versus a $3.9 million loss, and nine-month gross profit of $13.5 million versus a $0.9 million loss.
- Casa Berardi gross profit improved to $4.8 million in Q3 and $20.0 million year to date, versus a Q3 loss of $0.8 million and a nine-month loss of $1.3 million in 2015. Processing from the East Mine Crown Pillar pit began in July 2016.
- Average realized silver and gold prices increased year to date to $17.33 per ounce and $1,262 per ounce, respectively, from $16.08 and $1,177. Average realized zinc and lead prices declined year to date.
- Income taxes changed from benefits of $5.5 million in Q3 2015 and $4.2 million year to date in 2015 to provisions of $9.5 million and $22.6 million, respectively, in 2016, primarily because of higher taxable income and prior-year valuation allowance effects.
- The company initiated Canadian-dollar cash-flow hedges at Casa Berardi. At September 30, 2016, 70 contracts covered CAD$175 million of forecast costs through 2020, with net unrealized losses of approximately $1.6 million in accumulated other comprehensive loss.
Guidance, outlook, management commentary and risks
- Management expected the Lucky Friday #4 Shaft commissioning to begin by the end of 2016 and believed available capital resources were sufficient to complete the project.
- Management expected San Sebastian to continue generating positive cash flow through 2016 and 2017, but noted sensitivity to costs, precious-metals prices and operating conditions. The mine life was estimated at approximately 18 to 24 months.
- Management believed cash, investments, operating cash flow and available financing would be adequate for obligations and anticipated cash requirements over the next 12 months.
- Permitting and development of the Rock Creek and Montanore projects remain uncertain and have faced challenges from conservation groups.
- Material environmental and legal matters include the Johnny M Mine remediation, the Carpenter Snow Creek Superfund site, the resolved Gilt Edge and Nelson Tunnel/Commodore matters, Lucky Friday water-permit issues and pending personal-injury litigation. The company stated that some potential liabilities cannot currently be estimated and that ultimate costs could exceed recorded accruals.
- The Johnny M Mine remediation liability was accrued at an estimated $5.6 million, but the filing stated that the ultimate liability could be higher. The Carpenter Snow Creek matter involves potential remediation costs that the EPA has estimated may exceed $100 million, although Hecla could not reasonably estimate its liability.
- Metals prices, foreign exchange rates, mine safety, permitting, environmental compliance, operating costs, reserve estimates and reclamation obligations could materially affect results. A 10% change in the Canadian-dollar exchange rate was estimated to change net foreign-exchange gain or loss by approximately $14.0 million.
- The filing reported no material off-balance-sheet arrangements and stated that disclosure controls and procedures were effective as of September 30, 2016.
Most important facts for investors to verify
- Whether San Sebastian’s unusually high grades and negative after-by-product cash cost are sustainable through the remaining estimated mine life.
- Progress, final cost and commissioning status of the Lucky Friday #4 Shaft.
- Actual 2016 capital spending relative to the approximately $150 million estimate and the effect on liquidity.
- Senior Notes repayment or refinancing plans before the May 2021 maturity and compliance with revolving-credit covenants.
- Developments in Rock Creek and Montanore permitting and the valuation of their mineral interests.
- Potential changes to environmental, reclamation and litigation liabilities, particularly Johnny M, Carpenter Snow Creek and Lucky Friday matters.
- Exposure to silver, gold, zinc and lead prices, provisional concentrate settlements, forward contracts and Canadian-dollar operating costs.
- Whether the company’s deferred tax assets, including approximately $107 million of valuation allowances, can be realized through future taxable income.