Hecla Mining Company — Q1 2015 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops and produces silver, gold, lead and zinc through the Greens Creek, Lucky Friday and Casa Berardi operating units. The filing covers the quarter ended March 31, 2015, and presents unaudited U.S. GAAP results. Hecla had 370.3 million common shares outstanding as of May 5, 2015.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales of products | $119.1 million | $125.8 million |
| Gross profit | $19.9 million | $22.2 million |
| Gross margin | 16.7% | 17.7% |
| Income from operations | $4.9 million | $7.9 million |
| Operating margin | 4.1% | 6.3% |
| Net income | $12.6 million | $11.6 million |
| Income applicable to common stockholders | $12.4 million | $11.5 million |
| Basic and diluted EPS | $0.03 | $0.03 |
| Cash provided by operating activities | $21.4 million | $30.4 million |
| Capital expenditures | $27.0 million | $26.9 million |
- Cash and cash equivalents were $196.2 million at March 31, 2015, down from $209.7 million at year-end 2014. Cash, cash equivalents and non-current investments totaled $200.5 million.
- Total assets were $2.26 billion and stockholders’ equity was $1.42 billion.
- Long-term debt was $498.8 million, primarily the 6.875% senior notes due 2021. Including current and non-current capital leases, total debt-related liabilities were approximately $531.7 million.
- The $100 million revolving credit facility was undrawn, and Hecla was in compliance with all covenants.
- Net cash used in investing activities was $27.9 million and net cash used in financing activities was $4.4 million, resulting in a $13.4 million quarterly decrease in cash.
Material changes versus the prior comparable period
- Revenue declined 5.3%, primarily reflecting lower silver, gold and lead prices and reduced Casa Berardi sales. Average realized prices were $17.18 per silver ounce, $1,222 per gold ounce, $0.85 per pound of lead and $0.94 per pound of zinc.
- Gross profit decreased 10.7%, and operating income decreased 37.8%. The operating margin decline reflected lower consolidated sales, weaker performance at Casa Berardi and Lucky Friday, and higher corporate and exploration expenses.
- Net income increased 7.8%, despite lower operating income, because foreign exchange gains rose to $12.3 million from $4.1 million and the income tax provision fell to $1.4 million from $3.8 million. These benefits were partly offset by lower derivative gains and a $2.8 million other-than-temporary investment impairment.
- Operating cash flow declined $9.0 million, principally because of working-capital movements, including higher receivables, incentive compensation paid in cash and the timing of tax payments.
- Greens Creek sales increased to $67.4 million from $63.6 million and operating income increased to $14.7 million from $11.0 million. Lucky Friday operating income fell to $3.5 million from $4.7 million, while Casa Berardi changed from $3.4 million of operating income to a $0.8 million operating loss.
- Silver production increased at both Greens Creek and Lucky Friday, while Casa Berardi gold production declined to 25,411 ounces from 31,259 ounces. Casa Berardi’s cash cost after by-product credits increased to $973.52 per gold ounce from $886.28.
Guidance, outlook, risks and unusual items
- Management estimated 2015 capital expenditures of approximately $145 million and exploration and pre-development expenditures of approximately $18 million. These estimates may change with metals prices, operating performance and liquidity.
- The Lucky Friday #4 Shaft project is expected to cost approximately $225 million through completion, with approximately $176 million spent by March 31, 2015 and completion expected in 2016. Completion is exposed to metals prices, funding, regulatory, cost and ground-condition risks.
- Management believed available cash, operating cash flow, investments and the undrawn revolving facility would be adequate for the next 12 months, but identified sustained lower metals prices, higher costs and additional cash uses as liquidity risks.
- Hecla entered into a proposed stock-based acquisition of Revett Mining Company. Based on Hecla’s May 5 share price, estimated consideration was $18.8 million. The transaction remained subject to shareholder and other conditions, and Hecla also agreed to provide Revett up to $1.5 million of secured term loans.
- Environmental and legal exposures include Lucky Friday water-permit matters, the Johnny M Mine Area remediation, the Carpenter Snow Creek site, and CERCLA matters involving the Gilt Edge and Nelson Tunnel sites. The company estimated Johnny M remediation liability at $5.6 million, while several other exposures could not be reasonably estimated.
- Accrued reclamation and closure liabilities totaled $57.4 million. Greens Creek was supported by $68.9 million of surety bonds for reclamation and closure obligations.
- The company reported no material off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective as of March 31, 2015.
- On May 6, 2015, the board declared a $0.0025 per-share common dividend, payable in June 2015. No silver-price-linked dividend was declared because the first-quarter realized silver price was below the policy threshold.
Most important facts for an investor to verify
- Whether lower precious-metal prices and Casa Berardi’s production and recovery issues persist or improve.
- The sustainability of earnings excluding the $12.3 million foreign-exchange gain and other derivative-related gains.
- Progress, final cost and funding requirements for the Lucky Friday #4 Shaft project.
- Actual 2015 capital spending, exploration spending and operating cash flow relative to management’s estimates.
- Status and potential magnitude of environmental, reclamation and CERCLA liabilities, particularly matters for which the filing provides no reliable range.
- Whether the Revett transaction closes, its ultimate share dilution and the permitting and reclamation risks associated with Revett’s assets.
- Compliance with senior-note covenants, liquidity availability and the company’s ability to refinance or repay the $506.5 million aggregate principal amount of senior notes due in 2021.