Hecla Mining Company: Q2 2014 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 in Alaska, Lucky Friday in Idaho and Casa Berardi in Quebec, Canada. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared primarily with the corresponding 2013 periods.
Casa Berardi was acquired through the June 1, 2013 acquisition of Aurizon Mines; therefore, 2013 comparisons include only one month of Casa Berardi ownership.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales of products | $117.5 million | $85.3 million | $243.3 million | $161.8 million |
| Gross profit | $18.7 million | $5.1 million | $41.0 million | $30.7 million |
| Income (loss) from operations | $5.0 million | $(32.6) million | $12.9 million | $(34.8) million |
| Net loss | $(14.4) million | $(24.9) million | $(2.8) million | $(13.8) million |
| Loss applicable to common shareholders | $(14.5) million | $(25.0) million | $(3.0) million | $(14.0) million |
| Basic loss per share | $(0.04) | $(0.08) | $(0.01) | $(0.05) |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $57.0 million | $10.3 million |
Sales increased 38% in the second quarter and 50% for the first six months. Revenue included silver of $43.5 million, gold of $52.3 million, lead of $17.2 million and zinc of $18.4 million in the second quarter. Gross margin was approximately 15.9% in Q2 2014 versus 6.0% in Q2 2013, and approximately 16.8% for the first six months versus 19.0% in the prior-year period.
At June 30, 2014, cash and cash equivalents were $222.1 million, compared with $212.2 million at December 31, 2013. Including non-current marketable equity securities, cash, cash equivalents and investments totaled $229.6 million. Total assets were $2.26 billion and shareholders’ equity was $1.34 billion.
Long-term debt was $496.4 million, net of unamortized issuance discount, and total debt including capital leases was approximately $516.8 million. The debt primarily comprised 6.875% senior notes due 2021. Hecla also had a $100 million secured revolving credit facility, with no borrowings outstanding and all financial covenants satisfied at June 30, 2014.
Capital expenditures were $57.5 million in the first half of 2014. Management estimated approximately $150 million of 2014 capital expenditures and approximately $18 million of exploration and pre-development expenditures.
Material changes versus the prior comparable period
- Lucky Friday returned to sustained full historical production following its prior suspension. Q2 sales increased to $23.8 million from $5.1 million, and gross profit improved to $6.6 million from a $5.6 million loss.
- Casa Berardi contributed a full six months of production in 2014 versus one month in 2013. Q2 sales rose to $38.3 million from $10.1 million, and six-month gross profit increased to $7.7 million from a $1.4 million loss.
- Greens Creek sales declined to $55.4 million from $70.1 million in Q2 and to $119.0 million from $142.7 million for the first six months, primarily because of lower production, grades and shipment timing.
- 2013 included $20.3 million of Q2 and $25.6 million of six-month Aurizon acquisition costs; no comparable costs were recorded in 2014.
- Exploration and pre-development expenses declined by $7.2 million in Q2 and $13.9 million in the first six months, reflecting reduced discretionary spending.
- Derivative results reversed from gains of $6.5 million in Q2 2013 and $28.1 million for the first six months of 2013 to losses of $11.6 million and $2.1 million, respectively, in 2014.
- Interest expense increased to $7.0 million in Q2 and $13.8 million for the first six months, versus $6.5 million and $7.2 million, respectively, primarily because of the senior notes issued to fund the Aurizon acquisition.
- Net foreign exchange losses were $5.4 million in Q2 and $1.2 million for the first six months, reflecting greater Canadian-dollar exposure following the Aurizon acquisition.
Outlook, commentary, risks and unusual items
- Management stated that available cash, operating cash flow and the undrawn revolving facility should be adequate for the next 12 months, subject to metals prices, operating performance, costs and other factors.
- The Lucky Friday #4 Shaft project is expected to cost approximately $215 million through completion in 2016. Approximately $148 million had been spent by June 30, 2014, leaving approximately $67 million estimated to be spent.
- Greens Creek’s revised reclamation and closure plan increased estimated undiscounted closure costs to approximately $102.7 million and could require the reclamation bond to increase from $30 million to approximately $65.4 million. The final amount remains subject to agency review.
- Approximately $55.4 million remained payable under the Coeur d’Alene Basin environmental settlement as of June 30, 2014. After a $14.1 million warrant-proceeds payment in July, approximately $41.3 million remained as of the filing date, with the balance due in August 2014. The company expected warrant exercises to fund much of the obligation, but would remain responsible for any shortfall.
- At June 30, 2014, accrued reclamation and closure costs totaled $115.2 million. Environmental matters at Lucky Friday, the Johnny M site, Carpenter Snow Creek, Gilt Edge and Nelson Tunnel/Commodore could result in additional liabilities that the company cannot reasonably estimate.
- Lucky Friday faces unresolved water-permit matters and potential federal civil claims. Management believes some liability is reasonably possible but cannot estimate the amount or range.
- The company uses metal forward contracts that do not qualify for hedge accounting and are marked through earnings. A 10% change in the prices of metals in provisional concentrate sales would have changed their total value by approximately $4.3 million before considering hedges.
- Management identified metals prices, environmental and reclamation obligations, mineral reserves and business-combination accounting as critical estimates. A sustained decline in metals prices or higher operating and capital costs could impair liquidity, reserves, asset values or deferred tax assets.
- The Board declared a $0.0025 per-share minimum common dividend payable in September 2014. No silver-price-linked dividend was declared because the Q2 realized silver price was $19.62 per ounce, below the policy threshold.
Most important facts for an investor to verify
- Whether production and cash flow at Lucky Friday and Casa Berardi remain sufficient to support debt service and the #4 Shaft capital program.
- The final Greens Creek reclamation bond requirement and any resulting liquidity impact.
- The amount and timing of the remaining Coeur d’Alene Basin settlement payment and the extent to which warrant proceeds cover it.
- Potential liabilities from Lucky Friday water-permit matters and the listed Superfund and CERCLA sites, which are not fully estimable.
- Exposure to silver, gold, lead and zinc prices, Canadian-dollar exchange rates and derivative mark-to-market losses.
- Realizability of the $115.6 million U.S. net deferred tax asset and the effect of future taxable income assumptions.
- Compliance with the senior-note terms and the $100 million revolving credit facility covenants.