Hecla Mining Company: Q3 2014 Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company produces silver, gold, lead and zinc through the Greens Creek, Lucky Friday and Casa Berardi operating segments. The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Casa Berardi was acquired through the June 2013 Aurizon acquisition; therefore, the nine-month comparison is not fully comparable because 2013 includes only four months of Casa Berardi ownership.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Sales of products | $135.5 million | $106.6 million | $378.8 million | $268.4 million |
| Gross profit | $22.0 million | $20.7 million | $63.0 million | $51.4 million |
| Gross margin | 16.3% | 19.4% | 16.6% | 19.2% |
| Income from operations | $6.3 million | $1.7 million | $19.2 million | $(33.1) million |
| Net income (loss) | $3.7 million | $(8.5) million | $0.9 million | $(22.2) million |
| Income (loss) attributable to common shareholders | $3.5 million | $(8.6) million | $0.5 million | $(22.6) million |
| Basic EPS | $0.01 | $(0.03) | $0.00 | $(0.07) |
| Operating cash flow | Not separately provided | Not separately provided | $58.8 million | $5.1 million |
Cost of sales and direct production costs were $86.7 million in Q3 and $235.5 million year to date. Depreciation, depletion and amortization was $26.8 million in Q3 and $80.3 million year to date. Interest expense was $6.5 million in Q3 and $20.3 million year to date, compared with $14.5 million for the first nine months of 2013, primarily reflecting the Senior Notes issued to finance the Aurizon acquisition.
- Revenue mix: Q3 revenue included $47.5 million of silver, $55.6 million of gold, $18.4 million of lead and $30.9 million of zinc, less $16.9 million of smelter and refining charges.
- Segment sales: Q3 sales were $67.8 million at Greens Creek, $27.9 million at Lucky Friday and $39.9 million at Casa Berardi. Nine-month sales were $186.8 million, $71.7 million and $120.2 million, respectively.
- Segment profitability: Q3 operating income was $8.9 million at Greens Creek, $9.0 million at Lucky Friday and $0.4 million at Casa Berardi, offset by $(12.0) million of other operating costs.
- Cash costs: Q3 cash cost after by-product credits was $3.75 per silver ounce at Greens Creek, $8.71 per silver ounce at Lucky Friday and $897.83 per gold ounce at Casa Berardi. Nine-month costs were $2.95, $9.08 and $911.14, respectively.
Liquidity, Capital Structure and Cash Flow
- Cash and cash equivalents were $222.4 million at September 30, 2014, compared with $212.2 million at December 31, 2013. Cash, cash equivalents and non-current investments totaled $229.4 million.
- Operating cash flow was $58.8 million for the first nine months, while investing cash outflow was $86.5 million, including $90.7 million of capital expenditures. Financing cash inflow was $40.0 million, primarily from $54.4 million of warrant exercises.
- Long-term debt was $498.2 million, consisting primarily of 6.875% Senior Notes due 2021. Including capital leases, total debt-related liabilities were approximately $517.5 million.
- The company had a $100 million senior secured revolving credit facility, no borrowings outstanding, and reported compliance with all covenants at September 30, 2014.
- Capital lease liabilities totaled $19.4 million, including $8.5 million current and $10.9 million non-current.
- Management stated that existing cash, investments, projected operating cash flow and available financing were expected to be adequate for obligations over the next 12 months, subject to metals prices, operating performance and other factors.
Material Changes Versus the Prior Comparable Period
- Sales increased 27% in Q3 and 41% for the first nine months, driven primarily by the full-period contribution from Casa Berardi, resumed and sustained production at Lucky Friday, and higher zinc and lead prices.
- Net income improved from an $8.5 million loss to $3.7 million of income in Q3 and from a $22.2 million loss to $0.9 million of income for the first nine months.
- Lucky Friday benefited from full production levels and higher ore grades after the 2011-2012 production suspension. Its nine-month gross profit improved to $20.3 million from a $7.5 million loss.
- Greens Creek gross profit declined by $6.4 million in Q3 and $24.5 million year to date, primarily due to lower silver and gold prices, lower silver grades and negative provisional pricing adjustments.
- Casa Berardi generated $120.2 million of nine-month sales and $9.3 million of gross profit, compared with $37.5 million and $1.1 million, respectively, in the partial 2013 ownership period.
- Exploration and pre-development expense declined by $3.1 million in Q3 and $16.9 million year to date as management reduced discretionary spending in response to lower metals prices.
- Average realized Q3 silver and gold prices declined to $18.53 and $1,275, respectively, while realized zinc and lead prices increased to $1.07 and $1.02 per pound.
- Foreign exchange results improved to a $7.3 million Q3 gain and $6.1 million year-to-date gain, compared with losses in the 2013 periods, reflecting Canadian-dollar exposure from Casa Berardi.
Outlook, Management Commentary, Risks and Unusual Items
- Management estimated approximately $150 million of 2014 capital expenditures, with approximately $94 million spent through September 30, and approximately $21 million of exploration and pre-development expenditures.
- The Lucky Friday #4 Shaft project is expected to cost approximately $215 million through completion in 2016; approximately $157 million had been spent by September 30, leaving approximately $58 million estimated to be spent.
- Management cited volatile metals prices, foreign exchange movements, mine operating performance, capital costs, regulatory requirements, safety matters, environmental obligations and reclamation liabilities as significant risks.
- Accrued reclamation and closure liabilities totaled approximately $59.0 million. Greens Creek’s revised reclamation plan increased estimated undiscounted closure costs to approximately $102.7 million and required approximately $68.9 million of surety bonds.
- Environmental and legal contingencies include Lucky Friday water permit matters, CERCLA-related Superfund sites, and other litigation. The filing states that potential liabilities for several matters cannot be reasonably estimated and could be material.
- The company completed the remaining approximately $55.4 million of payments associated with the Coeur d’Alene Basin environmental settlement during 2014, funded primarily by warrant exercise proceeds. All 22.3 million outstanding warrants were exercised, producing $54.4 million of proceeds.
- The company recognized a $2.5 million impairment of equity securities in Q3 and reclassified $2.4 million of unrealized investment losses into earnings.
- Forward contracts generated a $2.6 million year-to-date loss on forecasted shipments and a $2.0 million loss on contracts related to provisional concentrate sales. The company had substantial zinc and lead contracts extending through 2017.
- No formal production or earnings guidance was provided in the filing. The company cautioned that interim results may not indicate full-year results.
Most Important Facts for Investors to Verify
- Whether low silver and gold prices, or further price declines, pressure Greens Creek and consolidated margins.
- Progress, remaining cost and completion timing for the Lucky Friday #4 Shaft project.
- Casa Berardi production, grades, throughput and cash costs following the full-year integration of Aurizon assets.
- Liquidity after capital expenditures, debt service, reclamation funding, pension obligations and potential share repurchases or dividends.
- Exposure to the $498.2 million Senior Notes, capital leases and applicable credit facility covenants.
- Potential financial impact of Lucky Friday water matters, CERCLA claims, reclamation obligations and other unresolved litigation.
- Sensitivity to silver, gold, zinc and lead prices, Canadian-dollar exchange rates and derivative-contract settlements.
- The company’s use of non-GAAP cash-cost measures and the reconciliation of those measures to GAAP production costs.