Business Context and Reporting Period
Hecla Mining Company filed its Form 10-K for the fiscal year ended December 31, 2013. The company explores, develops and produces silver, gold, lead and zinc through the Greens Creek, Lucky Friday and Casa Berardi operating units in the United States and Canada.
2013 included the June 1 acquisition of Aurizon Mines for approximately $714.5 million, adding the Casa Berardi gold mine and related Quebec mineral interests. The filing presents annual results; fourth-quarter 2013 supplementary data is also provided.
Financial and Operating Highlights
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Sales of products | $382.6 million | $321.1 million | Up 19%; Casa Berardi and resumed Lucky Friday production contributed |
| Gross profit | $66.1 million | $143.5 million | Gross margin declined to approximately 17.3% from 44.7% |
| Operating income (loss) | $(32.4) million | $37.9 million | Operating margin was approximately negative 8.5% |
| Net income (loss) | $(25.1) million | $15.0 million | Loss attributable to common stockholders was $(25.7) million, or $(0.08) per share |
| EBITDA | $69.1 million | $76.4 million | Non-GAAP measure |
| Cash flow from operations | $26.6 million | $69.0 million | Lower primarily because of reduced earnings and working-capital changes |
| Capital expenditures | $150.7 million | $113.1 million | Excludes $12.3 million of non-cash capital lease additions |
| Cash and cash equivalents | $212.2 million | $191.0 million | Cash increased despite acquisition and capital spending |
| Total assets | $2.23 billion | $1.38 billion | Increase primarily from the Aurizon acquisition |
| Total outstanding indebtedness | Approximately $513.5 million | Not comparable | Includes $500 million principal amount of 6.875% Senior Notes and capital leases |
Fourth-quarter 2013 sales were $114.2 million, gross profit was $14.7 million and net loss was $2.9 million, compared with fourth-quarter 2012 sales of $81.1 million, gross profit of $34.0 million and net income of $0.7 million.
- Silver production increased to 8.9 million ounces from 6.4 million ounces, and gold production increased to 120,000 ounces from 55,000 ounces.
- Lead production increased to 30,374 tons from 21,074 tons, while zinc production declined to 61,406 tons from 64,249 tons.
- Greens Creek sales declined to $263.3 million from $320.9 million; gross profit fell to $69.7 million from $143.3 million. Cash cost after by-product credits increased to $4.42 per silver ounce from $2.70.
- Lucky Friday restarted limited production in February 2013 and returned to full production in September. The unit generated a $4.9 million gross loss and produced 1.5 million ounces of silver.
- Casa Berardi contributed seven months of sales of $75.1 million, gold production of 62,532 ounces and a reported gross profit of $1.3 million. Cash cost after by-product credits was $951 per gold ounce.
Material Changes, Outlook and Risks
- Lower silver and gold prices materially pressured results. Average silver and gold prices fell to $23.83 and $1,411, respectively, from $31.15 and $1,669 in 2012.
- 2013 results included $26.4 million of Aurizon acquisition costs, $21.7 million of net interest expense and an $18.0 million gain on forecasted base-metal forward contracts.
- Management reduced discretionary capital, exploration and pre-development spending beginning in the fourth quarter because of lower precious-metals prices. 2014 estimates included approximately $150 million of capital expenditures and $18 million of exploration and pre-development spending.
- The #4 Shaft project at Lucky Friday was expected to cost approximately $215 million in total, with approximately $130 million spent through year-end 2013 and completion targeted for 2016. Completion remains sensitive to metals prices, costs, regulation and available liquidity.
- Management believed available cash, operating cash flow, investments and the undrawn $100 million revolving credit facility would be adequate for the next 12 months. A new $100 million revolving facility was entered into in February 2014.
- The company remained obligated to pay approximately $55.5 million under the Coeur d’Alene Basin settlement by August 2014. Total accrued reclamation and closure liabilities were $105.2 million at year-end.
- Greens Creek’s revised reclamation plan was expected to increase its asset retirement obligation and required reclamation bond in the first quarter of 2014; the amount of the increase was not yet clear.
- Material risks include volatile silver, gold, lead and zinc prices; mine safety incidents and regulatory actions; environmental and reclamation liabilities; reserve and impairment risk; labor matters at Lucky Friday; foreign-exchange exposure; acquisition integration; and debt-service requirements.
- Pending or potential matters included Lucky Friday water-permit issues, employee and wrongful-death litigation, environmental claims involving historical properties, and a union compensation claim estimated at $0 to $10 million. The filing states that ultimate outcomes could not be reasonably predicted for several matters.
Important Facts for Investors to Verify
- Reconcile the effect of the Aurizon acquisition on production, reserves, depreciation, deferred taxes, debt and share count.
- Review the Senior Notes’ covenants, guarantees, effective subordination and the $34.4 million of annual interest obligations.
- Assess liquidity after the $55.5 million Coeur d’Alene payment, planned 2014 capital spending, Lucky Friday shaft spending and potential Greens Creek bonding requirements.
- Validate the sustainability of production and unit costs after Lucky Friday’s restart and the planned Casa Berardi shaft completion.
- Monitor metal prices, provisional concentrate settlements and derivative gains, which materially affected 2013 revenue and earnings.
- Review environmental accruals, reclamation estimates, MSHA and EPA matters, and unresolved litigation for potential costs beyond recorded provisions.
- Note that the audited financial statements and internal control over financial reporting received unqualified opinions from BDO USA, LLP.