Hecla Mining Company — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter 2019 information. Hecla operates five segments: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian, and Nevada Operations. It produces and sells silver, gold, lead and zinc concentrates, doré and carbon material.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales of products | $673.3 million | $567.1 million | +18.7% |
| Gross profit | $23.4 million | $79.1 million | Down $55.7 million |
| Loss applicable to common stockholders | $100.1 million | $27.1 million | Loss increased |
| Basic and diluted loss per share | $0.20 | $0.06 | Loss increased |
| EBITDA | $129.3 million | $148.6 million | Down $19.3 million |
| Cash flow from operations | $120.9 million | $94.2 million | +28.3% |
| Capital expenditures | $121.4 million | $136.9 million | Down $15.5 million |
| Cash and cash equivalents | $62.5 million | $27.4 million | +$35.1 million |
| Total assets | $2.64 billion | $2.70 billion | Down $66.6 million |
Revenue increased primarily because of higher silver and gold volumes, higher realized silver and gold prices, and a full year of Nevada Operations. Average realized prices were $16.65 per ounce for silver and $1,413 per ounce for gold, compared with $15.63 and $1,265, respectively, in 2018. Realized lead and zinc prices declined to $0.91 and $1.14 per pound from $1.04 and $1.27.
Production totaled 12.6 million ounces of silver, 272,873 ounces of gold, 24,210 tons of lead and 58,857 tons of zinc. Gold production reached a company record, while Greens Creek achieved its highest silver production since Hecla acquired 100% ownership.
Consolidated all-in sustaining cost after by-product credits was $10.13 per silver ounce for the silver properties and $1,411 per gold ounce for the gold properties. These are non-GAAP measures and should be reconciled to GAAP cost of sales.
Fourth-quarter 2019
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Sales of products | $224.9 million | $136.5 million |
| Gross profit | $25.3 million | Gross loss of $1.3 million |
| Net loss | $8.0 million | $23.7 million |
| Loss applicable to common stockholders | $8.1 million | $23.8 million |
| Basic and diluted loss per share | $0.02 | $0.05 |
Material changes versus prior periods
- Net loss applicable to common stockholders widened to $100.1 million from $27.1 million, despite higher revenue and operating cash flow.
- Nevada Operations generated $107.8 million of sales but a $45.6 million gross loss, compared with a $15.8 million gross loss for the period owned in 2018. The 2019 results included approximately $37.1 million of inventory write-downs.
- Casa Berardi moved from a $10.9 million gross profit in 2018 to a $24.7 million gross loss in 2019, primarily due to lower gold production, lower grades, mill issues and stripping costs.
- Greens Creek gross profit increased to $88.0 million from $75.6 million, supported by higher silver, gold and lead sales volumes and higher realized silver and gold prices.
- Lucky Friday remained affected by the union strike. Suspension-related costs were $12.1 million in 2019, consisting of $7.8 million of cash costs and $4.3 million of non-cash depreciation. The strike ended January 7, 2020.
- San Sebastian gross profit declined to $5.7 million from $8.4 million as production shifted from higher-grade open pits to lower-grade underground ore.
- Net derivative losses were $4.0 million in 2019 versus a $40.3 million net gain in 2018. Foreign exchange results shifted from a $10.3 million gain to an $8.2 million loss.
- Interest expense increased to $48.4 million from $40.9 million, including a $2.9 million charge associated with prepayment of the Ressources Québec notes through equity issuance.
- Silver, zinc and lead proven and probable reserves increased 11%, 7% and 5%, respectively; gold reserves declined 5% from 2018.
Debt, liquidity and capital resources
- Total indebtedness was approximately $517.4 million at December 31, 2019, primarily consisting of $506.5 million of 6.875% Senior Notes due May 1, 2021.
- The company had no revolver borrowings at year-end but had $33.6 million of letters of credit outstanding. Approximately $116 million was available for borrowing under the then-effective $150 million availability limit.
- Management stated that it expected to refinance the Senior Notes. The filing cautions that refinancing may not be available or may be available only on unfavorable terms.
- Cash flow from operations of $120.9 million was more than offset by $121.4 million of capital expenditures. Financing activities provided $33.2 million, principally reflecting $49.0 million of at-the-market equity proceeds.
- Management estimated 2020 capital expenditures of approximately $115 million and exploration and pre-development expenditures of approximately $17.5 million.
- Contractual cash obligations totaled approximately $612.6 million, including $552.9 million related to the Senior Notes and associated interest, based on the filing’s schedule.
Outlook, commentary, risks and unusual items
- Lucky Friday was expected to return to full production by the end of 2020 as employees were gradually reinstated under a new collective bargaining agreement expiring January 6, 2023.
- At Nevada Operations, development was curtailed after production and capital costs exceeded sales. Fire Creek production was expected to continue only until approximately mid-2020, while the Midas mine had suspended production in the fourth quarter of 2019 and the Aurora mill was expected to enter care and maintenance in the first half of 2020.
- Management completed a Nevada impairment assessment after a second-quarter 2019 triggering event and recorded no impairment. The $511.4 million carrying value remains sensitive to metal prices, recoveries, ore grades, operating costs, hydrology, permitting, third-party processing and available funding. A future impairment could be material.
- San Sebastian had approximately eight to nine months of known mine life remaining at the filing date. Testing of the Hugh Zone sulfide bulk sample and evaluation of the El Toro discovery could extend the mine life, but success was not assured.
- Environmental, reclamation and closure liabilities totaled $108.4 million. The company also maintained approximately $185.5 million of surety bonds and $33.6 million of letters of credit for reclamation, closure, self-insurance and employee-benefit obligations.
- Material risks include volatility in silver, gold, lead and zinc prices; operational interruptions; mine safety and ground instability; labor disruptions; permitting and environmental litigation; foreign exchange exposure; customer and smelter concentration; pension underfunding; and the need to refinance debt due in 2021.
- Pending legal and environmental matters include EPA-related matters at the Johnny M site and Montana Superfund sites, litigation associated with the Klondex acquisition and Nevada Operations, and challenges affecting the Rock Creek and Montanore projects.
- The company adopted the new lease standard in 2019 and recognized approximately $22.4 million of operating lease assets and liabilities at adoption. BDO USA, LLP issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of refinancing the $506.5 million Senior Notes due May 1, 2021.
- Actual 2020 production ramp-up and costs at Lucky Friday following the end of the strike.
- Whether Nevada Operations resumes development, achieves economic production or requires a material impairment charge.
- Success of the Hugh Zone bulk-sample evaluation and the economic and permitting status of San Sebastian’s El Toro and other targets.
- Metal-price assumptions, reserve changes and the sensitivity of asset values and deferred tax assets to lower prices.
- Cash generation after sustaining capital, 2020 borrowing needs and compliance with revolving-credit covenants.
- Resolution and potential cost of environmental claims, reclamation obligations and pending Nevada, Montana and other litigation.
- Reliance on major customers and counterparties, including the four largest customers that represented approximately 24%, 23%, 17% and 8% of 2019 revenue, respectively.