Hecla Mining Company: Q1 2021 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious-metals mining producer with operations in the United States, Canada, and Mexico. Its reportable segments are Greens Creek, Lucky Friday, Casa Berardi, San Sebastian, and Nevada Operations. The filing covers the three months ended March 31, 2021, with comparison to March 31, 2020. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Sales of products | $210.9 million | $136.9 million |
| Gross profit | $64.8 million | $11.4 million |
| Income from operations | $38.4 million | $(15.1) million |
| Net income (loss) | $19.0 million | $(17.2) million |
| Income applicable to common stockholders | $18.8 million | $(17.3) million |
| Diluted earnings (loss) per share | $0.03 | $(0.03) |
| Cash provided by operating activities | $37.9 million | $4.9 million |
| Capital expenditures | $21.4 million | $19.9 million |
| Cash, cash equivalents and restricted cash | $140.8 million | $216.8 million |
Gross margin improved to approximately 30.7% from 8.3%, while operating margin improved to approximately 18.2% from negative 11.0%. Sales growth reflected higher realized prices and higher quantities sold. Realized prices were $25.66 per silver ounce, $1,770 per gold ounce, $0.92 per lead pound, and $1.32 per zinc pound.
Production totaled 3.46 million ounces of silver, 52,004 ounces of gold, 10,704 tons of lead, and 16,107 tons of zinc. Payable sales totaled 3.03 million silver ounces, 57,286 gold ounces, 8,668 lead tons, and 11,027 zinc tons.
At March 31, 2021, cash and cash equivalents were $139.8 million, marketable investments were $11.7 million, and total current assets were $297.9 million. Current liabilities were $109.1 million. Long-term debt was $508.0 million, consisting principally of $475.0 million of 7.25% Senior Notes due 2028 and approximately $38.4 million of IQ Notes due 2025. The $250 million revolving credit facility had no borrowings outstanding, although $20.3 million of letters of credit were outstanding, leaving approximately $229.7 million available for borrowing. Management stated that the company was in compliance with its covenants.
Net cash increased by $9.9 million during the quarter. The company paid $4.7 million of common-stock dividends and $0.1 million of preferred-stock dividends. Estimated 2021 capital expenditures are approximately $110 million, and estimated exploration and pre-development expenditures are approximately $38.5 million.
Material changes versus the prior comparable period
- Revenue increased approximately 54% to $210.9 million, driven by higher metal prices and higher sales volumes.
- Greens Creek sales increased to $98.4 million from $53.8 million, and gross profit increased to $45.2 million from $4.7 million. Silver AISC after by-product credits decreased to $1.59 per ounce from $7.90.
- Lucky Friday returned to full production in the fourth quarter of 2020 following the prior labor strike and ramp-up period. Sales increased to $29.1 million from $2.8 million, and gross profit was $6.3 million versus a $0.0 million loss. No ramp-up costs were recorded in Q1 2021, compared with $8.1 million in Q1 2020.
- Casa Berardi sales increased to $72.9 million from $46.2 million, and gross profit increased to $10.4 million from a $2.2 million loss. Gold production increased to 36,190 ounces from 26,752 ounces.
- San Sebastian mining and milling were completed in 2020. Q1 2021 sales were only $0.2 million versus $9.9 million in Q1 2020, and suspension-related costs were $0.7 million.
- Nevada Operations sales declined to $10.2 million from $24.2 million, and gross profit declined to $2.8 million from $7.2 million because of lower production and grades. Fire Creek is expected to enter care-and-maintenance in Q2 2021 after remaining stockpiled ore is processed.
- Interest expense decreased by $5.6 million because Q1 2020 included overlapping interest, debt redemption costs, and revolving-credit borrowings.
- Foreign-exchange results changed from a $6.6 million gain to a $2.1 million loss, primarily because of Canadian-dollar remeasurement effects.
- The company recorded a $4.6 million income and mining tax provision versus a $1.1 million benefit in Q1 2020. A tax classification change increased the Q1 2021 provision by approximately $3.1 million.
- Accumulated deficit and comparative balances were adjusted for an immaterial error related to previously unrecognized deferred taxes. The adjustment increased the January 1, 2019 accumulated deficit by $11.9 million.
Guidance, outlook, risks and unusual items
Management expects limited ore production from the Casa Berardi 160 Zone open pit to begin in Q4 2021. Nevada Operations is expected to process additional Fire Creek refractory ore in the second half of 2021, while Fire Creek is expected to be placed on care-and-maintenance in Q2 2021.
COVID-19 continued to create quarantine, staffing, operating, and potential production risks. Q1 2021 COVID-related quarantine costs at Greens Creek were approximately $0.6 million. Management cautioned that future restrictions could defer production and revenue, increase costs, or require additional liquidity.
The company increased its accrual for the Johnny M Mine CERCLA matter to $9.0 million from $6.1 million. Management stated that the liability could exceed the current accrual and could materially affect results or financial position. Other environmental matters, including the San Mateo Creek Basin, Carpenter Snow Creek, and Barker-Hughesville sites, remain difficult to estimate and could result in additional liabilities.
Environmental reclamation and closure liabilities totaled $120.3 million at March 31, 2021. The company also had $176.8 million of surety bonds and $20.3 million of letters of credit supporting reclamation, self-insurance, and employee benefit obligations.
Commodity and foreign-exchange volatility remain significant risks. A 10% change in the value of metals subject to provisional pricing could change the value of concentrate sales by approximately $8.8 million. A 10% change in the USD/CAD exchange rate could change net foreign-exchange gain or loss by approximately $10.5 million.
In May 2021, the board approved a quarterly silver-linked dividend of $0.075 per share based on the Q1 2021 realized silver price of $25.66 and increased the annual silver-linked dividend component by $0.01. The company may also sell up to 60 million common shares under an at-the-market agreement; no shares had been sold through March 31, 2021.
Most important facts for investors to verify
- Whether higher silver, gold, lead, and zinc prices and the Lucky Friday restart remain sustainable.
- Progress, costs, and production timing for the Casa Berardi 160 Zone open pit and Nevada Operations restructuring.
- COVID-19 restrictions, staffing impacts, quarantine costs, and potential production interruptions.
- Future environmental, reclamation, CERCLA, and litigation liabilities, particularly the Johnny M and San Mateo Creek Basin matters.
- Debt-service requirements, 2028 Senior Notes maturity exposure, and continued availability of the revolving credit facility.
- Whether estimated 2021 capital expenditures of $110 million and exploration spending of $38.5 million remain achievable without additional financing.
- The effect of commodity prices, provisional concentrate settlements, derivative positions, and Canadian-dollar movements on future earnings and cash flow.