Hecla Mining Company: Q3 2015 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, and produces silver, gold, lead, and zinc. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi, and, beginning in the third quarter, San Sebastian. The filing covers the three and nine months ended September 30, 2015, with comparisons to the same 2014 periods. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Sales of products | $104.9 million | $135.5 million | $328.2 million | $378.8 million |
| Gross profit (loss) | ($2.6 million) | $22.0 million | $26.8 million | $63.0 million |
| Income (loss) from operations | ($21.2 million) | $6.3 million | ($33.6 million) | $19.2 million |
| Net income (loss) | ($9.9 million) | $3.7 million | ($24.0 million) | $0.9 million |
| Loss applicable to common shareholders | ($10.0 million) | $3.5 million | ($24.4 million) | $0.5 million |
| Basic loss per share | ($0.03) | $0.01 | ($0.07) | — |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $79.0 million | $58.8 million |
Gross margin was approximately negative 2.4% in the third quarter and 8.2% for the first nine months, compared with approximately 16.3% and 16.6%, respectively, in the comparable 2014 periods. Lower metal prices and weaker operating performance at Lucky Friday and Casa Berardi were the principal pressures.
- Cash and cash equivalents were $174.5 million at September 30, 2015, down from $209.7 million at December 31, 2014. Cash, cash equivalents, and non-current investments totaled $176.5 million.
- Operating cash flow of $79.0 million exceeded capital expenditures of $95.4 million, producing negative free cash flow before financing and acquisition-related items.
- Total debt was approximately $510.8 million, including $499.4 million carrying value of the Senior Notes, $3.8 million of Revett debt, and $19.0 million of capital lease liabilities. The $100 million revolving credit facility was undrawn, and all covenants were satisfied.
- The Senior Notes have a 6.875% coupon and mature in 2021. Their September 30 carrying value was $499.4 million and estimated fair value was $413.8 million.
- Reclamation and closure liabilities totaled approximately $91.6 million, including current and non-current amounts.
Material changes versus the prior comparable period
- Sales declined 23% in the third quarter and 13% in the first nine months, reflecting lower silver, gold, lead, and zinc prices.
- Average realized prices in the first nine months fell to $16.08 per silver ounce, $1,177 per gold ounce, $0.85 per pound of lead, and $0.91 per pound of zinc, compared with $19.35, $1,288, $1.00, and $0.98, respectively, in 2014.
- Lucky Friday gross profit declined by $12.9 million in the quarter and $21.2 million year-to-date. Production was disrupted by a failed underground booster fan, lower-grade stoping, and 16 days of planned hoist maintenance. The replacement ventilation system was commissioned at the end of the quarter, and higher-grade production resumed.
- Casa Berardi shifted from gross profit to gross loss, primarily because of lower gold prices and lower first-half recoveries associated with ore from the 118 Zone. Recoveries improved during the third quarter.
- Greens Creek gross profit declined by $9.3 million in the quarter and $4.4 million year-to-date, principally due to lower metal prices and lower by-product credits.
- Foreign exchange gains increased to $9.1 million in the quarter and $19.5 million year-to-date, compared with $7.3 million and $6.1 million in the comparable periods.
- Derivative-contract gains were $3.3 million in the quarter and $8.3 million year-to-date, compared with losses in 2014. The year-to-date gains included $18.8 million realized on settled contracts, including $16.5 million of proceeds from monetized base-metal contracts. The forecasted-sales contract program was closed at September 30.
- Cash flow from operations increased by $20.2 million year-to-date, primarily because 2014 included approximately $55.4 million of payments related to the Coeur d’Alene Basin environmental settlement.
Guidance, outlook, commentary, and unusual items
- Hecla completed its acquisition of Revett on June 15, 2015, for approximately $20.1 million, consisting of $0.9 million in cash and $19.1 million in Hecla common stock. The acquisition added the Troy mine, which is on care-and-maintenance, and the undeveloped Rock Creek project.
- Management decided to develop near-surface, high-grade deposits at San Sebastian in Mexico, with ore production targeted for late 2015. Development and pre-production costs were expected to total approximately $10 million through the first half of 2016, with positive cash flow projected for 2016 and 2017, subject to metal prices, costs, and operating execution.
- The Lucky Friday #4 Shaft project was approximately 86% complete by expenditure, with $194 million spent against an estimated total cost of $225 million. Completion was expected in late 2016.
- Management estimated 2015 capital expenditures of approximately $150 million and exploration and pre-development expenditures of approximately $24 million.
- Management stated that available cash, projected operating cash flow, investments, and the undrawn revolving facility should be adequate for the next 12 months. Sustained low metal prices, higher costs, reduced operating cash flow, or additional capital needs could affect this assessment.
- The company increased its U.S. deferred-tax-asset valuation allowance to $19.7 million based on revised projections that certain net operating losses may expire before utilization.
- Hecla accrued $5.6 million for probable remediation costs at the Johnny M site and $9.9 million for probable settlement liabilities related to the Gilt Edge and Nelson Tunnel/Commodore Superfund sites. Potential exposure at the Carpenter Snow Creek site remains uncertain; the filing notes that total site remediation costs could exceed $100 million, but Hecla could not reasonably estimate its liability.
- Revett-related Troy reclamation costs were estimated at $18.8 million over three to four years, with an expected $16.8 million recovery under an insurance policy, subject to successful reimbursement.
- The Board declared a $0.0025 per-share common dividend payable in December 2015. No silver-price-linked dividend was declared because the third-quarter average realized silver price was $14.54 per ounce, below the policy threshold.
Most important facts an investor should verify
- Whether Lucky Friday’s ventilation and hoist issues are fully resolved and whether higher-grade production and costs improve as expected.
- Actual timing, capital requirements, permitting, and cash generation at San Sebastian and the Rock Creek project.
- Metal-price sensitivity, including provisional concentrate settlements, derivative gains, and remaining exposure to silver, gold, lead, and zinc prices.
- Liquidity under continued negative free cash flow, including funding for the #4 Shaft, mine capital expenditures, debt service, reclamation, and environmental obligations.
- The final amounts and timing of liabilities for Johnny M, Gilt Edge, Nelson Tunnel/Commodore, Carpenter Snow Creek, Troy reclamation, and other environmental matters.
- Realizability of U.S. deferred tax assets and the potential for additional valuation allowances.
- Compliance with Senior Note and revolving-credit covenants, and the maturity and refinancing implications of the 2021 Senior Notes.