Hecla Mining Company — Q3 2013 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, and produces silver, gold, lead, and zinc. The report covers the quarter and nine months ended September 30, 2013. Operations comprised Greens Creek, Lucky Friday, and Casa Berardi, the latter acquired through the June 1, 2013 acquisition of Aurizon Mines Ltd.
- Aurizon was acquired for approximately $714.5 million, including $496.2 million of cash and $218.3 million of Hecla shares.
- Lucky Friday resumed limited production in February 2013 after 2012 rehabilitation work and reached its historical throughput rate of 900 tons per day in late September.
- The company had 342.6 million common shares outstanding at September 30, 2013.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales of products | $106.6 million | $81.9 million | $268.4 million | $240.0 million |
| Gross profit | $20.7 million | $37.3 million | $51.4 million | $109.5 million |
| Gross margin | 19.4% | 45.6% | 19.2% | 45.6% |
| Income (loss) from operations | $1.7 million | $8.7 million | $(33.1) million | $31.7 million |
| Net income (loss) | $(8.5) million | $(0.9) million | $(22.2) million | $14.2 million |
| Loss applicable to common shareholders | $(8.6) million | $(1.0) million | $(22.6) million | $13.8 million |
| Basic loss per share | $(0.03) | approximately $0.00 | $(0.07) | $0.05 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $5.1 million | $66.5 million |
The filing does not present a consolidated EBITDA figure. Q3 operating margin was approximately 1.6%, compared with 10.7% in the prior-year quarter; the nine-month operating margin was approximately negative 12.3%, compared with 13.2% in 2012.
- Cash and cash equivalents were $237.8 million at September 30, 2013, compared with $191.0 million at December 31, 2012.
- Total cash, cash equivalents, and non-current marketable equity securities were $246.2 million.
- Current assets were $389.9 million versus current liabilities of $177.9 million.
- The company issued $500 million of senior notes, recorded at $490.4 million net of discount, bearing 6.875% interest and maturing May 1, 2021.
- Capital lease liabilities totaled approximately $20.0 million, including $7.4 million classified as current.
- A $100 million senior secured revolving credit facility was undrawn at the filing date, and the company was in compliance with its covenants.
- Capital expenditures were $112.8 million in the first nine months. Management estimated approximately $163 million of 2013 capital expenditures and $35 million of exploration and pre-development expenditures.
Material changes versus the prior comparable period
- Sales increased 30.2% in Q3 and 11.8% for the first nine months, primarily reflecting the Casa Berardi acquisition and resumed Lucky Friday production.
- Profitability declined materially as Greens Creek gross profit fell by $19.5 million in Q3 and $51.4 million for the first nine months. Lower silver and gold prices, lower zinc grades, higher mining and milling costs, and negative provisional pricing adjustments were significant factors.
- Greens Creek cash cost after by-product credits increased to $5.00 per silver ounce in Q3 and $4.18 for the first nine months, compared with $3.52 and $2.34, respectively, in 2012.
- Lucky Friday generated Q3 gross profit of $0.4 million but a nine-month gross loss of $7.5 million while returning to production.
- Casa Berardi contributed $27.4 million of Q3 sales, $2.5 million of gross profit, and 23,406 ounces of gold production. Lower-than-anticipated grades negatively affected results; management expected grades to improve in Q4.
- Interest expense increased to $7.3 million in Q3 and $14.5 million for the first nine months, compared with $0.6 million and $1.6 million in the prior-year periods, due primarily to the senior notes.
- Aurizon acquisition costs were $0.8 million in Q3 and $26.4 million for the first nine months.
- Operating cash flow fell by $61.4 million year over year to $5.1 million, while investing cash outflows increased to $437.8 million, largely due to the Aurizon acquisition and higher capital spending.
- The company recognized a $23.5 million gain on forecasted base-metal derivative contracts for the first nine months, compared with an $8.1 million loss in 2012. The Q3 result was a $4.6 million loss.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected Lucky Friday to maintain approximately 900 tons per day for the remainder of 2013 and expected lower unit costs as production normalized.
- The #4 Shaft project at Lucky Friday was expected to cost approximately $200 million in total, with $121 million spent through September 30, 2013, and completion expected in 2016.
- Casa Berardi's shaft deepening project was expected to be completed by the end of the first quarter of 2014 and was intended to increase production and extend mine life.
- Management stated that available cash, operating cash flow, investments, and financing capacity were expected to cover obligations for the next 12 months, but noted sensitivity to metals prices, operating costs, integration execution, and financing availability.
- Remaining obligations under the Coeur d'Alene Basin settlement were approximately $55.4 million by August 2014 after a $15 million payment in October 2013. If warrant proceeds are insufficient, Hecla is responsible for the remaining amount.
- Environmental and reclamation liabilities totaled approximately $124.3 million at September 30, 2013. The Greens Creek closure plan was expected to increase required reclamation bonding materially above the existing $30 million bond, although the amount was not yet determined.
- Significant unresolved matters included Lucky Friday water-permit allegations, CERCLA claims involving the Carpenter Snow Creek, Gilt Edge, and Nelson Tunnel sites, and other environmental and safety-related proceedings. Several potential liabilities could not be reasonably estimated and were not accrued.
- The company reported exposure to metal-price volatility, Canadian-dollar exchange-rate risk, provisional concentrate pricing, derivative-counterparty risk, mine safety and regulatory risks, and risks associated with integrating Aurizon.
- The filing states that no material off-balance-sheet arrangements existed at September 30, 2013. Management concluded that disclosure controls were effective.
Most important facts for investors to verify
- Whether Casa Berardi achieves expected grade, production, cost, and integration improvements.
- Whether Lucky Friday sustains full throughput and whether the #4 Shaft remains on schedule and within the approximately $200 million cost estimate.
- The effect of lower precious-metal prices and provisional pricing adjustments on revenue, margins, and cash flow.
- The company’s ability to service the $500 million senior notes while funding capital projects, reclamation, environmental settlements, and other commitments.
- The ultimate exposure from unresolved environmental, water-permit, mine-safety, labor, and litigation matters.
- The availability and covenant headroom of the $100 million revolving credit facility and the adequacy of liquidity if operating cash flow remains weak.