Hecla Mining Company — Q1 2020 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious- and base-metals producer operating five segments: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. Products include silver, gold, lead and zinc concentrates, carbon material and doré.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales of products | $136.9 million | $152.6 million |
| Gross profit | $11.4 million | $3.4 million |
| Gross margin | 8.3% | 2.3% |
| Loss from operations | $15.0 million | $16.1 million |
| Net loss | $17.2 million | $25.5 million |
| Loss applicable to common stockholders | $17.3 million | $25.7 million |
| Basic and diluted loss per share | $0.03 loss | $0.05 loss |
| Cash provided by operating activities | $4.9 million | $20.0 million |
| Capital expenditures | $19.9 million | $33.1 million |
| Cash, cash equivalents and restricted cash | $216.8 million | $12.8 million |
At March 31, 2020, cash and cash equivalents were $215.7 million, compared with $62.5 million at December 31, 2019. Total assets were $2.76 billion and stockholders’ equity was $1.66 billion. Current assets of $342.5 million exceeded current liabilities of $117.2 million.
Long-term debt consisted primarily of $469.0 million of 7.25% Senior Notes due 2028 and $210.0 million drawn under the revolving credit facility. Including current and non-current finance and operating leases, total reported debt and lease liabilities were approximately $700 million. The $250 million revolving facility had $28.7 million of letters of credit outstanding, and management reported compliance with its covenants.
Production totaled 3.25 million ounces of silver, 58,792 ounces of gold, 5,893 tons of lead and 12,847 tons of zinc. Payable sales totaled 2.58 million ounces of silver, 57,103 ounces of gold, 4,130 tons of lead and 9,836 tons of zinc.
Material changes versus the prior comparable period
- Sales declined 10.3%, primarily because of lower quantities of silver, gold and lead sold, lower realized prices for silver, lead and zinc, and approximately $8.5 million of higher Greens Creek treatment costs. Higher gold prices and improved Nevada Operations results partly offset the decline.
- Gross profit increased by $7.9 million and gross margin improved to 8.3%, despite lower revenue, mainly because of improved results at Nevada Operations, Casa Berardi and San Sebastian.
- Net loss narrowed by $8.3 million. Contributing items included a $7.9 million gain on metal derivatives versus a $1.8 million loss in Q1 2019, a $6.6 million foreign-exchange gain versus a $3.1 million loss, and lower exploration and general and administrative expenses.
- Interest expense increased by $5.6 million to $16.3 million because the Company temporarily had overlapping Senior Notes, recognized a $1.7 million unamortized discount on the redeemed notes, and incurred interest on the revolving facility.
- Operating cash flow declined by $15.1 million to $4.9 million, reflecting lower earnings, higher ramp-up and suspension costs, interest paid upon debt refinancing, derivative settlement payments and increased product inventories.
- On February 19, 2020, Hecla issued $475 million of 7.25% Senior Notes due 2028. Net proceeds of $469.5 million, together with cash on hand, funded redemption of the $506.5 million 6.875% Senior Notes due 2021.
- Hecla drew $210 million under its revolving credit facility as a precautionary liquidity measure related to COVID-19.
Guidance, outlook, commentary and risks
- COVID-19 caused Casa Berardi to suspend operations from approximately March 24 to April 15, with limited operations thereafter. Management estimated approximately 5,200 fewer gold ounces in March and approximately 7,100 fewer ounces in April than previously forecast. Second-quarter gold production and revenue were expected to be lower than previously anticipated.
- San Sebastian was suspended in early April under Mexican government orders, later extended through May 30. Management did not expect the suspension to materially affect full-year production, but the mine was expected to end production in Q4 2020 absent successful development of additional resources.
- Greens Creek incurred approximately $0.2 million per week for employee quarantining and revised staffing procedures. The filing states that broader or prolonged restrictions could materially affect production, costs and financial results.
- Lucky Friday’s union strike ended January 7, 2020. Re-staffing and ramp-up were underway, with full production expected by year-end 2020, although management warned that the process could take longer or cost more than expected. Q1 ramp-up costs were $6.3 million.
- Management estimated 2020 capital expenditures of approximately $90 million, including $19.9 million incurred through March 31, and exploration and pre-development expenditures of approximately $13.2 million, including $3.1 million incurred through March 31.
- Management stated that available cash, expected operating performance, metals prices, potential at-the-market equity sales and revolving-credit availability should support obligations for the next 12 months. However, prolonged COVID-19 disruptions, lower metals prices, higher costs, restricted credit access or additional liquidity needs could impair this assessment.
- Key operating risks include volatile metals prices, foreign-exchange movements, mine production and grade variability, COVID-19 restrictions, Nevada asset recoverability, permitting, environmental obligations, reclamation costs and litigation.
- Reported environmental and reclamation liabilities totaled $102.8 million. The Company accrued $6.1 million for the Johnny M Mine remediation matter, but disclosed that potential liability could be higher. Other EPA and Superfund matters have no reasonably estimable loss range in the filing.
- The Company reported ongoing litigation related to the Klondex acquisition, securities class actions and derivative claims. Outcomes and potential damages were not estimable.
Important facts for investors to verify
- Whether COVID-19 restrictions caused additional production losses, costs or liquidity needs after March 31, 2020, particularly at Casa Berardi, San Sebastian and Greens Creek.
- The pace and cost of Lucky Friday’s return to full production and the effect on consolidated cash flow.
- Available borrowing capacity, covenant compliance, variable-rate exposure and the timing of repayment of the $210 million revolving-facility draw.
- Whether Nevada Operations achieves the operating assumptions supporting recoverability of approximately $498.5 million of Nevada assets and avoids a future impairment.
- Actual 2020 capital spending, exploration spending and operating cash flow relative to management’s estimates.
- Changes in silver, gold, lead and zinc prices, derivative positions and provisional concentrate settlements, including the approximately $6.5 million sensitivity to a 10% change in exposed concentrate prices.
- Potential increases in environmental, reclamation and closure liabilities, including the Johnny M Mine and other EPA matters.
- Future production and economic prospects at San Sebastian, which was expected to end production in Q4 2020 without successful development of additional mineralization.