Hecla Mining Company — 2017 Second-Quarter Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, produces, and markets silver, gold, lead, and zinc through the Greens Creek, Lucky Friday, Casa Berardi, and San Sebastian operations. This Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales of products | $134.3 million | $171.3 million | $276.8 million | $302.3 million |
| Gross profit | $31.2 million | $58.5 million | $66.1 million | $89.3 million |
| Gross margin | 23.2% | 34.1% | 23.9% | 29.5% |
| Income from operations | $4.0 million | $41.6 million | $19.8 million | $57.2 million |
| Operating margin | 3.0% | 24.3% | 7.2% | 18.9% |
| Net income (loss) | $(24.0) million | $24.1 million | $2.8 million | $23.5 million |
| Income (loss) applicable to common shareholders | $(24.2) million | $24.0 million | $2.5 million | $23.2 million |
| Diluted EPS | $(0.06) | $0.06 | $0.01 | $0.06 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $45.8 million | $86.1 million |
Revenue declined 21.6% in the quarter and 8.4% year to date. The second-quarter loss included a $16.1 million income-tax provision despite a pretax loss, primarily due to taxes in Mexico and Quebec. First-half results benefited from a roughly $15.1 million deferred-tax valuation allowance release associated with a revised tax treatment for Lucky Friday #4 Shaft development costs.
- Cash and cash equivalents were $164.1 million at June 30, 2017, compared with $169.8 million at December 31, 2016.
- Total cash, cash equivalents, and investments were $206.6 million, compared with $203.9 million at year-end 2016.
- Current assets were $291.8 million versus current liabilities of $113.8 million, implying current coverage of approximately 2.6 times.
- Long-term debt was $501.6 million, consisting primarily of 6.875% Senior Notes due May 1, 2021. Total capital lease liabilities were $13.1 million.
- The $100 million secured revolving credit facility had no borrowings outstanding and $2.6 million of letters of credit outstanding. The company reported compliance with its covenants.
- Net cash decreased $5.7 million during the first half, ending at $164.1 million. Investing cash outflows were $53.6 million, including $46.0 million of capital expenditures; financing activities provided $1.1 million.
Material changes versus the prior comparable period
- Lucky Friday suspension: Union employees went on strike March 13, 2017, and production remained suspended throughout the second quarter. Suspension-related costs were $6.4 million in the quarter and $7.6 million in the first half, plus non-cash depreciation of $1.6 million and $2.0 million, respectively. Management expected cash expenditures of approximately $1.5 million to $2.0 million per month while preparing for interim and full-production restart, but could not predict the strike’s duration.
- Segment performance: Second-quarter operating income increased at Greens Creek to $15.4 million from $14.8 million, but declined at Lucky Friday to a loss of $8.2 million, Casa Berardi to a loss of $1.7 million, and San Sebastian to $11.9 million from $25.6 million.
- Casa Berardi: Lower gold grades reduced production and gross profit. Management expected grades to improve in the second half of 2017 as higher-grade underground areas became available, with surface-mining costs also expected to decline as stripping decreased.
- San Sebastian: Lower silver and gold grades reduced production and gross profit. Underground access development began in early 2017, with underground ore production anticipated in late 2017 and approximately $5.0 million of 2017 development capital costs.
- Greens Creek: Gross profit improved by $1.2 million in the quarter and $7.0 million in the first half, helped by higher gold, zinc, and lead prices and improved by-product credits, although silver, zinc, and lead grades were lower.
- Interest expense: Interest expense increased by $5.2 million in the quarter and $8.0 million in the first half. The increase reflected lower capitalized interest following completion of the #4 Shaft and $1.1 million of costs related to an unsuccessful proposed debt refinancing and tender offer.
- Capital spending: First-half capital expenditures fell to $46.0 million from $77.0 million, primarily because the Lucky Friday #4 Shaft project was completed in January 2017.
- Equity issuance: The at-the-market program generated $9.6 million of net proceeds in the second quarter. Cumulative net proceeds under the program were approximately $17.7 million through June 30, 2017.
Guidance, outlook, risks, contingencies, and unusual items
- Management estimated 2017 exploration and pre-development expenditures of $25 million to $30 million, including $12.7 million incurred through June 30. Full-year capital expenditure guidance was not available because of uncertainty surrounding Lucky Friday.
- Management believed available cash, investments, operating cash flow, potential equity proceeds, and the undrawn revolving facility would be adequate for the next 12 months. It cautioned that sustained lower metals prices, higher operating or capital costs, litigation, regulatory matters, or continued Lucky Friday disruption could affect liquidity and plans.
- The company abandoned a proposed $500 million offering of Senior Notes due 2025 and a concurrent tender offer for existing notes because available terms were not sufficiently attractive. Refinancing risk remains relevant before the 2021 maturity.
- In May and June 2017, federal court orders overturned and vacated environmental approvals for the Montanore project. Additional agency work and new approvals are required before the project can proceed beyond certain preliminary actions.
- Environmental and reclamation liabilities totaled $87.8 million at June 30, 2017. The company also had $116.9 million of surety bonds supporting reclamation, self-insurance, and employee benefit obligations.
- The Johnny M environmental matter had an accrued liability of $5.6 million, but estimated remediation costs in the related evaluation ranged from zero to $221 million. The company stated that its ultimate liability could exceed the accrual.
- The company disclosed unresolved EPA-related matters involving Lucky Friday water management, the Carpenter Snow Creek site, and the Barker-Hughesville site, as well as litigation related to Johnny M and the Troy Mine. Some potential liabilities could not be reasonably estimated.
- Commodity and foreign-exchange exposure remained significant. A 10% change in the relevant exchange rate was estimated to affect pretax foreign-exchange results by approximately $12.6 million for the Canadian dollar and $0.9 million for the Mexican peso. A 10% change in the value of metals in provisional concentrates would change their value by approximately $6.5 million.
- The board declared a $0.0025-per-share common dividend payable in September 2017. No silver-price-linked dividend was declared because the second-quarter average realized silver price was $17.14 per ounce, below the policy threshold.
Most important facts for investors to verify
- Duration, cash cost, labor developments, and restart timetable for the Lucky Friday strike and suspended production.
- Ability of Greens Creek and San Sebastian cash generation to offset Lucky Friday’s suspension and operating weakness at Casa Berardi.
- Future silver, gold, lead, and zinc prices, including the effect of provisional pricing and derivative contracts.
- Refinancing options and covenant capacity for the $506.5 million principal amount of Senior Notes due in 2021.
- Updated permitting status and potential capital requirements for Montanore and Rock Creek.
- Potential changes to environmental, reclamation, CERCLA, water-permit, and litigation liabilities beyond recorded accruals.
- Realizability of deferred tax assets, including the remaining valuation allowances and dependence on future taxable income.
- Cash use for Lucky Friday suspension costs, pension contributions, exploration, pre-development, dividends, and potential equity issuance.