Hecla Mining Company — Q1 2016 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious- and base-metals producer focused on silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi and San Sebastian. This filing covers the three months ended March 31, 2016, with comparisons to the three months ended March 31, 2015. San Sebastian resumed commercial production in late 2015 and contributed its first-quarter sales in 2016.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales of products | $131.0 million | $119.1 million | Up 10.0% |
| Gross profit | $30.8 million | $19.9 million | Up $10.9 million |
| Gross margin | 23.5% | 16.7% | Up 6.8 points |
| Income from operations | $15.6 million | $4.9 million | Up $10.7 million |
| Operating margin | 11.9% | 4.1% | Up 7.8 points |
| Net income (loss) | $(0.6) million | $12.6 million | Down $13.2 million |
| Loss/income applicable to common stockholders | $(0.8) million | $12.4 million | Down $13.2 million |
| Basic earnings per share | $0.00 loss | $0.03 | Declined |
| Cash provided by operating activities | $18.7 million | $21.4 million | Down $2.7 million |
Sales increased primarily because San Sebastian generated $23.7 million of sales and Casa Berardi sales were slightly higher. Greens Creek sales declined to $53.9 million from $67.4 million, while Lucky Friday sales increased to $21.3 million from $19.9 million. San Sebastian reported $16.0 million of gross profit and a negative cash cost after by-product credits of $3.26 per silver ounce. Casa Berardi gross profit increased to $3.0 million from $0.7 million.
Profitability was affected by an $8.2 million foreign-exchange loss, compared with a $12.3 million gain in the prior-year quarter; lower average realized prices for all four principal metals; no comparable derivative gain in 2016 versus a $5.8 million gain in 2015; and higher general and administrative expense. The company also recognized $0.7 million of investment impairment losses, compared with $2.8 million in Q1 2015.
Cash used in investing activities was $38.3 million, including $34.7 million of capital expenditures and a $3.9 million deposit into restricted cash for potential environmental settlements. Cash used in financing activities was $3.1 million, including dividends, capital-lease repayments, debt repayments and treasury-share purchases.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $134.0 million | $155.2 million |
| Total assets | $2.239 billion | $2.222 billion |
| Total liabilities | $891.9 million | $883.0 million |
| Stockholders’ equity | $1.347 billion | $1.339 billion |
| Long-term debt | $500.5 million | $500.2 million |
| Current liabilities | $132.8 million | $127.1 million |
The company had $506.5 million of principal amount outstanding under 6.875% Senior Notes due May 1, 2021, with a carrying value of $500.5 million and estimated fair value of $407.1 million. No amounts were outstanding under the $100 million revolving credit facility, and management reported substantial compliance with its covenants. Total capital-lease liabilities were $15.6 million.
Management stated that cash, investments, expected operating cash flow, the undrawn revolver and potential equity proceeds should be adequate for the next 12 months. The company estimated 2016 capital expenditures of approximately $150 million and exploration and pre-development expenditures of approximately $15 million.
Material changes versus the prior comparable period
- San Sebastian became a producing segment and contributed $23.7 million of sales and $16.0 million of gross profit.
- Sales increased 10%, but lower metal prices and unfavorable foreign-exchange movements caused a shift from common-stockholder income of $12.4 million to a loss of $0.8 million.
- Cash flow from operations declined despite higher operating income, primarily because of increases in accounts receivable and inventories related to shipment timing.
- Capital expenditures increased to $34.7 million from $27.0 million, principally due to Casa Berardi equipment and the East Mine Crown Pillar pit.
- Cash declined by $21.2 million during the quarter, while current restricted cash increased by $3.9 million.
- The company sold 737,275 shares under a new at-the-market equity program for net proceeds of approximately $2.1 million. The program authorizes sales of up to $75 million in aggregate.
- All outstanding warrants expired in March 2016.
Guidance, outlook, risks and unusual items
- The Lucky Friday #4 Shaft project is expected to cost approximately $225 million in total, of which $214.7 million had been spent by March 31, 2016; completion was expected in the fourth quarter of 2016.
- San Sebastian was expected to generate positive cash flow during 2016 and 2017, but the mine life was estimated at approximately 18 to 24 months and first-quarter ore grades were higher than anticipated over the expected mine life.
- Key risks include volatile silver, gold, lead and zinc prices, foreign-exchange exposure, operational and construction risks, environmental and reclamation liabilities, permitting for the Rock Creek project, mine-safety matters and labor negotiations at Lucky Friday.
- Consent decrees lodged in April 2016 proposed resolving the Gilt Edge and Nelson Tunnel/Commodore Superfund matters for combined net payments by CoCa of approximately $9.9 million. The decrees remained subject to public comment and court approval.
- The company had accrued $5.6 million for the Johnny M Mine remediation. Potential liability at the Carpenter Snow Creek site could not be reasonably estimated; the EPA has indicated that total site remediation costs may exceed $100 million.
- Environmental, reclamation and closure liabilities totaled $96.7 million at March 31, 2016. Surety bonds supporting reclamation, self-insurance and employee benefits totaled $100.5 million.
- The company recognized a $6.1 million net loss on metal forward contracts during the quarter, largely offsetting provisional-sales price adjustments. A 10% change in prices for metals exposed in provisional concentrates would have changed their aggregate value by approximately $5.2 million, before considering mitigating contracts.
- The Lucky Friday collective bargaining agreement expired April 30, 2016, with negotiations continuing.
- In April 2016, the company began using Canadian-dollar forward contracts covering approximately 3% of forecast Casa Berardi cash operating costs from 2017 through the third quarter of 2018.
Important facts for investors to verify
- Whether lower metal prices, foreign-exchange losses and provisional-sales adjustments continue to pressure earnings and cash flow.
- Actual completion cost and timing of the Lucky Friday #4 Shaft project.
- San Sebastian’s sustainable grades, throughput, mine life and cash generation after the unusually strong initial grades.
- Final court approval and funding requirements for the proposed $9.9 million CoCa Superfund settlement.
- Potential exposure from Carpenter Snow Creek, Lucky Friday water-permit matters and other environmental contingencies.
- Progress on the Lucky Friday labor negotiations and any effect on production.
- Liquidity after planned 2016 capital expenditures of approximately $150 million, exploration spending, debt service and environmental obligations.
- The filing text does not provide a formal production or earnings guidance range for 2016.