Hecla Mining Company — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company discovers, develops and produces silver, gold, lead and zinc. Its operating segments were Greens Creek in Alaska and Lucky Friday in Idaho. The filing covers the three months ended March 31, 2013, with unaudited results compared with the same period in 2012.
Financial Performance and Liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales of products | $76.5 million | $91.2 million | Down $14.7 million |
| Gross profit | $25.6 million | $48.2 million | Down $22.6 million |
| Gross margin | Approximately 33.5% | Approximately 52.9% | Lower |
| Income from operations | $(2.2) million | $25.4 million | Down $27.6 million |
| Net income | $11.1 million | $12.6 million | Down $1.5 million |
| Income applicable to common shareholders | $11.0 million | $12.4 million | Down $1.5 million |
| Basic and diluted EPS | $0.04 | $0.04 | No change |
| Cash provided by operating activities | $11.4 million | $41.4 million | Down $30.1 million |
| Capital additions | $25.8 million | $24.7 million | Up $1.1 million |
| Cash and cash equivalents | $168.6 million | $191.0 million at Dec. 31, 2012 | Down $22.4 million |
| Total assets | $1.38 billion | $1.38 billion at Dec. 31, 2012 | Essentially unchanged |
Operating margin was approximately negative 2.9% in Q1 2013 versus approximately 27.9% in Q1 2012. Net margin was approximately 14.5% versus 13.8%, primarily because a $21.5 million derivative gain offset weaker operating results.
The company had $178.0 million of cash, cash equivalents and non-current marketable equity securities at March 31, 2013. It had not drawn on its revolving credit facility and was in compliance with all related covenants. Capital lease liabilities totaled approximately $22.7 million, including $7.3 million current and $15.4 million non-current.
Operations and Material Changes
- Greens Creek: Sales declined to $72.6 million from $90.9 million and gross profit declined to $27.9 million from $47.9 million. Lower shipment timing, lower zinc and lead grades, lower silver and gold prices, negative provisional-price adjustments and higher mining and milling costs were principal factors.
- Greens Creek silver production increased to 1.78 million ounces from 1.33 million ounces, but total cash cost increased to $5.02 per silver ounce from $2.24.
- Lucky Friday: Limited production resumed in February 2013 after the Silver Shaft rehabilitation and haulage-way work were completed. The mine produced 120,492 ounces of silver, compared with no production in Q1 2012, but reported a $2.3 million gross loss and a $36.55 total cash cost per silver ounce.
- Lucky Friday suspension-related costs declined to $1.5 million from $6.2 million. Management expected production to ramp toward full levels by approximately mid-2013, although timing could vary.
- Exploration and pre-development expense increased to $11.3 million from $9.0 million, general and administrative expense increased to $6.9 million from $4.5 million, and Aurizon acquisition costs totaled $5.3 million.
- Average realized silver and gold prices decreased to $28.86 per ounce and $1,620 per ounce, respectively, from $36.59 and $1,751. Realized lead price increased to $1.07 per pound from $1.00, while realized zinc price decreased to $0.93 from $0.95.
Cash Flow, Debt and Corporate Transactions
- Cash flow from operations fell substantially because of lower operating income, weaker gross profit, acquisition costs and higher exploration and pre-development spending.
- Investing cash use was $28.2 million, including $25.8 million of capital expenditures and $2.6 million of marketable securities purchases. Financing cash use was $5.5 million, including $3.6 million of common dividends, $0.1 million of preferred dividends and $1.5 million of capital lease repayments.
- On April 1, 2013, the revolving credit commitment was reduced from $150 million to $100 million. No borrowings were outstanding as of the filing date.
- Hecla agreed to acquire Aurizon Mines Ltd. for consideration of approximately CAD$4.75 per share, payable in cash, Hecla shares or a combination subject to proration. The transaction was approved by Aurizon shareholders on May 9, 2013 and was expected to close in Q2 2013, subject to regulatory and customary conditions.
- On April 12, 2013, Hecla issued $500 million of senior notes due May 1, 2021, bearing interest at 6.875%. Net proceeds of approximately $490 million were placed in escrow primarily to fund the Aurizon acquisition. If closing conditions were not satisfied by September 1, 2013, the notes generally would have to be redeemed at par plus accrued interest.
Guidance, Outlook and Risks
- Management expected Lucky Friday to return to full production approximately by mid-2013 and intended to continue the #4 Shaft project, expected to cost approximately $200 million in total, including approximately $102 million spent by March 31, 2013.
- Estimated 2013 capital expenditures were approximately $152 million for Greens Creek and Lucky Friday, with approximately $42 million of exploration and pre-development expenditures. Aurizon separately estimated approximately $102 million of Casa Berardi capital expenditures and $7 million of exploration spending.
- Management believed available cash, investments, operating cash flow and financing capacity would be adequate for the next 12 months, but noted that metals prices, operating performance, acquisition integration and capital requirements could affect liquidity.
- Base-metal derivative contracts generated a $21.5 million gain in Q1 2013, compared with a $5.2 million loss in Q1 2012. The gain was primarily caused by declining lead and zinc prices and is not representative of recurring operating profitability.
- Significant contingencies included Lucky Friday water-permit matters, environmental and Superfund claims, reclamation obligations, mine-safety and labor-related claims, shareholder litigation and the Coeur d'Alene Basin settlement. Remaining settlement payments included $15.0 million due in October 2013 and approximately $55.4 million due by August 2014.
- Accrued reclamation and closure liabilities totaled approximately $113.9 million. The company expected the revised Greens Creek closure plan to require a potentially material increase in reclamation bonding.
- Key risks included volatile silver, gold, lead and zinc prices; mine safety and regulatory actions; environmental liabilities; execution and integration of Aurizon; increased leverage following the senior-note issuance; and the possibility that cash flow would be insufficient for debt service, capital projects and other obligations.
Most Important Facts for Investors to Verify
- Whether the Aurizon acquisition closed as planned and the final cash/share consideration and resulting debt and share dilution.
- Whether the escrowed senior-note proceeds were released or whether the notes were redeemed.
- Lucky Friday’s production ramp, cost per ounce and progress toward full production.
- Greens Creek shipment volumes, ore grades, metal prices and cash costs.
- Whether operating cash flow recovered from the Q1 level of $11.4 million.
- Future derivative gains or losses and the company’s exposure to changes in lead and zinc prices.
- Environmental, reclamation, water-permit, mine-safety and litigation outcomes, including the Coeur d’Alene payment obligations.
- Capital spending and liquidity requirements for the #4 Shaft, Greens Creek, Aurizon and exploration projects.