Hecla Mining Company 2019 Q3 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, San Sebastian and Nevada Operations. The filing covers the unaudited quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The Nevada Operations segment reflects the July 2018 acquisition of Klondex Mines.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Sales of products | $161.5 million, versus $143.6 million | $448.3 million, versus $430.6 million |
| Gross profit (loss) | $14.9 million, versus $6.6 million | $(1.9) million, versus $80.4 million |
| Income (loss) from operations | $(5.1) million, versus $(30.4) million | $(64.7) million, versus $(14.7) million |
| Net loss | $(19.5) million, versus $(23.2) million | $(91.6) million, versus $(2.9) million |
| Loss per common share | $(0.04), versus $(0.05) | $(0.19), versus $(0.01) |
| Cash provided by operating activities | Not separately provided | $63.6 million, versus $75.2 million |
- Approximate gross margins were 9.2% in the third quarter and negative 0.4% for the first nine months, compared with 4.6% and 18.7%, respectively, in 2018.
- Approximate operating margins were negative 3.2% in the third quarter and negative 14.4% for the first nine months.
- Cash and cash equivalents were $33.0 million at September 30, 2019, compared with $27.4 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $34.0 million.
- Capital expenditures were $97.3 million in the first nine months, versus $83.3 million in 2018. Net cash used in investing activities was $95.9 million, compared with $184.6 million.
- Debt consisted primarily of $506.5 million principal amount of Senior Notes due May 2021, approximately $30.2 million carrying value of Ressources Québec Notes, and $50.0 million drawn under the revolving credit facility. Reported long-term debt was $584.6 million, excluding current liabilities and lease obligations.
- The revolver was amended in July 2019: availability was temporarily reduced from $250 million to $150 million, and leverage covenant thresholds were revised. The company stated that it was in compliance with its covenants at September 30.
- Total liabilities were $1.06 billion and shareholders’ equity was $1.62 billion at September 30, 2019.
- Operating cash flow covered approximately 65% of capital expenditures during the first nine months, before financing activities.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 12.5%, primarily from higher gold prices and gold sales, stronger silver and gold production, and the inclusion of Nevada Operations for a full comparable quarter.
- Nine-month sales increased 4.1%, but gross profit fell sharply because of higher production costs and depreciation, lower lead and zinc prices, weaker Casa Berardi results, and losses at Nevada Operations.
- Derivative results deteriorated materially: the company recorded a $4.7 million third-quarter loss and a $2.7 million nine-month loss, compared with gains of $19.5 million and $40.3 million in the respective 2018 periods.
- Casa Berardi generated a nine-month operating loss of $26.3 million, compared with operating income of $3.1 million in 2018, reflecting lower gold production, grades, throughput and recoveries. Management expected higher fourth-quarter production.
- Nevada Operations generated a nine-month operating loss of $43.8 million. Management curtailed near-term Fire Creek development and suspended Hollister production and Hatter Graben development while evaluating operational challenges.
- Greens Creek remained the strongest contributor, producing $52.1 million of operating income for the first nine months, although this was below $59.4 million in 2018 due to higher costs and lower lead and zinc prices.
- Lucky Friday remained affected by a labor strike that began in March 2017. Limited production continued, and suspension-related costs declined to $8.8 million for the first nine months from $18.3 million in 2018.
- Production increased year over year for the first nine months for silver, gold and lead, while payable zinc sales declined. Average realized silver and gold prices increased, while realized lead and zinc prices decreased.
- The company adopted lease accounting guidance on January 1, 2019, recognizing approximately $22.4 million of operating lease assets and liabilities.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2019 capital expenditures of approximately $138 million, including $97.3 million incurred through September 30, and exploration and pre-development expenditures of approximately $17.5 million, including $16.1 million incurred.
- Management believed available cash, operating performance, metals prices, potential at-the-market equity sales and revolver availability would support obligations for the next 12 months, but noted substantial dependence on operating performance, commodity prices and access to liquidity.
- Lucky Friday reached a tentative labor agreement in September 2019, subject to union ratification. If ratified, the mine would be staffed in stages and management estimated approximately one year would be needed to return to full production. Restart-related cash expenditures were expected to be approximately $1.0 million to $1.5 million per month, in addition to limited-production costs.
- Nevada’s September 30 carrying value was $524.8 million. A June 2019 recoverability assessment found no impairment, but management stated that a sustained gold price below approximately $1,280 per ounce, higher costs, or further operational setbacks could result in a material future impairment.
- In September 2019, the company received $20.1 million for two Greens Creek concentrate parcels that were not shipped until October. The amount was recorded as deferred revenue at quarter-end, with related costs remaining in inventory.
- The company recorded $32.9 million of Nevada inventory write-downs in the first nine months of 2019, including $4.6 million in the third quarter, compared with $7.2 million for the comparable 2018 post-acquisition period.
- Environmental and reclamation liabilities totaled $111.3 million. Surety bonds of $191.8 million and letters of credit of $38.5 million supported reclamation, closure, self-insurance and employee-benefit obligations.
- Material contingencies include EPA and CERCLA matters, including the Johnny M site, where the company increased its accrued remediation liability to $5.9 million; unresolved Montanore permitting and trespass litigation; and several Klondex-related shareholder and contractual lawsuits for which potential losses were not estimable.
- Commodity and foreign-exchange volatility remains significant. At quarter-end, a 10% change in relevant metal prices could have changed the value of concentrate receivables by approximately $9.9 million, while a 10% CAD/USD movement could have changed foreign-exchange results by approximately $10.6 million.
Most Important Facts for Investors to Verify
- Verify the refinancing or repayment plan for the $506.5 million Senior Notes and approximately $30.2 million of Ressources Québec Notes due May 2021.
- Monitor revolver availability, leverage-ratio compliance and the scheduled tightening of leverage covenants through 2020.
- Track Nevada production, costs, third-party processing arrangements and any renewed impairment assessment.
- Confirm ratification and implementation of the Lucky Friday labor agreement and the timing and cost of the production restart.
- Reconcile planned 2019 capital expenditures and exploration spending with actual cash flow and liquidity.
- Review exposure to silver, gold, lead and zinc prices, derivative settlements, and foreign-exchange movements.
- Assess developments in environmental proceedings, Montanore and Rock Creek permitting, reclamation obligations and Klondex-related litigation.