Hecla Mining Company — Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops and produces silver, gold, lead and zinc through the Greens Creek, Lucky Friday, Casa Berardi and San Sebastian segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, filed August 9, 2018. The company reported 401.3 million common shares outstanding at June 30, 2018 and 477.0 million shares outstanding as of August 7, 2018 as stated on the filing cover.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales of products | $147.3 million | $134.3 million | $287.0 million | $276.8 million |
| Gross profit | $35.0 million | $31.2 million | $73.8 million | $66.1 million |
| Gross margin | 23.8% | 23.2% | 25.7% | 23.9% |
| Income from operations | $3.8 million | $4.0 million | $15.7 million | $19.8 million |
| Operating margin | 2.5% | 3.0% | 5.5% | 7.2% |
| Net income | $12.1 million | $(24.0) million | $20.3 million | $2.8 million |
| Income applicable to common shareholders | $11.9 million | $(24.2) million | $20.0 million | $2.5 million |
| Diluted EPS | $0.03 | $(0.06) | $0.05 | $0.01 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $47.0 million | $45.8 million |
| Capital expenditures | Not separately provided | Not separately provided | $43.3 million | $46.0 million |
At June 30, 2018, cash and cash equivalents were $239.7 million, current investments were $5.6 million, non-current investments were $7.4 million and total current assets were $352.4 million. Total assets were $2.39 billion and shareholders’ equity was $1.50 billion.
Long-term debt was $533.2 million on the consolidated balance sheet, with total principal senior notes of $506.5 million due May 1, 2021 at 6.875% and approximately CAD$40 million of Series 2018-A notes due May 1, 2021 at 4.68%. Capital lease liabilities totaled $14.8 million. The company had no borrowings under its former $100 million revolving facility at June 30, 2018, other than $3.0 million of letters of credit.
Cash, cash equivalents and restricted cash increased by $53.6 million during the first six months, to $240.7 million. Financing activities provided $22.3 million, including $31.0 million of net proceeds from the Ressources Québec notes. Management estimated 2018 capital expenditures of $140 million to $145 million, exploration and pre-development expenditures of approximately $40 million, and research and development expenditures of $6 million to $10 million.
Material changes versus prior comparable periods
- Second-quarter sales increased 9.7%, while six-month sales increased 3.7%. Gold, zinc and lead sales improved in the second quarter; silver sales declined.
- Six-month net income improved to $20.3 million from $2.8 million, primarily reflecting derivative gains, foreign exchange gains and lower income tax expense compared with 2017. The 2017 period included a significant tax benefit related to the timing of Lucky Friday shaft deductions.
- Base-metal derivative gains were $16.8 million in the second quarter and $20.8 million for the first six months, compared with $2.5 million and a $5.3 million loss, respectively, in the comparable 2017 periods. These gains are market-sensitive and not necessarily indicative of recurring operating performance.
- Greens Creek and Casa Berardi improved materially. Six-month gross profit increased by $19.0 million and $11.4 million, respectively. Greens Creek benefited from higher by-product credits and lower depreciation; Casa Berardi benefited from higher gold production and prices.
- San Sebastian deteriorated substantially. Six-month gross profit fell to $9.7 million from $29.6 million as the operation transitioned from higher-grade open-pit ore to lower-grade underground production.
- Lucky Friday remained constrained by a union strike that began March 13, 2017. Six-month sales fell to $8.3 million from $19.8 million, while suspension-related costs, including depreciation, totaled approximately $11.8 million.
- Cash flow from operations was broadly stable, increasing to $47.0 million from $45.8 million, while investing cash usage decreased to $15.2 million from $54.7 million due partly to investment maturities.
Guidance, outlook, risks and unusual items
On July 20, 2018, after quarter-end, Hecla acquired Klondex Mines Ltd. for preliminary estimated consideration of $407.7 million, consisting of $155.2 million in cash, 75.3 million Hecla shares valued at $242.4 million and warrants valued at $10.1 million. The acquisition added three producing gold mines and exploration properties in northern Nevada. Klondex also contributed approximately $11.9 million of cash, while its $35.0 million revolving-facility borrowing was repaid after closing.
On July 16, 2018, the company entered into a new $200 million senior secured revolving credit facility, expected to increase to $250 million subject to conditions. Hecla had drawn $47.0 million by the filing date, leaving approximately $150 million of stated availability before any increase.
Management stated that available cash, investments, expected operating cash flow and financing capacity should be adequate for the next 12 months, but noted that liquidity depends on metals prices, operating performance, capital needs, acquisitions, litigation and regulatory matters.
- Lucky Friday production may remain disrupted; management estimated $1.5 million to $2.0 million of monthly cash expenditures to advance restart engineering and infrastructure. A prolonged strike could lead to an impairment review of approximately $428.1 million of Lucky Friday property, plant and equipment and mineral interests.
- Metals prices remain volatile. A 10% change in the value of metals contained in provisional concentrate sales would affect value by approximately $6.3 million before considering hedges.
- Foreign exchange exposure is material: a 10% change in the USD/CAD rate would have affected net foreign exchange gain or loss by approximately $11.2 million, based on the filing’s sensitivity analysis.
- Environmental and reclamation liabilities totaled $86.4 million. The company had $117.0 million of surety bonds supporting reclamation, closure, self-insurance and employee benefit obligations.
- The company accrued $5.6 million for remediation at the Johnny M Mine site, but stated that ultimate liability could be higher. EPA matters involving Johnny M, Carpenter Snow Creek and Barker-Hughesville remain uncertain.
- Rock Creek and Montanore development remain subject to permitting challenges, litigation and possible regulatory changes, including Montana ballot initiative I-186.
- China announced potential tariffs on lead and silver concentrates. The filing states that Hecla sold $0.1 million of silver concentrates to China in the first half of 2018 and no lead concentrates to China during that period.
Important facts for investors to verify
- Verify the final purchase-price allocation, financing impact and operating results of the July 2018 Klondex acquisition.
- Monitor post-acquisition debt, covenant compliance, revolver availability and the refinancing requirement for senior notes due in 2021.
- Track resolution of the Lucky Friday labor dispute, restart timing, monthly suspension costs and any impairment analysis.
- Assess whether derivative gains, foreign exchange gains and provisional-sales adjustments are recurring or principally market-driven.
- Review San Sebastian’s underground transition, grades, production levels and cost trends.
- Evaluate exposure to silver, gold, lead and zinc prices, foreign exchange rates, tariffs and counterparty performance under derivative contracts.
- Review environmental accruals and potential liabilities associated with Johnny M, Carpenter Snow Creek, Barker-Hughesville, reclamation and water-permit matters.