Hecla Mining Company: Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Hecla Mining Company is a precious- and base-metals producer of silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi and San Sebastian. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017, and the balance sheet is presented as of March 31, 2018 versus December 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales of products | $139.7 million | $142.5 million | Down 2.0% |
| Gross profit | $38.8 million | $34.9 million | Up 11.1% |
| Gross margin | 27.8% | 24.5% | Up 3.3 points |
| Income from operations | $11.9 million | $15.9 million | Down 24.7% |
| Operating margin | 8.6% | 11.1% | Down 2.5 points |
| Net income | $8.2 million | $26.8 million | Down 69.3% |
| Income applicable to common stockholders | $8.1 million | $26.7 million | Down 69.6% |
| Basic and diluted EPS | $0.02 | $0.07 | Down $0.05 |
| Cash flow from operations | $16.4 million | $38.3 million | Down $21.9 million |
| Capital expenditures | $17.6 million | $21.7 million | Down $4.0 million |
Net income in Q1 2017 benefited from a $29.1 million income-tax benefit, primarily related to a change in the tax treatment of Lucky Friday #4 Shaft development costs. Q1 2018 included a $0.8 million tax provision.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $212.6 million at March 31, 2018, compared with $186.1 million at December 31, 2017.
- Total cash, cash equivalents and investments were $254.7 million, compared with $227.5 million at year-end 2017.
- Total current assets were $366.1 million versus $320.3 million at December 31, 2017; total current liabilities were $115.9 million versus $112.1 million.
- Long-term debt was $533.6 million, compared with $502.2 million at year-end, reflecting the issuance of CAD$40 million, approximately US$30.8 million, of Series 2018-A Senior Notes to Ressources Québec.
- The Company reported approximately $546.3 million of total indebtedness, including capital leases. Existing Senior Notes have a principal amount of $506.5 million, bear interest at 6.875% and mature May 1, 2021. The Ressources Québec Notes bear interest at 4.68% and also mature May 1, 2021.
- The $100 million revolving credit facility was substantially undrawn, with approximately $97 million available after $2.6 million of letters of credit. Management stated that the Company was substantially in compliance with its covenants at March 31, 2018.
- Management believes available liquidity, expected operating cash flow and potential financing sources are adequate for the next 12 months, but this assessment includes the potential cash requirements of the proposed Klondex acquisition.
Material Changes Versus the Prior Comparable Period
- Sales declined modestly because lower silver, lead and zinc volumes more than offset higher gold volume and higher realized gold, lead and zinc prices. Realized silver price declined to $16.84 per ounce from $17.90.
- Production decreased to 2.5 million silver ounces from 3.4 million, while gold production increased to 57,808 ounces from 56,113. Lead production declined to 5,627 tons from 8,636, and zinc production declined to 15,211 tons from 15,537.
- Greens Creek sales increased to $65.9 million from $58.9 million, and operating income increased to $23.2 million from $14.1 million. AISC after by-product credits improved to $0.59 per silver ounce from $3.86.
- Casa Berardi sales increased to $55.5 million from $41.7 million, and operating income improved to $3.3 million from an operating loss of $2.2 million. AISC after by-product credits improved to $1,086 per gold ounce from $1,256.
- Lucky Friday sales fell to $5.0 million from $20.0 million, and the segment reported an operating loss of $4.1 million versus operating income of $3.9 million. Production remained limited because of the continuing union strike.
- San Sebastian sales declined to $13.3 million from $22.0 million, and operating income declined to $5.0 million from $13.5 million as the operation transitioned from open-pit to underground mining and processed lower-grade ore.
- Other operating expenses increased to $26.8 million from $19.0 million, including higher Lucky Friday suspension-related costs, exploration and acquisition costs. Klondex acquisition costs were $2.5 million.
- Net gains on derivative contracts were $4.0 million in Q1 2018, compared with a $7.8 million loss in Q1 2017. Foreign exchange results also improved to a $2.6 million gain from a $2.3 million loss.
- Operating cash flow decreased substantially, primarily because of lower income and unfavorable working-capital changes, including higher inventories and lower payroll accruals.
Guidance, Outlook, Risks and Unusual Items
- For 2018, management estimated capital expenditures of $95 million to $105 million, exploration and pre-development expenditures of $35 million to $42 million, and research and development expenditures of $13 million to $18 million.
- Lucky Friday employees had been on strike since March 13, 2017. The Company expected cash expenditures of approximately $1.0 million to $1.5 million per month for engineering, infrastructure and restart activities, in addition to limited-production costs. After quarter-end, the Company settled an unfair labor practice claim with the NLRB but stated that the settlement was not expected to resolve the principal labor dispute.
- The Company cautioned that a prolonged Lucky Friday disruption could result in an impairment review of approximately $422 million of property, plant, equipment and mineral interests, although the mine has identified reserves and mineralized material and an estimated mine life of approximately 22 years.
- On March 16, 2018, Hecla agreed to acquire Klondex Mines Ltd. for consideration valued at approximately $462 million at announcement. The transaction remained subject to shareholder, regulatory and other approvals and could require up to approximately $157.4 million of cash consideration and substantial share issuance. Completion and integration risks are material.
- Environmental and reclamation liabilities totaled approximately $87.2 million. The Johnny M Mine remediation liability was accrued at $5.6 million, but the filing states that ultimate costs could be higher. Potential liabilities related to the Carpenter Snow Creek site could not be reasonably estimated.
- The Company had $117.0 million of surety bonds supporting reclamation, closure, self-insurance and employee-benefit obligations.
- Metals-price and foreign-exchange exposure remains significant. A 10% change in the value of provisional concentrate sales would affect value by approximately $6.9 million; a 10% change in the USD/CAD exchange rate would have affected net foreign-exchange gain or loss by approximately $11.6 million.
- The Company adopted new revenue-recognition and financial-instrument accounting standards in 2018. Revenue recognition timing and amounts were not materially changed, while adoption of the financial-instrument standard resulted in a $1.3 million cumulative adjustment from accumulated other comprehensive loss to retained deficit.
Most Important Facts for Investors to Verify
- Whether the Lucky Friday strike is resolved and when full production and normal cost metrics resume.
- The final approval, financing, consideration mix and integration performance of the proposed Klondex acquisition.
- Actual 2018 capital, exploration, pre-development and research expenditures versus management’s ranges.
- Production volumes, realized metal prices and derivative gains or losses, particularly for silver and base metals.
- Compliance with debt covenants, availability under the revolving facility and refinancing requirements for debt maturing in 2021.
- Changes in environmental, reclamation and Superfund-related liabilities, including the Johnny M and Carpenter Snow Creek matters.
- Whether lower San Sebastian grades and the transition to underground mining affect production, costs and reserves beyond Q1.