Hecla Mining Company 2016 Q2 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, with operating segments at Greens Creek, Lucky Friday, Casa Berardi and San Sebastian. The filing covers the three and six months ended June 30, 2016; financial statements are unaudited. San Sebastian resumed commercial production in late 2015 and contributed materially to 2016 results.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales of products | $171.3 million | $104.2 million | $302.3 million | $223.3 million |
| Gross profit | $58.5 million | $9.5 million | $89.3 million | $29.3 million |
| Gross margin | 34.1% | 9.1% | 29.5% | 13.1% |
| Income from operations | $41.6 million | $(17.3) million | $57.2 million | $(12.4) million |
| Net income | $24.1 million | $(26.7) million | $23.5 million | $(14.1) million |
| Income applicable to common shareholders | $24.0 million | $(26.8) million | $23.2 million | $(14.4) million |
| Diluted EPS | $0.06 | $(0.07) | $0.06 | $(0.04) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $86.1 million | $52.2 million |
| Capital expenditures | Not separately provided | Not separately provided | $77.0 million | $58.3 million |
Q2 net margin was approximately 14.1%, compared with negative 25.6% in the prior-year quarter. Six-month net margin was approximately 7.8%, compared with negative 6.3% in the prior-year period.
- Cash and cash equivalents were $143.6 million at June 30, 2016, versus $155.2 million at December 31, 2015. Cash, cash equivalents and investments totaled $163.2 million.
- The company had no borrowings under its new $100 million revolving credit facility and had $2.6 million of letters of credit outstanding. Management stated that all financial covenants were satisfied.
- Senior Notes had principal outstanding of $506.5 million, bear interest at 6.875%, and mature May 1, 2021. Reported carrying value was $500.4 million and estimated fair value was $492.6 million.
- Total capital lease liabilities were $15.1 million. Accrued reclamation and closure liabilities totaled $97.1 million, including current and non-current amounts.
- Total assets were $2.27 billion and shareholders’ equity was $1.38 billion at June 30, 2016.
Material changes versus the prior comparable period
- Sales increased 64% in Q2 and 35% for the first six months, primarily reflecting San Sebastian production, stronger gold and silver sales, and improved production at Casa Berardi and Lucky Friday.
- San Sebastian generated Q2 sales of $35.7 million and gross profit of $26.5 million; six-month sales were $59.4 million and gross profit was $42.5 million. The mine had negative cash cost after by-product credits of $3.05 per silver ounce in Q2 and $3.15 for the first half.
- Casa Berardi gross profit improved to $12.1 million in Q2 from a $1.2 million loss, and to $15.1 million for the first half from a $0.5 million loss, mainly due to higher gold production, grades, recoveries and prices.
- Lucky Friday gross profit improved to $4.1 million in Q2 from a $0.6 million loss, while six-month gross profit increased to $6.8 million from $3.0 million. Silver production rose 40% in Q2 and 27% for the first half.
- Greens Creek Q2 gross profit rose to $15.8 million from $11.2 million, but six-month gross profit declined to $24.9 million from $26.9 million because of lower silver, zinc and lead prices.
- Operating cash flow increased by $33.9 million year over year, but investing cash use increased by $35.9 million, largely because capital expenditures rose by $18.7 million and the company purchased $16.1 million of bonds.
- Foreign exchange results deteriorated from a $10.4 million gain in the first half of 2015 to a $10.1 million loss in the first half of 2016. The company initiated Canadian-dollar hedges for Casa Berardi operating costs.
Guidance, outlook, commentary and risks
- Management estimated 2016 capital expenditures of approximately $150 million and exploration and pre-development expenditures of approximately $19 million, subject to operating performance, metals prices and financial conditions.
- The Lucky Friday #4 Shaft was expected to become operational in the fourth quarter of 2016. The project’s estimated total cost was approximately $225 million, most of which had already been incurred.
- Processing from the Casa Berardi East Mine Crown Pillar open pit began in July 2016. Management expected approximately 5,000 ounces of gold in 2016 and 20,000 to 30,000 ounces annually for approximately five remaining years.
- Management expected San Sebastian to generate positive cash flow through the remainder of 2016 and part of 2017, but noted its short mine life of approximately 18 to 24 months and sensitivity to costs and precious-metals prices.
- The company expected available cash, investments, operating cash flow and financing capacity to satisfy obligations for the next 12 months. Liquidity requirements include debt service, mine capital spending, reclamation, litigation, acquisitions and dividends.
- A proposed Mines Management merger, involving the Montanore project, was pending shareholder approval. Based on the August 2, 2016 share price, estimated consideration was approximately $59.1 million in Hecla shares. The transaction was subject to litigation, permitting and other closing risks.
- Hecla withdrew its proposed takeover bid for Dolly Varden Silver in late July 2016 after a required condition precedent was not satisfied.
- Environmental and legal exposures include the Johnny M site, Carpenter Snow Creek, and South Dakota and Colorado Superfund sites. The company accrued $9.9 million for the proposed CoCa settlement, with the Gilt Edge consent decree not yet entered as of filing.
- The Johnny M remediation liability was estimated at $5.6 million, but the filing states that ultimate costs could be higher. A lawsuit alleging personal injury related to the site was filed in August 2016, and the company could not yet estimate any loss.
- Metal prices remain volatile. A 10% change in the value of metals in provisional concentrate sales would have affected value by approximately $6.5 million, before considering hedging effects. A 10% change in the U.S. dollar/Canadian dollar exchange rate would have affected net foreign-exchange gain or loss by approximately $13.9 million.
Most important facts for an investor to verify
- Whether the Lucky Friday #4 Shaft was completed on schedule and within the remaining capital budget.
- Actual 2016 production, realized prices and cash costs, particularly at San Sebastian and Casa Berardi.
- Progress and final terms of the Mines Management merger, including permitting and litigation related to Montanore.
- Final court approval and cash funding requirements for the Gilt Edge and Nelson Tunnel/Commodore settlements.
- Potential changes to reclamation, environmental and litigation liabilities beyond recorded accruals.
- Compliance with the Senior Notes and revolving-credit covenants while funding approximately $150 million of planned 2016 capital expenditures.
- Exposure to silver, gold, lead, zinc and Canadian-dollar movements, including the impact of provisional sales and derivative contracts.