Hecla Mining Company — Q2 2022 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious-metals producer focused on silver, gold, lead and zinc. Its operating segments are Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations. The filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $191.2 million | $218.0 million | $377.7 million | $428.8 million |
| Gross profit | $37.3 million | $61.9 million | $82.7 million | $129.3 million |
| Gross margin | 19.5% | 28.4% | 21.9% | 30.2% |
| Income from operations | $7.7 million | $29.1 million | $22.5 million | $70.2 million |
| Net income (loss) | $(13.5) million | $2.7 million | $(9.4) million | $24.2 million |
| Loss/income applicable to common shareholders | $(13.7) million | $2.6 million | $(9.6) million | $23.9 million |
| Diluted EPS | $(0.03) | $0.01 | $(0.02) | $0.04 |
| Cash flow from operations | $40.2 million | $86.3 million | $78.1 million | $124.2 million |
| Free cash flow | $5.9 million | $54.4 million | $22.3 million | $70.9 million |
Silver production was 3.6 million ounces in the quarter and 7.0 million ounces year to date; gold production was 45,719 ounces and 87,361 ounces, respectively. Q2 silver AISC after by-product credits was $8.55 per ounce, compared with $7.54 in the prior-year quarter. Gold AISC was $1,641 per ounce, compared with $1,419.
At June 30, 2022, cash and cash equivalents were $198.2 million, compared with $210.0 million at December 31, 2021. Including investments, total cash, cash equivalents and investments were $222.1 million. Long-term debt was $507.8 million, consisting primarily of $475.0 million of 7.25% Senior Notes due 2028 and approximately $37.4 million of IQ Notes. The $250 million revolving credit facility had no borrowings and $14.9 million of letters of credit outstanding, leaving approximately $235.1 million of borrowing capacity.
Material changes versus prior comparable periods
- Q2 sales declined 12.3%, and first-half sales declined 11.9%, primarily because of lower silver prices and lower silver and gold sales volumes.
- Silver revenue fell to $70.1 million in Q2 from $92.8 million, driven by a lower realized silver price of $20.68 per ounce versus $27.14. Gold revenue was $82.0 million, supported by higher realized prices, while zinc revenue increased.
- Gross profit and operating income declined substantially because of lower revenue, inflation in labor, fuel, consumables and contractor costs, and lower grades or volumes at certain operations.
- Greens Creek remained the largest contributor but its Q2 operating income declined to $27.8 million from $56.4 million. Lucky Friday operating income declined to $5.5 million from $11.7 million. Casa Berardi reported a Q2 operating loss of $0.6 million, while Nevada Operations had no Q2 sales and a $9.7 million operating loss.
- Operating cash flow decreased by $46.1 million in the first half, while capital expenditures increased to $55.8 million from $53.3 million. The company also invested $21.9 million in other mining companies.
- Fair value adjustments remained a significant expense at $(16.4) million in Q2, primarily from unrealized losses on equity investments. However, derivative-related losses were materially lower than in Q2 2021.
- Comprehensive income was $51.8 million in Q2 and $22.8 million year to date, primarily because of gains in the fair value of derivative contracts designated as hedges; these gains did not represent comparable operating earnings.
Guidance, outlook, commentary and risks
- Management estimated 2022 capital expenditures of approximately $150 million to $160 million, with $60.9 million incurred through June 30, and exploration and pre-development expenditures of approximately $45.0 million, with $24.0 million incurred.
- Management stated that existing cash, expected operating performance, potential ATM equity proceeds and revolving-credit availability should be sufficient for obligations and cash requirements during the following 12 months, but noted that this depends on metals prices, operating results and access to financing.
- The company continues to face volatility in silver, gold, lead and zinc prices, foreign-exchange exposure, inflationary costs, mine operating and development risks, COVID-19 impacts, environmental obligations and regulatory requirements.
- As of June 30, 2022, environmental and reclamation liabilities totaled $114.3 million. Surety bonds totaled $181.8 million and letters of credit totaled $14.9 million.
- Hecla disclosed EPA Notices of Violation involving alleged RCRA violations at Greens Creek and Clean Water Act violations at Lucky Friday. The company disputed certain allegations and could not reasonably estimate potential penalties.
- Environmental matters at the Johnny M/San Mateo Creek Basin, Carpenter Snow Creek and Barker-Hughesville sites remain unresolved. The company stated that some potential liabilities cannot be reasonably estimated.
- Subsequent to quarter-end, Hecla agreed to acquire the remaining shares of Alexco Resource Corp., advanced $20 million to Alexco, and agreed to issue approximately $135 million of Hecla common stock to terminate Wheaton Precious Metals’ silver stream at Alexco’s Keno Hill property, subject to completion of the acquisition.
- On July 21, 2022, Hecla replaced its prior facility with a $150 million secured revolving credit facility, expandable by up to $75 million, maturing in July 2026. The facility is secured in part by the Greens Creek group and assets.
- COVID-19 mitigation costs declined to $0.1 million in Q2 and $0.4 million year to date, from $1.4 million and $3.0 million in the prior-year periods, respectively, but management continued to identify potential operational and financial impacts.
Most important facts for investors to verify
- Reconcile the decline in sales, gross margin, operating income and cash flow with realized metals prices, production volumes, grades and inflationary costs.
- Assess liquidity after planned capital expenditures, exploration spending, debt service, potential Alexco-related funding and the replacement credit facility.
- Review the economic sensitivity to metals prices and foreign exchange, including the stated approximately $8.1 million impact from a 10% change in the value of exposed provisional metal sales and approximately $7.7 million from a 10% CAD/USD movement.
- Evaluate the size, timing and potential escalation of environmental, reclamation, EPA and litigation contingencies.
- Confirm the terms, dilution and closing conditions of the Alexco acquisition and the proposed Wheaton stream termination.
- Distinguish GAAP earnings and cash flow from non-GAAP cash cost, AISC, free cash flow and derivative-related comprehensive income measures.