Hecla Mining Company: FY 2016 Form 10-K Summary
Business context and reporting period
Hecla Mining Company explores, develops and produces silver, gold, lead and zinc from four operating segments: Greens Creek in Alaska, Lucky Friday in Idaho, Casa Berardi in Quebec, Canada, and San Sebastian in Durango, Mexico. The filing covers the fiscal year ended December 31, 2016. Fourth-quarter 2016 sales were $164.2 million, gross profit was $43.5 million and net income was $20.3 million.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Sales of products | $646.0 million | $443.6 million | +46% |
| Gross profit | $191.5 million | $38.5 million | +397% |
| Income from operations | $116.9 million | $(35.6) million | Turned profitable |
| Net income | $69.5 million | $(87.0) million | Turned profitable |
| Income applicable to common stockholders | $69.0 million | $(87.5) million | Turned profitable |
| Basic and diluted EPS | $0.18 | $(0.23) | Improved |
| EBITDA | $236.2 million | $107.3 million | +120% |
| Cash flow from operations | $225.3 million | $106.4 million | +112% |
Gross margin was approximately 29.6%, operating margin 18.1%, net margin 10.8% and EBITDA margin 36.6%. Cost of sales and other direct production costs were $339.0 million, while depreciation, depletion and amortization was $115.5 million. Interest expense, net of capitalized interest, was $21.8 million, and the income tax provision was $27.4 million, representing an effective tax rate of approximately 28%.
Production totaled 17.2 million ounces of silver, 233,929 ounces of gold, 42,472 tons of lead and 68,516 tons of zinc. Silver production increased 48% from 2015 and gold production increased 24%. Consolidated cash cost after by-product credits was $3.10 per silver ounce for Greens Creek, Lucky Friday and San Sebastian combined; this is a non-GAAP measure. Unit cash costs were $3.84 per silver ounce at Greens Creek, $8.89 at Lucky Friday, $(3.35) at San Sebastian and $763.98 per gold ounce at Casa Berardi.
At December 31, 2016, cash and cash equivalents were $169.8 million, current investments were $29.1 million and non-current investments were $5.0 million, for total cash, cash equivalents and investments of $203.9 million. Total debt, including capital leases, was approximately $512.9 million. The company had $506.5 million principal amount of 6.875% Senior Notes due May 1, 2021 and no borrowings under its $100 million revolving credit facility. Capital expenditures were $164.8 million, and cash used in investing activities was $198.7 million.
Material changes versus the prior comparable period
- Results benefited substantially from a full year of San Sebastian production. San Sebastian generated $113.9 million of sales and $82.7 million of gross profit in 2016, compared with no reported sales in 2015.
- Greens Creek gross profit increased to $69.1 million from $32.6 million, supported by higher silver grades, improved recoveries and higher metal prices.
- Casa Berardi gross profit increased to $21.4 million from $4.9 million, primarily because of higher throughput and the start of ore processing from the East Mine Crown Pillar open pit in July 2016.
- Lucky Friday gross profit increased to $18.3 million from $1.1 million as higher grades and production improved results, although throughput remained below 2014 levels.
- Average market prices increased from 2015 for silver, gold, lead and zinc, but remained below 2014 levels. Realized prices were $17.16 per silver ounce, $1,245 per gold ounce, $0.85 per pound of lead and $0.95 per pound of zinc.
- Cash flow from operations more than doubled, while capital expenditures increased to $164.8 million from $137.4 million.
- General and administrative expense rose to $45.0 million from $34.2 million, primarily because of higher incentive compensation. Foreign exchange results shifted from a $24.6 million gain in 2015 to a $2.9 million loss in 2016.
- Hecla acquired Mines Management for $52.1 million, primarily in Hecla common stock, obtaining the Montanore project in Montana. Acquisition costs were $2.7 million. The company also continued to own the Rock Creek project acquired with Revett in 2015.
Guidance, outlook, commentary and risks
Management estimated 2017 capital expenditures of $120 million to $125 million and exploration and pre-development expenditures of $20 million to $25 million. Management expected San Sebastian to generate positive cash flow in 2017 and 2018, subject to metal prices, operating costs and successful underground development. Underground access and rehabilitation work began in January 2017, with underground production expected by the end of 2017.
The #4 Shaft at Lucky Friday was completed and commissioned in January 2017; additional development is expected to continue through 2017. Casa Berardi’s East Mine Crown Pillar pit was expected to contribute approximately 20,000 to 30,000 gold ounces annually for roughly five remaining years. Known mine-life estimates were approximately 10 years at Greens Creek, 22 years at Lucky Friday and 11 years at Casa Berardi, based on current reserve and mine-plan assumptions.
Important risks include substantial exposure to silver, gold, lead and zinc prices; production disruptions from ground instability, equipment failures, weather, power availability or mine safety events; labor uncertainty at Lucky Friday, where the collective bargaining agreement expired in April 2016 and employees rejected the company’s contract offer in February 2017; and extensive environmental, reclamation and permitting obligations.
Rock Creek and Montanore face legal and permitting challenges, including pending lawsuits affecting Montanore. The company had accrued $85.6 million for reclamation and environmental obligations and maintained $112.7 million of surety bonds. Potential liabilities at the Johnny M site were estimated at $5.6 million, while the company could not reasonably estimate potential exposure at the Carpenter Snow Creek Superfund site.
Other unusual items included a $16.0 million cash settlement of insurance related to the Troy mine, a $4.4 million gain on forward contracts for forecasted base-metal production, a $14.2 million loss on contracts related to provisional concentrate sales, and a $16.2 million decrease in deferred-tax valuation allowances. Management stated that no impairment indicators existed for long-lived assets at year-end.
Investor verification checklist
- Reconcile production, payable sales and realized prices, particularly the effect of provisional concentrate settlements and derivatives.
- Assess whether San Sebastian can sustain positive cash flow after the higher-grade open-pit material is depleted and whether underground production begins as planned.
- Monitor Lucky Friday labor negotiations, mine safety conditions and the ramp-up of the completed #4 Shaft.
- Compare actual 2017 capital and exploration spending with the $120 million to $125 million and $20 million to $25 million estimates.
- Review Senior Notes maturity and refinancing requirements, including the $506.5 million principal due in 2021 and covenant compliance.
- Evaluate environmental accruals, surety bonds, pending legal matters and the proposed federal hard-rock mining financial-assurance rules.
- Test reserve sensitivity to metal prices, recovery rates, grades, operating costs and permitting assumptions.
- Consider dilution from the at-the-market equity program, acquisitions and shares issued for pension funding; common shares outstanding increased to 395.3 million at year-end from 378.1 million.