Hecla Mining Company: Q1 2014 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company is a precious- and base-metals producer focused on silver, gold, lead and zinc. The report covers the three months ended March 31, 2014. Operations comprised Greens Creek, Lucky Friday and Casa Berardi, the latter acquired through the June 1, 2013 acquisition of Aurizon Mines.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales of products | $125.8 million | $76.5 million |
| Gross profit | $22.2 million | $25.6 million |
| Income from operations | $7.9 million | $(2.2) million |
| Net income | $11.6 million | $11.1 million |
| Income applicable to common stockholders | $11.5 million | $11.0 million |
| Basic and diluted EPS | $0.03 | $0.04 |
| Cash provided by operating activities | $30.4 million | $11.4 million |
| Capital expenditures | $26.9 million | $25.8 million |
Gross margin declined to approximately 17.7% from 33.5%, primarily because production costs and depreciation increased substantially following the addition of Casa Berardi and because of lower precious-metals prices. Net income benefited from a $9.5 million derivative gain, a $4.1 million foreign-exchange gain and a lower effective tax rate, partly offset by $6.8 million of net interest expense.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $207.6 million at March 31, 2014, compared with $212.2 million at December 31, 2013. Cash, cash equivalents and non-current marketable securities totaled $216.3 million.
- Total assets were $2.25 billion and stockholders’ equity was $1.34 billion at quarter-end.
- Long-term debt was $491.0 million, primarily the 6.875% senior notes due May 1, 2021. Including current and non-current capital leases, total debt-related liabilities were approximately $527.8 million.
- The company had a $100 million senior secured revolving credit facility, no borrowings outstanding, and was in compliance with all covenants.
- Management stated that available cash, investments, operating cash flow and financing capacity should be adequate for the next 12 months, subject to metals prices, operating performance and other risks.
Material changes versus the prior comparable period
- Revenue increased 64% year over year, primarily because Casa Berardi contributed $42.1 million of sales and Lucky Friday production recovered from its 2012 suspension.
- Casa Berardi generated $5.7 million of gross profit and produced 31,259 ounces of gold.
- Lucky Friday sales rose to $20.1 million from $3.8 million, and the segment moved from a $2.3 million gross loss to a $4.7 million gross profit as production reached sustained full-production levels.
- Greens Creek gross profit fell to $11.8 million from $27.9 million because of lower silver, gold and lead prices, despite higher throughput and production.
- Average realized prices declined to $20.04 per ounce for silver from $28.86, $1,298 per ounce for gold from $1,620, and $0.98 per pound for lead from $1.07. Realized zinc prices were $0.90 per pound versus $0.93.
- Exploration and pre-development expense decreased to $4.6 million from $11.3 million as management scaled back discretionary spending.
- Interest expense increased sharply following the 2013 issuance of the senior notes used partly to fund the Aurizon acquisition.
- Operating cash flow increased by $19.0 million, while net cash decreased by $4.5 million after investing and financing activities.
Guidance, outlook, risks and unusual items
- Management estimated 2014 capital expenditures of approximately $150 million and exploration and pre-development expenditures of approximately $18 million.
- The Lucky Friday #4 Shaft project is expected to cost approximately $215 million in total, with $138 million spent through March 31, 2014 and completion expected in 2016.
- Casa Berardi’s West Mine Shaft deepening project was expected to be completed in late third quarter 2014, with commissioning thereafter.
- The company was obligated to pay approximately $55.4 million under the Coeur d’Alene Basin settlement by August 2014. Proceeds from outstanding warrants were expected to fund the obligation if exercised; otherwise, the company would be responsible for the remaining payment.
- Greens Creek’s revised reclamation and closure plan increased estimated undiscounted closure costs to approximately $102.7 million from $73.9 million, increasing the recorded asset retirement obligation by approximately $8.0 million. The company expects to increase its $30 million reclamation bond, potentially by a material amount, but stated that bonding capacity may not be available.
- Accrued reclamation and closure costs totaled $114.0 million at March 31, 2014, including the Coeur d’Alene settlement obligation.
- Lucky Friday faced continuing EPA and Clean Water Act matters, including potential civil penalties and groundwater investigations. The company believed liability was reasonably possible but could not reasonably estimate the amount.
- Other environmental and Superfund matters included the Johnny M, Carpenter Snow Creek, Gilt Edge and Nelson Tunnel/Commodore sites. Several potential liabilities were not recorded because the ultimate amounts could not be estimated.
- The company used metal forward contracts and recognized a $9.5 million gain on contracts covering forecasted zinc and lead sales. These instruments mitigate some price exposure but create counterparty and opportunity risks.
- The company reported a $4.1 million foreign-exchange gain and does not currently hedge its Canadian-dollar exposure. A 1% change in the U.S. dollar/Canadian dollar exchange rate would have affected the reported net foreign-exchange gain by approximately $1.5 million.
- On May 5, 2014, the board declared a $0.0025-per-share common dividend totaling approximately $0.9 million. No silver-price-linked dividend was declared because the first-quarter realized silver price was below the policy threshold.
Most important facts for investors to verify
- Whether silver, gold, lead and zinc prices support expected cash flow and debt service.
- Progress, cost changes and funding capacity for the Lucky Friday #4 Shaft and Casa Berardi shaft projects.
- The timing and funding source for the $55.4 million Coeur d’Alene Basin settlement payment.
- The final reclamation bond requirement and potential cost increases at Greens Creek.
- Developments and potential penalties related to Lucky Friday water permits, environmental claims and Superfund matters.
- Whether derivative gains are recurring or primarily mark-to-market benefits that may reverse as metal prices change.
- Casa Berardi’s operating performance and integration following the Aurizon acquisition.
- The company’s ability to maintain liquidity while funding approximately $150 million of 2014 capital expenditures and servicing $500 million of senior notes.