Hecla Mining Company — Q3 2017 Form 10-Q Summary
Business context and reporting period
Hecla Mining Company explores, develops, produces and markets silver, gold, lead and zinc through the Greens Creek, Lucky Friday, Casa Berardi and San Sebastian segments. The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company had 399.0 million common shares outstanding as of November 3, 2017.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales of products | $140.8 million | $179.4 million | $417.7 million | $481.7 million |
| Gross profit | $43.6 million | $58.7 million | $109.8 million | $148.0 million |
| Gross margin | 31.0% | 32.7% | 26.3% | 30.7% |
| Income from operations | $20.9 million | $38.2 million | $40.8 million | $95.4 million |
| Net income | $1.4 million | $25.8 million | $4.2 million | $49.3 million |
| Income applicable to common shareholders | $1.3 million | $25.7 million | $3.8 million | $48.9 million |
| Basic EPS | $0.00 | $0.07 | $0.01 | $0.13 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $74.1 million | $173.1 million |
At September 30, 2017, cash and cash equivalents were $172.9 million, current investments were $33.0 million and non-current investments were $7.1 million, for total cash and investments of approximately $213.0 million. Total assets were $2.40 billion and shareholders’ equity was $1.51 billion.
Long-term debt was $501.9 million, consisting primarily of 6.875% Senior Notes due May 2021 with $506.5 million principal outstanding. Capital lease liabilities totaled $13.3 million. The $100 million revolving credit facility was amended to extend its term to July 2020; no borrowings were outstanding, although $2.6 million of letters of credit were outstanding. Management reported compliance with all debt covenants and approximately $97 million of borrowing availability.
For the first nine months, investing cash outflows were $69.2 million, including $70.4 million of capital expenditures. Financing cash outflows were $2.8 million. Cash increased $3.1 million from year-end 2016.
Material changes versus the prior comparable period
- Nine-month sales declined 13.3%, gross profit declined 25.8% and income applicable to common shareholders declined 92.2% from 2016.
- Production and payable sales of silver declined materially, while gold production increased modestly. Nine-month silver production fell to 9.5 million ounces from 13.2 million ounces; gold production increased to 171,720 ounces from 170,779 ounces.
- Lucky Friday production was suspended after unionized employees began a strike on March 13, 2017. Limited production resumed in July, but Q3 sales were only $0.2 million and nine-month segment operating income was a loss of $9.0 million versus income of $13.4 million in 2016. Suspension-related costs were $4.8 million in Q3 and $14.4 million for nine months.
- Base-metal derivative losses were $11.2 million in Q3 and $16.5 million for nine months, compared with no material activity in the 2016 comparable periods.
- Foreign-exchange losses were $4.8 million in Q3 and $10.9 million for nine months, compared with a Q3 2016 gain of $2.4 million and a nine-month 2016 loss of $7.7 million.
- Interest expense increased by $3.8 million in Q3 and $11.8 million for nine months, partly because substantially less interest was capitalized after completion of the Lucky Friday #4 Shaft project.
- Income tax benefits of $5.4 million in Q3 and $18.4 million for nine months contrasted with tax provisions in 2016. The nine-month benefit included approximately $15.1 million from releasing a valuation allowance after an IRS-approved change in the timing of deductions for Lucky Friday #4 Shaft costs.
- A $4.8 million Q3 gain on disposition of property, plant and equipment and mineral interests primarily related to insurance proceeds for the Troy mine mill-building collapse.
Operations, outlook and management commentary
- Management expects 2017 capital expenditures of approximately $105 million to $110 million, including $70.4 million incurred through September 30. Exploration and pre-development expenditures are expected to total $25 million to $30 million, including $21.7 million incurred through September 30.
- Management expects to spend approximately $1.0 million to $1.5 million per month at Lucky Friday to advance engineering and infrastructure for a full-production restart, in addition to limited interim-production costs. The duration of the strike and timing of a labor agreement remain uncertain.
- San Sebastian underground development and rehabilitation are expected to support deeper ore production beginning in the first quarter of 2018. Planned 2017 underground development capital is approximately $5.0 million. Management expects positive San Sebastian cash flow to continue until early or mid-2020, subject to operating and metals-price risks.
- Management believes available cash, investments, operating cash flow and financing capacity will be adequate for obligations and potential cash requirements over the next 12 months.
- The proposed June 2017 offering of $500 million of new Senior Notes and related tender offer for existing notes were abandoned because available terms were not sufficiently attractive. Refinancing risk remains relevant ahead of the 2021 maturity.
- Montanore project environmental approvals were vacated by a federal court in June 2017 and remanded for further agency review. Additional approvals are required before the project can proceed beyond certain preliminary actions. Rock Creek and Montanore also face permitting and litigation risks.
- Recorded reclamation and closure liabilities totaled $87.3 million. Surety bonds supporting reclamation, self-insurance and employee benefits totaled $117.4 million. Significant environmental contingencies include the Johnny M site, for which the company accrued $5.6 million but disclosed possible remediation costs ranging from zero to $221 million, and the Carpenter Snow Creek site, where potential liability cannot presently be estimated.
- At September 30, 2017, the company had foreign-currency hedge contracts covering CAD and MXN operating costs and metal forward contracts. Forecasted-sales metal derivatives generated a $16.5 million loss for the first nine months as zinc and lead prices increased.
Important facts for investors to verify
- Progress toward resolving the Lucky Friday strike and the timing, cost and reliability of a full-production restart.
- Actual 2017 capital, exploration and pre-development spending versus the stated ranges, together with available liquidity and covenant compliance.
- Senior Notes refinancing or repayment plans before the May 2021 maturity and the effect of the 6.875% interest burden.
- Effects of silver, gold, zinc and lead prices, foreign-exchange rates and derivative positions on revenue, cash flow and earnings.
- Montanore and Rock Creek permitting outcomes, including the consequences of the 2017 court decision affecting Montanore.
- Potential changes to environmental, reclamation, Superfund, water-permit and personal-injury liabilities beyond recorded accruals.
- Whether San Sebastian underground development begins production as expected in the first quarter of 2018 and whether projected positive cash flow continues through early or mid-2020.
- The sustainability of the company’s minimum common-stock dividend; the Board declared $0.0025 per share for December 2017, while the silver-price-linked component was zero because Q3 realized silver price was $17.01 per ounce.