Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Form 10-Q, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, results of litigation, prospects and opportunities, including reserves and other mineralization. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “feel,” “plan,” “estimate,” “project,” “forecast” and similar expressions. These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to, those set forth under Part I, Item 1A – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2018, as updated in Part II, Item 1A – Risk Factors in this quarterly report on Form 10-Q for the quarter ended March 31, 2019. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Hecla Mining Company and our subsidiaries have provided precious and base metals to the U.S. and worldwide since 1891. We discover, acquire, develop, produce and market silver, gold, lead and zinc.
We produce lead, zinc and bulk concentrates, which we sell to custom smelters and brokers, and unrefined doré containing gold and silver, which is sold to refiners or further refined before sale of the metals to traders. We are organized into five segments that encompass our operating and development units: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations. The map below shows the locations of our operating units, our exploration and pre-development projects, as well as our corporate offices located in Coeur d'Alene, Idaho and Vancouver, British Columbia.
Our current business strategy is to focus our financial and human resources in the following areas:
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operating our properties safely, in an environmentally responsible manner, and cost-effectively;
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•
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fully integrate the acquisition of Klondex Mines Ltd. ("Klondex") discussed further below, which gives us ownership of a mill, operating mines and other mineral interests in northern Nevada;
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continuing to optimize and improve operations at our units, which includes incurring research and development expenditures that may not result in tangible benefits;
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•
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expanding our proven and probable reserves and production capacity at our units;
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•
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conducting our business with financial stewardship to preserve our financial position in varying metals price environments;
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•
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advance permitting of the Rock Creek and Montanore projects;
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•
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maintaining and investing in exploration and pre-development projects in the vicinities of seven mining districts and projects, most of which we believe to be under-explored and under-invested: North Idaho's Silver Valley in the historic Coeur d'Alene Mining District; our Greens Creek unit on Alaska's Admiralty Island located near Juneau; the silver-producing district near Durango, Mexico; the Abitibi region of northwestern Quebec, Canada; our projects in northern Nevada; the Rock Creek and Montanore projects in northwestern Montana; and the Creede district of southwestern Colorado; and
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•
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continuing to seek opportunities to acquire or invest in mining properties and companies.
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A number of key factors may impact the execution of our strategy, including regulatory issues and metals prices. Metals prices can be very volatile. As discussed in the
Critical Accounting Estimates
section below, metals prices are influenced by a number of factors beyond our control. Average market prices of silver, gold, lead, and zinc in the first three months of 2019 were lower than their levels from the comparable period last year, as illustrated by the table in
Results of Operations
below. While we believe current global economic and industrial trends could result in continued demand for the metals we produce, prices have been volatile and there can be no assurance that current prices will continue.
The total principal amount of our Senior Notes due May 1, 2021 is $506.5 million, and they bear interest at a rate of 6.875% per year. The net proceeds from the Senior Notes were primarily used for the acquisition of Aurizon in June 2013. In addition, in March 2018 we entered into a note purchase agreement pursuant to which we issued CAD$40 million (approximately USD$30.8 million at the time of the transaction) in aggregate principal amount of our Series 2018-A Senior Notes due May 1, 2021 (the “RQ Notes”) to Ressources Québec which have an annual coupon rate of 4.68%. The net proceeds from the RQ Notes were used for development and expansion of our Casa Berardi unit. Also, we drew $58 million under our revolving credit facility during the first quarter of 2019, all of which was repaid during that period, with $85.0 million drawn as of the date of this report. Amounts drawn on the revolving credit facility are subject to a variable rate of interest. See
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information on our debt arrangements. As discussed in the
Financial Liquidity and Capital Resources
section below, we believe that we will be able to meet the obligations associated with the Senior Notes, RQ Notes and amounts drawn on our revolving credit facility; however, a number of factors could impact our ability to meet the debt obligations and fund our other projects.
On July 20, 2018, we completed the acquisition of all of the issued and outstanding common shares of Klondex for total consideration valued at approximately $413.9 million at the time of consummation of the acquisition. See
Note 13
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information. As a result of the acquisition, we own 100% of three land packages in northern Nevada totaling approximately 110 square miles and containing operating or previously-operating mines with a history of high-grade gold production, which we believe to be prospective and under-explored. The acquired properties include the Hatter Graben development project, where we have started construction of an access drift, the Fire Creek mine, which we believe has been under-developed and has the potential for continued production, and various other gold properties. We believe the acquisition has the potential to increase our annual gold production. We are faced with the challenge of integrating the acquisition and assuming operating responsibility for Klondex's mines and other operations. See
Item 1A. Risk Factors - Operating, Development, Exploration and Acquisition Risks
in our annual report filed on Form 10-K for the year ended December 31, 2018, as
updated in
Part II, Item 1A – Risk Factors
in this quarterly report on Form 10-Q for the quarter ended March 31, 2019,
for risks associated with our acquisition of Klondex.
On June 15, 2015, we completed the acquisition of Revett Mining Company, giving us 100% ownership of the Rock Creek project, a significant undeveloped silver and copper deposit in northwestern Montana. And, on September 13, 2016, we completed the acquisition of Mines Management, Inc., giving us 100% ownership of the Montanore project, another significant undeveloped silver and copper deposit located approximately 10 miles from our Rock Creek project. Development of Rock Creek and Montanore has been challenged by non-governmental organizations and governmental agencies at various times, including a recent questioning of the validity of the operating permit at Montanore by the Montana Department of Environmental Quality. In addition, a State court remanded back to the Montana Department of Natural Resources and Conservation for further consideration a water right permit it had issued for the Rock Creek project. This decision does not impact advancing the evaluation phase of the project as recently authorized by the U.S. Forest Service in its Record of Decision. The evaluation phase is necessary to obtain needed information to further assess the mineralization, geohydrology and other potential environmental effects of a future full mining project at Rock Creek. Thus, there can be no assurance that we will be able to obtain the permits required to develop these projects
.
In
Part II, Item 1A – Risk Factors
in this quarterly report on Form 10-Q for the quarter ended March 31, 2019, see
Legal challenges could prevent the Rock Creek or Montanore projects from ever being developed
for more information.
As further discussed in the
Lucky Friday Segment
section below, the union employees at Lucky Friday have been on strike since March 13, 2017. Production at Lucky Friday was suspended from the start of the strike until July 2017, with limited production by salaried employees commencing at that time. We cannot predict how long the strike will last or whether an agreement will be reached. We expect cash expenditures of approximately $1.0 million to $1.5 million per month to advance engineering and infrastructure for the restart of full production, in addition to costs related to limited interim production. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.
We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; involving employees in the establishment of safety standards; and participating in the National Mining Association's
CORESafety
program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. We work with the Mine Safety and Health Administration ("MSHA") to address issues outlined in its investigations and inspections and continue to evaluate our safety practices.
Another challenge for us is the risk associated with environmental litigation and ongoing reclamation activities. As described in
Part I, Item 1A. Risk Factors
of our annual report filed on Form 10-K for the year ended December 31, 2018 and
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited),
it is possible that our estimate of these liabilities (and our ability to estimate liabilities in general) may change in the future, affecting our strategic plans. We are involved in various environmental legal matters and the estimate of our environmental liabilities and liquidity needs, as well as our strategic plans, may be significantly impacted as a result of these matters or new matters that may arise. We strive to ensure that our activities are conducted in compliance with applicable laws and regulations and attempt to resolve environmental litigation on terms as favorable to us as possible.
Results of Operations
Sales of products by metal for the three-month periods ended March 31, 2019 and 2018 were as follows:
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Three Months Ended
March 31,
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(in thousands)
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2019
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2018
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Silver
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$
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45,506
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$
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35,222
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Gold
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79,679
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73,044
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Lead
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9,025
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9,227
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Zinc
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24,755
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30,109
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Less: Smelter and refining charges
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(6,348
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)
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(7,893
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)
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Sales of products
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$
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152,617
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$
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139,709
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The fluctuations in sales for the first quarter of 2019 compared to the same period of 2018 were primarily due to:
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Higher quantities and silver, gold and lead sold as a result of higher production of those metals, partially offset by lower zinc volume. See
The Greens Creek Segment,
The Lucky Friday Segment, The Casa Berardi Segment, The San Sebastian Segment
and
The Nevada Operations Segment
sections below for more information on metal production and sales volumes at each of our operating segments. Total metals production and sales volumes for each period are shown in the following table:
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Three Months Ended
March 31,
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2019
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2018
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Silver -
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Ounces produced
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2,923,131
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2,534,095
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Payable ounces sold
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2,898,083
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2,091,464
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Gold -
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Ounces produced
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60,021
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57,808
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Payable ounces sold
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60,936
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54,839
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Lead -
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Tons produced
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5,784
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5,627
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Payable tons sold
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4,848
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3,868
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Zinc -
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Tons produced
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13,944
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15,211
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Payable tons sold
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9,533
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10,104
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The difference between what we report as "ounces/tons produced" and "payable ounces/tons sold" is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades which impact the amount of metals contained in concentrates produced and sold.
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Lower average realized prices for silver, gold, lead and zinc. These price variances are illustrated in the table below.
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Three months ended March 31,
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2019
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2018
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Silver –
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London PM Fix ($/ounce)
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$
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15.57
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$
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16.77
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Realized price per ounce
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$
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15.70
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$
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16.84
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Gold –
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London PM Fix ($/ounce)
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$
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1,304
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$
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1,329
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Realized price per ounce
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$
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1,308
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$
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1,332
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Lead –
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LME Final Cash Buyer ($/pound)
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$
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0.92
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$
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1.14
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Realized price per pound
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$
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0.93
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$
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1.19
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Zinc –
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LME Final Cash Buyer ($/pound)
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$
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1.23
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$
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1.55
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Realized price per pound
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$
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1.30
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$
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1.49
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Average realized prices typically differ from average market prices primarily because concentrate sales are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices. Due to the time elapsed between shipment of concentrates and final settlement with the customers, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metals prices each period through final settlement. For the first quarter of 2019, we recorded net positive price adjustments to provisional settlements of $0.5 million compared to net negative price adjustments to provisional settlements of $0.1 million in the first quarter of 2018. The price adjustments related to silver, gold, lead and zinc contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period. See
Note 11
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information. The gains and losses on these contracts are included in revenues and impact the realized prices for silver, gold, lead and zinc. Realized prices are calculated by dividing gross revenues for each metal (which include the price adjustments and gains and losses on the forward contracts discussed above) by the payable quantities of each metal included in concentrate and doré shipped during the period.
For the first quarter of 2019, we recorded a loss applicable to common stockholders of $25.7 million ($0.05 per basic common share), compared to income of $8.1 million ($0.02 per basic common share) during the first quarter of 2018. The following factors contributed to the results for the first three months of 2019 compared to the same period in 2018:
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A gross loss at our Nevada Operations unit of $13.8 million in the first quarter of 2019, and gross profit at our Casa Berardi, San Sebastian and Lucky Friday units in the first quarter of 2019 that was lower by $15.4 million, $7.3 million and $0.9 million, respectively, compared to the first quarter of 2018. This was partially offset by gross profit that was higher by $2.0 million for the first quarter of 2019 at our Greens Creek unit. See
The Greens Creek Segment,
The Lucky Friday Segment, The Casa Berardi Segment, The San Sebastian Segment
and
The Nevada Operations Segment
sections below.
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A net foreign exchange loss in the first quarter of 2019 of $3.1 million versus a net gain of $2.6 million in the same period of 2018, with the variance primarily related to the impact of strengthening of the CAD relative to the USD on remeasurement of our assets and liabilities in Quebec. During the first quarter of 2019, the applicable CAD-to-USD exchange rate decreased from 1.3643 to 1.3364, compared to an increase in the rate from 1.2545 to 1.2893 during the first quarter of 2018.
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•
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A loss on base metal derivatives contracts of $1.8 million in the first quarter of 2019 compared to a gain of $4.0 million in the same period of 2018. See
Note 11
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
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•
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Higher general and administrative accruals by $2.2 million in the first quarter of 2019 compared to the first quarter of 2018 due to increased expense for incentive compensation.
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•
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Lower research and development costs by $1.0 million in the first quarter of 2019 compared to the same period of 2018.
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•
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Lower suspension-related costs at Lucky Friday by $2.2 million in the first quarter of 2019 compared to the first quarter of 2018 due to increased production, as discussed in
The Lucky Friday Segment
section below.
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•
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$2.5 million in costs in the first quarter of 2018 related to our acquisition of Klondex.
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•
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Exploration and pre-development expense decreased by $3.1 million in the first quarter of 2019 compared to the first quarter of 2018. In 2019, we have continued exploration work at our Greens Creek, San Sebastian, Casa Berardi and Nevada Operations units, and on our land package near our Lucky Friday unit. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves. Pre-development expense of $0.9 million in the first quarter of 2019 was related to advancement of our Montanore and Rock Creek projects.
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An income tax benefit of $7.2 million in first quarter of 2019 compared to an income tax provision of $0.8 million in the first quarter of 2018. The benefit in the 2019 period is primarily the result of losses in Nevada and Quebec.
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The Greens Creek Segment
Dollars are in thousands (except per ounce and per ton amounts)
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Three months ended March 31,
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2019
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2018
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Sales
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$
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80,129
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$
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65,850
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Cost of sales and other direct production costs
|
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(41,743
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)
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(31,222
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)
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Depreciation, depletion and amortization
|
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(12,370
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)
|
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(10,639
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)
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Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
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(54,113
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)
|
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(41,861
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)
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Gross profit
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$
|
26,016
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|
|
$
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23,989
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Tons of ore milled
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206,825
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|
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|
211,430
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Production:
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Silver (ounces)
|
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2,232,747
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1,913,232
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Gold (ounces)
|
|
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14,328
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|
|
|
13,118
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Zinc (tons)
|
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13,518
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|
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14,799
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Lead (tons)
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4,782
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5,021
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Payable metal quantities sold:
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Silver (ounces)
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2,241,172
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1,460,981
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Gold (ounces)
|
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13,864
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|
|
|
9,006
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|
Zinc (tons)
|
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|
9,533
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|
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9,792
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Lead (tons)
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4,344
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|
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2,924
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Ore grades:
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Silver ounces per ton
|
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13.46
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11.71
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Gold ounces per ton
|
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0.10
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|
0.10
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Zinc percent
|
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7.32
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|
|
8.05
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Lead percent
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2.83
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2.96
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Mining cost per ton
|
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$
|
78.83
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|
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$
|
68.99
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Milling cost per ton
|
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$
|
35.86
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|
|
$
|
32.64
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Cash Cost, After By-product Credits, per Silver Ounce
(1)
|
|
$
|
0.49
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|
|
$
|
(4.99
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)
|
All-In Sustaining Cost ("AISC"), After By-product Credits, per Silver Ounce
(1)
|
|
$
|
3.24
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|
|
$
|
0.59
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|
|
(1)
|
A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)
.
|
The $2.0 million increase in gross profit during the first quarter of 2019 compared to the same 2018 period was the result of higher metals sales volumes due to the timing of concentrate shipments, partially offset by lower average prices for silver, gold, zinc and lead.
Mining and milling costs per ton increased by 14% and 10%, respectively, in the first quarter of 2019 compared to the same period in 2018, primarily as a result of lower mill throughput.
The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, per Silver Ounce for the first quarter of 2019 compared to the same period of 2018:
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
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Three Months Ended March 31,
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|
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2019
|
|
|
2018
|
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Cash Cost, Before By-product Credits, per Silver Ounce
|
|
$
|
21.41
|
|
|
$
|
24.49
|
|
By-product credits
|
|
|
(20.92
|
)
|
|
|
(29.48
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
0.49
|
|
|
$
|
(4.99
|
)
|
The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
AISC, Before By-product Credits, per Silver Ounce
|
|
$
|
24.16
|
|
|
$
|
30.07
|
|
By-product credits
|
|
|
(20.92
|
)
|
|
|
(29.48
|
)
|
AISC, After By-product Credits, per Silver Ounce
|
|
$
|
3.24
|
|
|
$
|
0.59
|
|
The increase in Cash Costs, After By-Product Credits, per Silver Ounce for the first quarter of 2019 compared to 2018 was the result of lower by-product credits, partially offset by higher silver production. The increase in AISC, After By-Product Credits, per Silver Ounce was due to lower by-product credits, partially offset by higher silver production and lower capital spending.
Mining and milling costs per ounce decreased in the first quarter of 2019 compared to 2018 on a per-ounce basis due primarily to higher silver production.
Other cash costs per ounce for the first quarter of 2019 were lower compared to 2018 due to the effect of higher silver production and lower expense for Alaska mine license tax.
Treatment costs were lower in the first quarter of 2019 compared to 2018 as a result of improved terms, higher silver production and lower silver prices, as treatment costs include the value of silver not payable to us through the smelting process. The silver not payable to us is either recovered by the smelters through further processing or ultimately not recovered and included in the smelters’ waste material.
By-product credits per ounce were lower in the first quarter of 2019 compared to 2018 due to (i) lower gold, zinc and lead prices, (ii) lower zinc and lead production, due to lower mill throughput and ore grades, and (iii) the impact of higher silver production.
The difference between what we report as “production” and “payable metal quantities sold” is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades which impact the amount of metals contained in concentrates produced and sold.
While revenue from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product of the Greens Creek unit is appropriate because:
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•
|
silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;
|
|
•
|
we have historically presented Greens Creek as a producer primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;
|
|
•
|
metallurgical treatment maximizes silver recovery;
|
|
•
|
the Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and
|
|
•
|
in most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery.
|
Likewise, we believe the identification of gold, lead and zinc as by-product credits is appropriate because of their lower economic value compared to silver and due to the fact that silver is the primary product we intend to produce. In addition, we have not consistently received sufficient revenue from any single by-product metal to warrant classification of such as a co-product.
We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce.
The Lucky Friday Segment
Dollars are in thousands (except per ounce and per ton amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
2,182
|
|
|
$
|
4,977
|
|
Cost of sales and other direct production costs
|
|
|
(2,012
|
)
|
|
|
(3,479
|
)
|
Depreciation, depletion and amortization
|
|
|
(169
|
)
|
|
|
(621
|
)
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
|
(2,181
|
)
|
|
|
(4,100
|
)
|
Gross profit
|
|
$
|
1
|
|
|
$
|
877
|
|
Tons of ore milled
|
|
|
13,803
|
|
|
|
9,559
|
|
Production:
|
|
|
|
|
|
|
|
|
Silver (ounces)
|
|
|
173,627
|
|
|
|
99,780
|
|
Lead (tons)
|
|
|
1,002
|
|
|
|
606
|
|
Zinc (tons)
|
|
|
426
|
|
|
|
412
|
|
Payable metal quantities sold:
|
|
|
|
|
|
|
|
|
Silver (ounces)
|
|
|
86,845
|
|
|
|
155,743
|
|
Lead (tons)
|
|
|
504
|
|
|
|
944
|
|
Zinc (tons)
|
|
|
—
|
|
|
|
312
|
|
Ore grades:
|
|
|
|
|
|
|
|
|
Silver ounces per ton
|
|
|
13.33
|
|
|
|
11.10
|
|
Lead percent
|
|
|
7.97
|
|
|
|
6.92
|
|
Zinc percent
|
|
|
3.54
|
|
|
|
4.79
|
|
Mining cost per ton
|
|
$
|
131.25
|
|
|
$
|
114.76
|
|
Milling cost per ton
|
|
$
|
36.45
|
|
|
$
|
21.67
|
|
|
(1)
|
A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)
.
|
Gross profit decreased by $0.9 million in the first quarter of 2019 compared to 2018 due to lower metal sales volumes, due to the timing of concentrate shipments, and lower average prices for silver, lead and zinc. During the first quarters of 2019 and 2018, limited production was performed by salaried staff as a result of the ongoing strike by unionized employees starting in mid-March 2017, discussed further below.
Mining cost per ton increased by 14% in the first quarter of 2019 compared to the same period in 2018 due primarily to higher costs. Milling cost per ton in the first quarter of 2019 decreased by 26%, compared to the first quarter of 2018 due to higher throughput. Mining and milling cost per ton for the first quarters of 2019 and 2018 are not indicative of future operating results under full production, as there was reduced mill throughput during those periods. In addition, costs not directly related to mining and processing ore have been classified as suspension costs during the strike period, and excluded from the calculations of mining and milling cost per ton.
Many of the employees at our Lucky Friday unit are represented by a union, and the most recent collective bargaining agreement with the union expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer, and on March 13, 2017 went on strike, and have been on strike since that time. Production at Lucky Friday was suspended from the start of the strike, until limited production by salaried personnel commenced in July 2017. Salaried personnel have continued to perform limited production and capital improvements. Suspension costs during the strike totaled $1.9 million and $4.1 million in the first quarters of 2019 and 2018, respectively, which are combined with non-cash depreciation expense of $0.9 million for each of those periods, in a separate line item on our consolidated statements of operations. These suspension costs are excluded from the calculation of gross profit, Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce, when presented. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations. If the strike continues for a further extended period or it is determined an eventual resolution is unlikely, it may be appropriate in the future to review the carrying value of properties, plants, equipment and mineral interests at Lucky Friday. Under such review, if estimated undiscounted cash flows from Lucky Friday were less than its carrying value, an impairment loss would be recognized for the difference between the carrying value and the estimated fair value. The carrying value of properties, plants, equipment and mineral interests at Lucky Friday as of March 31, 2019 was approximately $435.9 million. However, Lucky Friday has significant identified reserves and mineralized material and a current estimated mine life of approximately 17 years.
On April 30, 2018, we settled with the National Labor Relations Board ("NLRB") an unfair labor practice claim made by the union. As part of the settlement, Hecla Limited rescinded its last, best and final contract offer implemented in March 2017. On May 4, 2018, we gave notice to the union that the parties to the labor dispute are at impasse, and implemented portions of our revised final offer presented in December 2017.
See
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for contingencies related to various accidents and other events occurring at the Lucky Friday mine in prior periods.
The Casa Berardi Segment
Dollars are in thousands (except per ounce and per ton amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
40,062
|
|
|
$
|
55,548
|
|
Cost of sales and other direct production costs
|
|
|
(32,926
|
)
|
|
|
(33,077
|
)
|
Depreciation, depletion and amortization
|
|
|
(16,155
|
)
|
|
|
(16,110
|
)
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
|
(49,081
|
)
|
|
|
(49,187
|
)
|
Gross (loss) profit
|
|
$
|
(9,019
|
)
|
|
$
|
6,361
|
|
Tons of ore milled
|
|
|
329,751
|
|
|
|
348,549
|
|
Production:
|
|
|
|
|
|
|
|
|
Gold (ounces)
|
|
|
31,799
|
|
|
|
40,177
|
|
Silver (ounces)
|
|
|
8,240
|
|
|
|
8,891
|
|
Payable metal quantities sold:
|
|
|
|
|
|
|
|
|
Gold (ounces)
|
|
|
30,613
|
|
|
|
41,645
|
|
Silver (ounces)
|
|
|
8,462
|
|
|
|
8,835
|
|
Ore grades:
|
|
|
|
|
|
|
|
|
Gold ounces per ton
|
|
|
0.12
|
|
|
|
0.135
|
|
Silver ounces per ton
|
|
|
0.03
|
|
|
|
0.03
|
|
Mining cost per ton
|
|
$
|
86.14
|
|
|
$
|
76.95
|
|
Milling cost per ton
|
|
$
|
15.77
|
|
|
$
|
15.96
|
|
Cash Cost, After By-product Credits, per Gold Ounce
(1)
|
|
$
|
1,113
|
|
|
$
|
827
|
|
AISC, After By-product Credits, per Gold Ounce
(1)
|
|
$
|
1,338
|
|
|
$
|
1,086
|
|
|
(1)
|
A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)
.
|
Gross profit decreased by $15.4 million for the first quarter of 2019 compared to the same period in 2018 primarily due to lower gold volume, resulting from reduced mill throughput, recoveries and ore grades, and lower gold prices. The lower mill throughput and recoveries were a result of planned adjustments to a number of mill components, to accommodate a higher throughput, and the requirement for a new carbon in leach drive train, which is being installed in May 2019. The reduced production in the first quarter of 2019 is expected to be made-up over the remainder of the year.
Mining cost per ton for the first quarter of 2019 was higher than the first quarter of 2018 by 12% due to lower ore production. Milling cost per ton for the first quarter of 2019 was within 1% of its level for the first quarter of 2018.
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, per Gold Ounce for the first quarter of 2019 compared to the same period of 2018:
The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Cost, Before By-product Credits, per Gold Ounce
|
|
$
|
1,117
|
|
|
$
|
831
|
|
By-product credits
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Cash Cost, After By-product Credits, per Gold Ounce
|
|
$
|
1,113
|
|
|
$
|
827
|
|
The following table summarizes the components of AISC, After By-product Credits, per Gold Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
AISC, Before By-product Credits, per Gold Ounce
|
|
$
|
1,342
|
|
|
$
|
1,090
|
|
By-product credits
|
|
|
(4
|
)
|
|
|
(4
|
)
|
AISC, After By-product Credits, per Gold Ounce
|
|
$
|
1,338
|
|
|
$
|
1,086
|
|
The increase in Cash Cost, After By-product Credits, per Gold Ounce for the first quarter of 2019 compared to the first quarter of 2018 was primarily the result of lower gold production. The increase in AISC, After By-product Credits, per Gold Ounce was due to lower gold production and higher exploration spending, partially offset by lower capital spending.
The difference between what we report as "production" and "payable metal quantities sold" is mainly attributable to inventory changes incidental to the timing of sales of refined metals and shipping schedules.
We believe the identification of silver as a by-product credit is appropriate at Casa Berardi because of its lower economic value compared to gold and due to the fact that gold is the primary product we intend to produce there. In addition, we do not receive sufficient revenue from silver at Casa Berardi to warrant classification of such as a co-product. Because we consider silver to be a by-product of our gold production at Casa Berardi, the value of silver offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce.
The San Sebastian Segment
Dollars are in thousands (except per ounce and per ton amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
12,600
|
|
|
$
|
13,334
|
|
Cost of sales and other direct production costs
|
|
|
(10,591
|
)
|
|
|
(5,091
|
)
|
Depreciation, depletion and amortization
|
|
|
(1,760
|
)
|
|
|
(684
|
)
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
|
(12,351
|
)
|
|
|
(5,775
|
)
|
Gross profit
|
|
$
|
249
|
|
|
$
|
7,559
|
|
Tons of ore milled
|
|
|
44,475
|
|
|
|
34,397
|
|
Production:
|
|
|
|
|
|
|
|
|
Silver (ounces)
|
|
|
441,079
|
|
|
|
512,192
|
|
Gold (ounces)
|
|
|
3,530
|
|
|
|
4,513
|
|
Payable metal quantities sold:
|
|
|
|
|
|
|
|
|
Silver (ounces)
|
|
|
496,550
|
|
|
|
465,905
|
|
Gold (ounces)
|
|
|
3,730
|
|
|
|
4,188
|
|
Ore grades:
|
|
|
|
|
|
|
|
|
Silver ounces per ton
|
|
|
10.94
|
|
|
|
16.10
|
|
Gold ounces per ton
|
|
|
0.095
|
|
|
|
0.142
|
|
Mining cost per ton
|
|
$
|
125.59
|
|
|
$
|
115.12
|
|
Milling cost per ton
|
|
$
|
62.21
|
|
|
$
|
67.13
|
|
Cash Cost, After By-product Credits, per Silver Ounce
(1)
|
|
$
|
11.23
|
|
|
$
|
2.81
|
|
AISC, After By-product Credits, per Silver Ounce
(1)
|
|
$
|
16.55
|
|
|
$
|
8.37
|
|
|
(1)
|
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)
.
|
The $7.3 million decrease in gross profit in the first quarter of 2019 compared to the same period of 2018 is primarily due to lower silver and gold ore grades and higher costs, as a result of transitioning from open pit to underground mining, and lower average silver and gold prices. The ore processed in the first quarter of 2018 came from higher grade deposits mined from shallow open pits. Production from the existing open pits substantially ended in December 2017; however, during the first quarter of 2018, mill throughput primarily came from ore stockpiled from the open pits. In January 2017, we started development of a new underground portal and work to rehabilitate historic underground infrastructure which should allow us to mine deeper portions of the deposits at San Sebastian. Limited ore production from underground began in January 2018 and continued to increase during the first quarter. The underground ore production has lower grades than the open pits.
Mining cost per ton for the first quarter of 2019 was higher than the first quarter of 2018 by 9% due to the transition to underground production, partially offset by higher ore tonnage. Milling cost per ton decreased by 7% in the first quarter of 2019 compared to the first quarter of 2018 due to the higher ore tonnage.
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Silver Ounce for the first quarter of 2019 compared to the same period of 2018:
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
$
|
21.67
|
|
|
$
|
14.52
|
|
By-product credits
|
|
|
(10.44
|
)
|
|
|
(11.71
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
11.23
|
|
|
$
|
2.81
|
|
The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
AISC, Before By-product Credits, per Silver Ounce
|
|
$
|
26.99
|
|
|
$
|
20.08
|
|
By-product credits
|
|
|
(10.44
|
)
|
|
|
(11.71
|
)
|
AISC, After By-product Credits, per Silver Ounce
|
|
$
|
16.55
|
|
|
$
|
8.37
|
|
The increase in Cash Cost, After By-product Credits, per Silver Ounce in the first quarter of 2019 compared to the same period of 2018 was primarily the result of lower silver production and higher mining costs, due to the transition from open pit to underground mining, and lower by-product credits per ounce due to lower gold production and prices. The same factors along with higher capital spending, partially offset by lower exploration costs, resulted in the increase in AISC, After By-product Credits, per Silver Ounce in the first quarter of 2019 compared to the same period of 2018.
The difference between what we report as "production" and "payable metal quantities sold" is mainly attributable to inventory changes incidental to the timing of sales of refined metals and shipping schedules.
We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. We believe the identification of gold as a by-product credit is appropriate at San Sebastian because of its anticipated lower economic value compared to silver over the life of the mine. In addition, we will not receive sufficient revenue from gold at San Sebastian to warrant classification of such as a co-product. Because we consider gold to be a by-product of our silver production at San Sebastian, the value of gold offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce.
The Nevada Operations Segment
On July 20, 2018, we completed the acquisition of all of the issued and outstanding common shares of Klondex for total consideration of $413.9 million. See
Note 13
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information. The acquisition gives us 100% ownership of the Fire Creek, Midas and Hollister mines, where gold is the primary metal produced, the Aurora mill, and interests in various gold exploration properties, all located in northern Nevada.
Dollars are in thousands (except per ounce and per ton amounts)
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
Sales
|
|
$
|
17,644
|
|
Cost of sales and other direct production costs
|
|
|
(23,114
|
)
|
Depreciation, depletion and amortization
|
|
|
(8,333
|
)
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
|
(31,447
|
)
|
Gross profit (loss)
|
|
$
|
(13,803
|
)
|
Tons of ore milled
|
|
|
41,365
|
|
Production:
|
|
|
|
|
Gold (ounces)
|
|
|
10,364
|
|
Silver (ounces)
|
|
|
67,438
|
|
Payable metal quantities sold:
|
|
|
|
|
Gold (ounces)
|
|
|
12,729
|
|
Silver (ounces)
|
|
|
65,054
|
|
Ore grades:
|
|
|
|
|
Gold ounces per ton
|
|
|
0.300
|
|
Silver ounces per ton
|
|
|
2.49
|
|
Mining cost per ton
|
|
$
|
212.56
|
|
Milling cost per ton
|
|
$
|
112.35
|
|
Cash Cost, After By-product Credits, per Gold Ounce
(1)
|
|
$
|
1,782
|
|
AISC, After By-product Credits, per Gold Ounce
(1)
|
|
$
|
3,056
|
|
|
(1)
|
A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)
.
|
Cost of sales and other direct production costs and depreciation, depletion and amortization exceeded sales by $13.8 million in the first quarter of 2019. Sales were impacted by ore grades that were lower than expected, and cost of sales and other direct production costs for the first quarter of 2019 includes write-downs totaling $9.7 million of the values of stockpile, in-process and finished goods inventory to their net realizable value.
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Gold Ounce for the first quarter of 2019:
The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
Cash Cost, Before By-product Credits, per Gold Ounce
|
|
$
|
1,884
|
|
By-product credits
|
|
|
(102
|
)
|
Cash Cost, After By-product Credits, per Gold Ounce
|
|
$
|
1,782
|
|
The following table summarizes the components of AISC, After By-product Credits, per Gold Ounce:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
AISC, Before By-product Credits, per Gold Ounce
|
|
$
|
3,158
|
|
By-product credits
|
|
|
(102
|
)
|
AISC, After By-product Credits, per Gold Ounce
|
|
$
|
3,056
|
|
We believe the identification of silver as a by-product credit is appropriate at Nevada Operations because of its lower economic value compared to gold and due to the fact that gold is the primary product we intend to produce there. In addition, we do not receive sufficient revenue from silver at Nevada Operations to warrant classification of such as a co-product. Because we consider silver to be a by-product of our gold production at Nevada Operations, the value of silver offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce.
Transition and improvement activities since our acquisition of the Nevada Operations have included an increase in underground development and rehabilitation at the Fire Creek mine, construction of a new tailings dam, installation of a carbon-in-leach circuit in order to improve recoveries at the Midas mill, where ore from each of the mines is processed, and start of development of a new drift to the Hatter Graben area at Hollister. However, because total production and capital costs exceeded sales, we are currently undertaking a review of the Nevada operations. The review will include an evaluation of: the level of development at Fire Creek and the other mining operations in Nevada; grade control procedures; different mining methods and plans; alternative methods of processing Fire Creek ore by third-parties; and the rate of development of the Hatter Graben project. This review may result in, among other possible outcomes, the following changes at the Fire Creek mine: a reduction in capital spending; ceasing current production and only developing to spirals 9,10 and 11; or a temporary cessation of all mine operations at Fire Creek. We anticipate this review to be completed in the second quarter of 2019. See
Note 13
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
Corporate Matters
Employee Benefit Plans
Our defined benefit pension plans provide a significant benefit to our employees, but also represent a significant liability to us. The liability recorded for the funded status of our plans was $50.4 million and $48.3 million as of March 31, 2019 and December 31, 2018, respectively. We expect to contribute a total of approximately $2.2 million in cash or shares of our common stock to our defined benefit plans in 2019. While the economic variables which will determine future funding requirements are uncertain, we expect contributions to continue to be required in future years under current plan provisions, and we periodically examine the plans for affordability and competitiveness. See
Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
Income Taxes
On July 20, 2018, we acquired all of the issued and outstanding common shares of Klondex in a taxable stock acquisition. Klondex was a Canadian holding company which was amalgamated into our Canadian acquisition entity to form Klondex Mines Unlimited Liability Company (“KMULC”), a Canadian unlimited liability company. KMULC is the Canadian parent of a U.S. consolidated group located in Nevada. We filed an election to treat KMULC as a corporation. As a result of the Canadian parent U.S. corporate status, the Nevada U.S. Group did not join the existing U.S. consolidated tax group for Hecla Mining Company and subsidiaries (“Hecla U.S.”). A net deferred tax liability of $60.2 million was recorded for the fair market value of assets acquired in excess of carryover tax basis. See
Note 13
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for additional information regarding the acquisition.
Each reporting period we assess our deferred tax balance based on a review of long-range forecasts and quarterly activity. We recognized a full valuation allowance on our Hecla U.S. net deferred tax assets at the end of 2017 based on results of tax law changes and maintain a full valuation allowance on Hecla U.S. net deferred tax assets at March 31, 2019.
Our net U.S. deferred tax liability for the Nevada U.S. Group at March 31, 2019 was $51.6 million compared to the $63.2 million net deferred tax liability at December 31, 2018. The $11.6 million decrease includes $9.1 million related to an adjustment to the purchase price allocation for the July 2018 acquisition of Klondex (see
Note 13
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
) and $2.5 million for current period activity. The deferred tax liability is primarily related to the excess of the carrying value of the mineral resource assets over the tax bases of those assets for U.S. tax reporting.
Our net Canadian deferred tax liability at March 31, 2019 was $107.8 million, a decrease of $2.5 million from the $110.3 million net deferred tax liability at December 31, 2018. The deferred tax liability is primarily related to the excess of the carrying value of the mineral resource assets over the tax bases of those assets for Canadian tax reporting.
Our Mexican net deferred tax asset at March 31, 2019 was $3.1 million, an increase of $1.1 million from the net deferred tax asset of $2.0 million at December 31, 2018. A $1.7 million partial valuation allowance remains on deferred tax assets in Mexico.
As a result of the Tax Cuts and Jobs Act enacted in December 2017, our Alternative Minimum Tax ("AMT") credit carryforward of $10.0 million became partially refundable through 2020 and fully refundable in 2021. In December 2018, the U.S. government determined refunds of AMT credit carried forward will not be subject to sequestration; therefore, the valuation allowance was removed for $0.6 million. AMT credit carry forward of $5.0 million is classified as a current receivable and $5.0 million is classified as a long-term receivable.
Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)
The tables below present reconciliations between the most comparable GAAP measure of cost of sales and other direct production costs and depreciation, depletion and amortization to the non-GAAP measures of (i) Cash Cost, Before By-product Credits, (ii) Cash Cost, After By-product Credits, (iii) AISC, Before By-product Credits and (iv) AISC, After By-product Credits for our operations at the Greens Creek, Lucky Friday, San Sebastian, Casa Berardi and Nevada Operations units and for the Company for the three-month periods ended March 31, 2019 and 2018.
Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce are measures developed by precious metals companies (including the Silver Institute and the World Gold Council) in an effort to provide a uniform standard for comparison purposes. There can be no assurance, however, that these non-GAAP measures as we report them are the same as those reported by other mining companies.
Cash Cost, After By-product Credits, per Ounce is an important operating statistic that we utilize to measure each mine's operating performance. We use AISC, After By-product Credits, per Ounce as a measure of our mines' net cash flow after costs for exploration, pre-development, reclamation, and sustaining capital. This is similar to the Cash Cost, After By-product Credits, per Ounce non-GAAP measure we report, but also includes on-site exploration, reclamation, and sustaining capital costs. Current GAAP measures used in the mining industry, such as cost of goods sold, do not capture all the expenditures incurred to discover, develop and sustain silver and gold production. Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce also allow us to benchmark the performance of each of our mines versus those of our competitors. As a silver and gold mining company, we also use these statistics on an aggregate basis - aggregating the Greens Creek, Lucky Friday and San Sebastian mines - to compare our performance with that of other silver mining companies, and aggregating Casa Berardi and Nevada Operations for comparison to other gold mining companies. Similarly, these statistics are useful in identifying acquisition and investment opportunities as they provide a common tool for measuring the financial performance of other mines with varying geologic, metallurgical and operating characteristics.
Cash Cost, Before By-product Credits and AISC, Before By-product Credits include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining expense, on-site general and administrative costs, royalties and mining production taxes. AISC, Before By-product Credits for each mine also includes on-site exploration, reclamation, and sustaining capital costs. AISC, Before By-product Credits for our consolidated silver properties also includes corporate costs for general and administrative expense, exploration and sustaining capital projects. By-product credits include revenues earned from all metals other than the primary metal produced at each unit. As depicted in the tables below, by-product credits comprise an essential element of our silver unit cost structure, distinguishing our silver operations due to the polymetallic nature of their orebodies.
In addition to the uses described above, Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce provide management and investors an indication of operating cash flow, after consideration of the average price, received from production. We also use these measurements for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective.
The Casa Berardi, Nevada Operations and combined gold properties information below reports Cash Cost, After By-product Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce for the production of gold, their primary product, and by-product revenues earned from silver, which is a by-product at Casa Berardi and Nevada Operations. Only costs and ounces produced relating to units with the same primary product are combined to represent Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce. Thus, the gold produced at our Casa Berardi and Nevada Operations units is not included as a by-product credit when calculating Cash
Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce for the total of Greens Creek, Lucky Friday and San Sebastian, our combined silver properties. Similarly, the silver produced at our other three units is not included as a by-product credit when calculating the gold metrics for Casa Berardi and Nevada Operations.
In thousands (except per ounce amounts)
|
|
Three Months Ended March 31, 2019
|
|
|
|
Greens Creek
|
|
|
Lucky Friday
(2)
|
|
|
San Sebastian
|
|
|
Corporate
(3)
|
|
|
Total Silver
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
$
|
54,113
|
|
|
$
|
2,181
|
|
|
$
|
12,351
|
|
|
|
|
|
|
$
|
68,645
|
|
Depreciation, depletion and amortization
|
|
|
(12,370
|
)
|
|
|
(169
|
)
|
|
|
(1,760
|
)
|
|
|
|
|
|
|
(14,299
|
)
|
Treatment costs
|
|
|
10,352
|
|
|
|
810
|
|
|
|
131
|
|
|
|
|
|
|
|
11,293
|
|
Change in product inventory
|
|
|
(3,865
|
)
|
|
|
1,483
|
|
|
|
(853
|
)
|
|
|
|
|
|
|
(3,235
|
)
|
Reclamation and other costs
|
|
|
(415
|
)
|
|
|
—
|
|
|
|
(312
|
)
|
|
|
|
|
|
|
(727
|
)
|
Exclusion of Lucky Friday costs
|
|
|
—
|
|
|
|
(4,305
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(4,305
|
)
|
Cash Cost, Before By-product Credits
(1)
|
|
|
47,815
|
|
|
|
—
|
|
|
|
9,557
|
|
|
|
|
|
|
|
57,372
|
|
Reclamation and other costs
|
|
|
737
|
|
|
|
—
|
|
|
|
123
|
|
|
|
|
|
|
|
860
|
|
Exploration
|
|
|
81
|
|
|
|
—
|
|
|
|
1,717
|
|
|
|
441
|
|
|
|
2,239
|
|
Sustaining capital
|
|
|
5,312
|
|
|
|
—
|
|
|
|
506
|
|
|
|
61
|
|
|
|
5,879
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,959
|
|
|
|
9,959
|
|
AISC, Before By-product Credits
(1)
|
|
|
53,945
|
|
|
|
—
|
|
|
|
11,903
|
|
|
|
|
|
|
|
76,309
|
|
By-product credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc
|
|
|
(23,285
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(23,285
|
)
|
Gold
|
|
|
(16,518
|
)
|
|
|
—
|
|
|
|
(4,602
|
)
|
|
|
|
|
|
|
(21,120
|
)
|
Lead
|
|
|
(6,917
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(6,917
|
)
|
Total By-product credits
|
|
|
(46,720
|
)
|
|
|
—
|
|
|
|
(4,602
|
)
|
|
|
|
|
|
|
(51,322
|
)
|
Cash Cost, After By-product Credits
|
|
$
|
1,095
|
|
|
$
|
—
|
|
|
$
|
4,955
|
|
|
|
|
|
|
$
|
6,050
|
|
AISC, After By-product Credits
|
|
$
|
7,225
|
|
|
$
|
—
|
|
|
$
|
7,301
|
|
|
|
|
|
|
$
|
24,987
|
|
Divided by ounces produced
|
|
|
2,233
|
|
|
|
—
|
|
|
|
441
|
|
|
|
|
|
|
|
2,674
|
|
Cash Cost, Before By-product Credits, per Ounce
|
|
$
|
21.41
|
|
|
$
|
—
|
|
|
$
|
21.67
|
|
|
|
|
|
|
$
|
21.45
|
|
By-product credits per ounce
|
|
|
(20.92
|
)
|
|
|
—
|
|
|
|
(10.44
|
)
|
|
|
|
|
|
|
(19.19
|
)
|
Cash Cost, After By-product Credits, per Ounce
|
|
$
|
0.49
|
|
|
$
|
—
|
|
|
$
|
11.23
|
|
|
|
|
|
|
$
|
2.26
|
|
AISC, Before By-product Credits, per Ounce
|
|
$
|
24.16
|
|
|
$
|
—
|
|
|
$
|
26.99
|
|
|
|
|
|
|
$
|
28.53
|
|
By-product credits per ounce
|
|
|
(20.92
|
)
|
|
|
—
|
|
|
|
(10.44
|
)
|
|
|
|
|
|
|
(19.19
|
)
|
AISC, After By-product Credits, per Ounce
|
|
$
|
3.24
|
|
|
$
|
—
|
|
|
$
|
16.55
|
|
|
|
|
|
|
$
|
9.34
|
|
In thousands (except per ounce amounts)
|
|
Three Months Ended March 31, 2019
|
|
|
|
Casa Berardi
|
|
|
Nevada Operations
(4)
|
|
|
Total Gold
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
$
|
49,081
|
|
|
$
|
31,447
|
|
|
$
|
80,528
|
|
Depreciation, depletion and amortization
|
|
|
(16,155
|
)
|
|
|
(8,333
|
)
|
|
|
(24,488
|
)
|
Treatment costs
|
|
|
442
|
|
|
|
38
|
|
|
|
480
|
|
Change in product inventory
|
|
|
2,268
|
|
|
|
(3,246
|
)
|
|
|
(978
|
)
|
Reclamation and other costs
|
|
|
(129
|
)
|
|
|
(379
|
)
|
|
|
(508
|
)
|
Cash Cost, Before By-product Credits
(1)
|
|
|
35,507
|
|
|
|
19,527
|
|
|
|
55,034
|
|
Reclamation and other costs
|
|
|
129
|
|
|
|
378
|
|
|
|
507
|
|
Exploration
|
|
|
1,346
|
|
|
|
118
|
|
|
|
1,464
|
|
Sustaining capital
|
|
|
5,692
|
|
|
|
12,707
|
|
|
|
18,399
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
—
|
|
AISC, Before By-product Credits
(1)
|
|
|
42,674
|
|
|
|
32,730
|
|
|
|
75,404
|
|
By-product credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Gold
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Lead
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Silver
|
|
|
(126
|
)
|
|
|
(1,057
|
)
|
|
|
(1,183
|
)
|
Total By-product credits
|
|
|
(126
|
)
|
|
|
(1,057
|
)
|
|
|
(1,183
|
)
|
Cash Cost, After By-product Credits
|
|
$
|
35,381
|
|
|
$
|
18,470
|
|
|
$
|
53,851
|
|
AISC, After By-product Credits
|
|
$
|
42,548
|
|
|
$
|
31,673
|
|
|
$
|
74,221
|
|
Divided by ounces produced
|
|
|
32
|
|
|
|
10
|
|
|
|
42
|
|
Cash Cost, Before By-product Credits, per Ounce
|
|
$
|
1,116.59
|
|
|
$
|
1,884.17
|
|
|
$
|
1,305.27
|
|
By-product credits per ounce
|
|
|
(3.96
|
)
|
|
|
(101.99
|
)
|
|
|
(28.06
|
)
|
Cash Cost, After By-product Credits, per Ounce
|
|
$
|
1,112.63
|
|
|
$
|
1,782.18
|
|
|
$
|
1,277.21
|
|
AISC, Before By-product Credits, per Ounce
|
|
$
|
1,341.95
|
|
|
$
|
3,158.05
|
|
|
$
|
1,788.37
|
|
By-product credits per ounce
|
|
|
(3.96
|
)
|
|
|
(101.99
|
)
|
|
|
(28.06
|
)
|
AISC, After By-product Credits, per Ounce
|
|
$
|
1,337.99
|
|
|
$
|
3,056.06
|
|
|
$
|
1,760.31
|
|
In thousands (except per ounce amounts)
|
|
Three Months Ended March 31, 2019
|
|
|
|
Total Silver
|
|
|
Total Gold
|
|
|
Total
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
$
|
68,645
|
|
|
$
|
80,528
|
|
|
$
|
149,173
|
|
Depreciation, depletion and amortization
|
|
|
(14,299
|
)
|
|
|
(24,488
|
)
|
|
|
(38,787
|
)
|
Treatment costs
|
|
|
11,293
|
|
|
|
480
|
|
|
|
11,773
|
|
Change in product inventory
|
|
|
(3,235
|
)
|
|
|
(978
|
)
|
|
|
(4,213
|
)
|
Reclamation and other costs
|
|
|
(727
|
)
|
|
|
(508
|
)
|
|
|
(1,235
|
)
|
Exclusion of Lucky Friday costs
|
|
|
(4,305
|
)
|
|
|
—
|
|
|
|
(4,305
|
)
|
Cash Cost, Before By-product Credits
(1)
|
|
|
57,372
|
|
|
|
55,034
|
|
|
|
112,406
|
|
Reclamation and other costs
|
|
|
860
|
|
|
|
507
|
|
|
|
1,367
|
|
Exploration
|
|
|
2,239
|
|
|
|
1,464
|
|
|
|
3,703
|
|
Sustaining capital
|
|
|
5,879
|
|
|
|
18,399
|
|
|
|
24,278
|
|
General and administrative
|
|
|
9,959
|
|
|
|
—
|
|
|
|
9,959
|
|
AISC, Before By-product Credits
(1)
|
|
|
76,309
|
|
|
|
75,404
|
|
|
|
151,713
|
|
By-product credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc
|
|
|
(23,285
|
)
|
|
|
—
|
|
|
|
(23,285
|
)
|
Gold
|
|
|
(21,120
|
)
|
|
|
—
|
|
|
|
(21,120
|
)
|
Lead
|
|
|
(6,917
|
)
|
|
|
—
|
|
|
|
(6,917
|
)
|
Silver
|
|
|
|
|
|
|
(1,183
|
)
|
|
|
(1,183
|
)
|
Total By-product credits
|
|
|
(51,322
|
)
|
|
|
(1,183
|
)
|
|
|
(52,505
|
)
|
Cash Cost, After By-product Credits
|
|
$
|
6,050
|
|
|
$
|
53,851
|
|
|
$
|
59,901
|
|
AISC, After By-product Credits
|
|
$
|
24,987
|
|
|
$
|
74,221
|
|
|
$
|
99,208
|
|
Divided by ounces produced
|
|
|
2,674
|
|
|
|
42
|
|
|
|
|
|
Cash Cost, Before By-product Credits, per Ounce
|
|
$
|
21.45
|
|
|
$
|
1,305.27
|
|
|
|
|
|
By-product credits per ounce
|
|
|
(19.19
|
)
|
|
|
(28.06
|
)
|
|
|
|
|
Cash Cost, After By-product Credits, per Ounce
|
|
$
|
2.26
|
|
|
$
|
1,277.21
|
|
|
|
|
|
AISC, Before By-product Credits, per Ounce
|
|
$
|
28.53
|
|
|
$
|
1,788.37
|
|
|
|
|
|
By-product credits per ounce
|
|
|
(19.19
|
)
|
|
|
(28.06
|
)
|
|
|
|
|
AISC, After By-product Credits, per Ounce
|
|
$
|
9.34
|
|
|
$
|
1,760.31
|
|
|
|
|
|
In thousands (except per ounce amounts)
|
|
Three Months Ended March 31, 2018
|
|
|
|
Greens Creek
|
|
|
Lucky Friday
(2)
|
|
|
San Sebastian
|
|
|
Corporate
(3)
|
|
|
Total Silver
|
|
|
Casa Berardi (Gold)
|
|
|
Total
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization
|
|
$
|
41,861
|
|
|
$
|
4,100
|
|
|
$
|
5,775
|
|
|
|
|
|
|
$
|
51,736
|
|
|
$
|
49,187
|
|
|
$
|
100,923
|
|
Depreciation, depletion and amortization
|
|
|
(10,639
|
)
|
|
|
(621
|
)
|
|
|
(684
|
)
|
|
|
|
|
|
|
(11,944
|
)
|
|
|
(16,110
|
)
|
|
|
(28,054
|
)
|
Treatment costs
|
|
|
11,388
|
|
|
|
572
|
|
|
|
204
|
|
|
|
|
|
|
|
12,164
|
|
|
|
535
|
|
|
|
12,699
|
|
Change in product inventory
|
|
|
5,154
|
|
|
|
(1,022
|
)
|
|
|
2,638
|
|
|
|
|
|
|
|
6,770
|
|
|
|
(101
|
)
|
|
|
6,669
|
|
Reclamation and other costs
|
|
|
(912
|
)
|
|
|
(45
|
)
|
|
|
(494
|
)
|
|
|
|
|
|
|
(1,451
|
)
|
|
|
(142
|
)
|
|
|
(1,593
|
)
|
Exclusion of Lucky Friday costs
|
|
|
—
|
|
|
|
(2,984
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(2,984
|
)
|
|
|
—
|
|
|
|
(2,984
|
)
|
Cash Cost, Before By-product Credits
(1)
|
|
|
46,852
|
|
|
|
—
|
|
|
|
7,439
|
|
|
|
|
|
|
|
54,291
|
|
|
|
33,369
|
|
|
|
87,660
|
|
Reclamation and other costs
|
|
|
849
|
|
|
|
—
|
|
|
|
106
|
|
|
|
|
|
|
|
955
|
|
|
|
143
|
|
|
|
1,098
|
|
Exploration
|
|
|
360
|
|
|
|
—
|
|
|
|
2,312
|
|
|
|
444
|
|
|
|
3,116
|
|
|
|
1,190
|
|
|
|
4,306
|
|
Sustaining capital
|
|
|
9,482
|
|
|
|
—
|
|
|
|
430
|
|
|
|
117
|
|
|
|
10,029
|
|
|
|
9,067
|
|
|
|
19,096
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,735
|
|
|
|
7,735
|
|
|
|
|
|
|
|
7,735
|
|
AISC, Before By-product Credits
(1)
|
|
|
57,543
|
|
|
|
—
|
|
|
|
10,287
|
|
|
|
|
|
|
|
76,126
|
|
|
|
43,769
|
|
|
|
119,895
|
|
By-product credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc
|
|
|
(32,142
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(32,142
|
)
|
|
|
|
|
|
|
(32,142
|
)
|
Gold
|
|
|
(15,292
|
)
|
|
|
—
|
|
|
|
(5,998
|
)
|
|
|
|
|
|
|
(21,290
|
)
|
|
|
|
|
|
|
(21,290
|
)
|
Lead
|
|
|
(8,974
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(8,974
|
)
|
|
|
|
|
|
|
(8,974
|
)
|
Silver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148
|
)
|
|
|
(148
|
)
|
Total By-product credits
|
|
|
(56,408
|
)
|
|
|
—
|
|
|
|
(5,998
|
)
|
|
|
|
|
|
|
(62,406
|
)
|
|
|
(148
|
)
|
|
|
(62,554
|
)
|
Cash Cost, After By-product Credits
|
|
$
|
(9,556
|
)
|
|
$
|
—
|
|
|
$
|
1,441
|
|
|
|
|
|
|
$
|
(8,115
|
)
|
|
$
|
33,221
|
|
|
$
|
25,106
|
|
AISC, After By-product Credits
|
|
$
|
1,135
|
|
|
$
|
—
|
|
|
$
|
4,289
|
|
|
|
|
|
|
$
|
13,720
|
|
|
$
|
43,621
|
|
|
$
|
57,341
|
|
Divided by ounces produced
|
|
|
1,913
|
|
|
|
—
|
|
|
|
512
|
|
|
|
|
|
|
|
2,425
|
|
|
|
40
|
|
|
|
|
|
Cash Cost, Before By-product Credits, per Ounce
|
|
$
|
24.49
|
|
|
$
|
—
|
|
|
$
|
14.52
|
|
|
|
|
|
|
$
|
22.38
|
|
|
$
|
830.56
|
|
|
|
|
|
By-product credits per ounce
|
|
|
(29.48
|
)
|
|
|
—
|
|
|
|
(11.71
|
)
|
|
|
|
|
|
|
(25.73
|
)
|
|
|
(3.68
|
)
|
|
|
|
|
Cash Cost, After By-product Credits, per Ounce
|
|
$
|
(4.99
|
)
|
|
$
|
—
|
|
|
$
|
2.81
|
|
|
|
|
|
|
$
|
(3.35
|
)
|
|
$
|
826.88
|
|
|
|
|
|
AISC, Before By-product Credits, per Ounce
|
|
$
|
30.07
|
|
|
$
|
—
|
|
|
$
|
20.08
|
|
|
|
|
|
|
$
|
31.39
|
|
|
$
|
1,089.40
|
|
|
|
|
|
By-product credits per ounce
|
|
|
(29.48
|
)
|
|
|
—
|
|
|
|
(11.71
|
)
|
|
|
|
|
|
|
(25.73
|
)
|
|
|
(3.68
|
)
|
|
|
|
|
AISC, After By-product Credits, per Ounce
|
|
$
|
0.59
|
|
|
$
|
—
|
|
|
$
|
8.37
|
|
|
|
|
|
|
$
|
5.66
|
|
|
$
|
1,085.72
|
|
|
|
|
|
(1)
|
Includes all direct and indirect operating costs related to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mining production taxes, before by-product revenues earned from all metals other than the primary metal produced at each unit. AISC, Before By-product Credits also includes on-site exploration, reclamation, and sustaining capital costs.
|
(2)
|
The unionized employees at Lucky Friday have been on strike since March 13, 2017, and production at Lucky Friday has been limited since that time. For the first quarter of 2019 and 2018, costs related to suspension of full production totaling approximately $1.9 million and $4.1 million, respectively, along with $0.9 million in non-cash depreciation expense for each of those periods, have been excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, Cash Cost, Before By-product Credits, Cash Cost, After By-product Credits, AISC, Before By-product Credits, and AISC, After By-product Credits.
|
(3)
|
AISC, Before By-product Credits for our consolidated silver properties includes corporate costs for general and administrative expense, exploration and sustaining capital.
|
(4)
|
The Nevada Operations were acquired on July 20, 2018 as a result of the acquisition of Klondex (see
Note 13
of
Notes to Condensed Consolidated Financial Statement (Unaudited)
for more information).
|
Financial Liquidity and Capital Resources
Our liquid assets include (in millions):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Cash and cash equivalents held in U.S. dollars
|
|
$
|
7.8
|
|
|
$
|
15.7
|
|
Cash and cash equivalents held in foreign currency
|
|
|
4.0
|
|
|
|
11.7
|
|
Total cash and cash equivalents
|
|
|
11.8
|
|
|
|
27.4
|
|
Marketable equity securities, non-current
|
|
|
6.8
|
|
|
|
6.6
|
|
Total cash, cash equivalents and investments
|
|
$
|
18.6
|
|
|
$
|
34.0
|
|
Cash and cash equivalents decreased by $15.6 million in the first three months of 2019. Cash held in foreign currencies represents balances in Canadian dollars and Mexican pesos, with the $7.9 million decrease in the first quarter of 2019 resulting from decreases in both Canadian dollars and Mexican pesos held. The value of non-current marketable equity securities increased by $0.2 million (see
Note 2
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information).
As further discussed in
Note 13
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
, on July 20, 2018, we completed the acquisition Klondex for total consideration of approximately $413.9 million, consisting of $252.2 million in shares of our common stock and warrants to purchase shares of our common stock and $161.7 million in cash. Klondex had cash, cash equivalents and restricted cash and cash equivalents not relating to their Canadian assets of approximately $22.4 million and $35.0 million drawn on their revolving credit facility at the time of the acquisition. We paid off the amount drawn on the Klondex revolving credit facility in July 2018.
As discussed in
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited),
on April 12, 2013, we completed an offering of Senior Notes in the total principal amount of US$500 million, which have a total principal balance of $506.5 million as of March 31, 2019
.
The Senior Notes are due May 1, 2021 and bear interest at a rate of 6.875% per year from the most recent payment date to which interest has been paid or provided for. In addition, in March 2018 we entered into a note purchase agreement pursuant to which we issued our Series 2018-A Senior Notes due May 1, 2021 (the “RQ Notes”) for total principal of CAD$40 million (approximately USD$30.8 million at the time of the transaction) to Ressources Québec. The RQ Notes bear interest at a rate of 4.68% per year. Interest on the Senior Notes and RQ Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013 and May 1, 2018, respectively, and we have made all interest payments payable to date. Also, in July 2018 we entered into a new $250 million revolving credit facility. Interest is payable on amounts drawn from the revolving credit facility at a rate of between 2.25% and 3.25% over the London Interbank Offered Rate, or between 1.25% and 2.25% over an alternative base rate, with interest payable on March 31, June 30, September 30, and December 31 of each year. We drew $58.0 million on the facility and repaid that amount in the first quarter of 2019. There were no amounts drawn on the credit facility as of March 31, 2019, with $85.0 million drawn as of the date of this report.
As further discussed in the
Lucky Friday Segment
section above, the union employees at Lucky Friday have been on strike since March 13, 2017, and production at Lucky Friday has been limited since that time. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.
As discussed in
Note 8
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
, in February 2016 we entered into an equity distribution agreement under which we may issue and sell shares of our common stock from time to time having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we are in possession of any material non-public information, and the agreement can be terminated by us at any time. As of March 31, 2019, we had sold 7,173,614 shares through the at-the-market program for net proceeds of $24.5 million. There were no shares sold under the at-the-market program during the first quarter of 2019.
Pursuant to our common stock dividend policy described in
Note 8
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
, our Board of Directors declared and paid dividends on common stock totaling $1.2 million in the first quarter of 2019 and $1.0 million in the first quarter of 2018. On May 7, 2019, our Board of Directors declared a dividend on common stock totaling $1.2 million payable in June 2019. Our dividend policy has a silver-price-linked component which ties the amount of declared common stock dividends to our realized silver price for the preceding quarter. Another component of our common stock dividend policy anticipates paying an annual minimum dividend. The declaration and payment of dividends on common stock is at the sole discretion of our board of directors, and there can be no assurance that we will continue to declare and pay common stock dividends in the future.
On May 8, 2012, we announced that our board of directors approved a stock repurchase program. Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors. The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of March 31, 2019, 934,100 shares have been purchased in prior periods at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at May 7, 2019, was $2.10 per share. No shares were purchased under the program during the first quarter of 2019.
We may defer some capital investment and/or exploration and pre-development activities, engage in asset sales or secure additional capital if necessary to maintain liquidity. We also may pursue additional acquisition opportunities, which could require additional equity issuances or other forms of financing. There can be no assurance that such financing will be available to us.
As a result of our current cash balances, the performance of our current and expected operations, current metals prices, proceeds from potential at-the-market sales of common stock, and availability of our revolving credit facility, we believe we will be able to meet our obligations and other potential cash requirements during the next 12 months. Our obligations and other uses of cash may include, but are not limited to: debt service obligations related to the Senior Notes, RQ Notes and revolving credit facility, capital expenditures at our operations, potential acquisitions of other mining companies or properties, regulatory matters, litigation, potential repurchases of our common stock under the program described above, and payment of dividends on common stock, if declared by our board of directors. Throughout the second half of 2018 and the first quarter of 2019, we borrowed under our revolving credit facility in order to meet our ongoing working capital requirements. All amounts borrowed under the facility were repaid, with no outstanding balance as of March 31, 2019. We anticipate similarly borrowing under our credit facility during the rest of 2019. We currently estimate a total of approximately $150 million will be spent on capital expenditures, primarily for equipment, infrastructure, and development at our mines, in 2019, including $33.1 million incurred in the first three months of March 31, 2019. We also estimate exploration and pre-development expenditures will total approximately $28 million in 2019, including $5.3 million already incurred as of March 31, 2019. Our expenditures for these items and our related plans for 2019 may change based upon our financial position, metals prices, and other considerations. Our ability to fund the activities described above will depend on our operating performance, metals prices, our ability to estimate revenues and costs, sources of liquidity available to us, including the revolving credit facility, and other factors. A sustained downturn in metals prices, or significant increase in operational or capital costs or other uses of cash, our inability to access the credit facility or the sources of liquidity discussed above, or other factors beyond our control could impact our plans.
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Cash provided by operating activities (in millions)
|
|
$
|
20.0
|
|
|
$
|
16.4
|
|
Cash provided by operating activities in the first quarter of 2019 increased by $3.6 million compared to the same period in 2018. The increase was due to working capital and other operating asset and liability changes resulting in a net cash outflow of $0.8 million in the first three months of 2019, which was lower than the net cash outflow of $10.8 million in the first three months of 2018. The $10.1 million variance attributable to working capital and other asset and liability changes was primarily the result of higher payroll accruals due to the timing of payment of incentive compensation related to prior year performance, a smaller increase in accounts receivable and lower product inventory, partially offset by reductions to accounts payable
.
The lower cash outflow related to working capital and other asset and liability changes was partially offset by lower income adjusted for non-cash items.
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Cash used in investing activities (in millions)
|
|
$
|
(33.1
|
)
|
|
$
|
(18.2
|
)
|
During the first quarter of 2019 we invested $33.1 million in capital expenditures, not including $3.5 million in capital lease additions, compared to $17.6 million in the same period in 2018, with the variance primarily due to the addition of the Nevada Operations unit acquired in July 2018 and higher costs at San Sebastian, partially offset by lower costs at Greens Creek and Casa Berardi. During the first quarter of 2018, we purchased bonds having a cost basis of $31.2 million and bonds valued at $30.5 million matured, with no such activity during the first quarter of 2019.
|
|
Three Months Ended
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
Cash provided by (used in) financing activities (in millions)
|
|
$
|
(2.6
|
)
|
|
$
|
27.3
|
|
|
In the first quarter of 2019, we had $58.0 million in draws on our revolving credit facility, with that amount repaid during the quarter. In the first quarter of 2018, we received proceeds of $31.0 million from the issuance of Notes to Ressources Québec, as discussed above. We paid cash dividends on our common stock of $1.2 million and $1.0 million, respectively, in the first quarter of 2019 and 2018 and cash dividends of $0.1 million on our Series B Preferred Stock during each of those periods. We made repayments on our capital leases of $1.3 million in the first quarter of both 2019 and 2018. In addition, during the first quarter of 2018, we acquired treasury shares for $1.2 million as the result of employees' elections to utilize net share settlement to satisfy their tax withholding obligations related to incentive compensation paid in stock. See
Note 8
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
Contractual Obligations, Contingent Liabilities and Commitments
The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our Senior Notes, RQ Notes, outstanding purchase orders, certain capital expenditures, our credit facility and lease arrangements as of March 31, 2019 (in thousands):
|
|
Payments Due By Period
|
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
Total
|
|
Purchase obligations
(1)
|
|
|
8,732
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,732
|
|
Commitment fees
(2)
|
|
|
1,250
|
|
|
|
2,500
|
|
|
|
260
|
|
|
|
—
|
|
|
|
4,010
|
|
Contractual obligations
(3)
|
|
|
4,335
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,335
|
|
Finance lease commitments
(4)
|
|
|
5,903
|
|
|
|
9,163
|
|
|
|
1,119
|
|
|
|
—
|
|
|
|
16,185
|
|
Operating lease commitments
(5)
|
|
|
9,214
|
|
|
|
8,333
|
|
|
|
4,000
|
|
|
|
1,352
|
|
|
|
22,899
|
|
Supplemental executive retirement plan
(6)
|
|
|
644
|
|
|
|
1,666
|
|
|
|
2,223
|
|
|
|
6,058
|
|
|
|
10,591
|
|
Defined benefit pension plans
(6)
|
|
|
2,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,200
|
|
Senior Notes
(7)
|
|
|
34,822
|
|
|
|
544,224
|
|
|
|
—
|
|
|
|
—
|
|
|
|
579,046
|
|
RQ Notes
(8)
|
|
|
1,401
|
|
|
|
31,449
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,850
|
|
Total contractual cash obligations
|
|
$
|
68,501
|
|
|
$
|
597,335
|
|
|
$
|
7,602
|
|
|
$
|
7,410
|
|
|
$
|
680,848
|
|
|
(1)
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Consists of open purchase orders of approximately $3.8 million at the Greens Creek unit, $1.5 million at the Lucky Friday unit, $0.4 million at the Casa Berardi unit and $2.9 million at the Nevada Operations unit.
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(2)
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We have a $250 million revolving credit agreement under which we are required to pay a standby fee of 0.5% per annum on undrawn amounts under the revolving credit agreement. With the exception of $3.0 million in letters of credit outstanding, there was no amount drawn under the revolving credit agreement as of March 31, 2019. The table above assumes no amounts will be drawn during the agreement's term; however, as discussed above, we anticipate borrowing under our credit facility throughout 2019. For more information on our credit facility, see
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
.
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(3)
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As of March 31, 2019, we were committed to approximately $4.3 million for various items.
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(4)
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Includes scheduled finance lease payments of $9.6 million, $1.3 million, $3.6 million and $1.7 million (including interest), respectively, for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units. These leases have fixed payment terms and contain bargain purchase options at the end of the lease periods (see
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information).
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(5)
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We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements.
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(6)
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We sponsor defined benefit pension plans covering substantially all U.S. employees and provide certain post-retirement benefits for qualifying retired employees, along with a supplemental executive retirement plan. These amounts represent our estimate of the future funding requirements for these plans. We believe we will have funding requirements related to our defined benefit plans beyond one year; however, such obligations are not fixed in nature and are difficult to estimate, as they involve significant assumptions. See
Note 7
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
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(7)
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On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021. The Senior Notes bear interest at a rate of 6.875% per year from the original date of issuance or the most recent payment date to which interest has been paid or provided for. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013, and we have made all interest payments payable to date. Since the initial offering, we have issued an additional $6.5 million in aggregate principal amount of the Senior Notes to fund obligations under our defined benefit pension plan. See
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
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(8)
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On March 5, 2018, we issued the RQ Notes in the principal amount of CAD$40 million (approximately USD$30.8 million at the time of the transaction) . The RQ Notes bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018, and we have made all interest payments payable to date. See
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
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We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters. At March 31, 2019, our liabilities for these matters totaled $109.5 million. Future expenditures related to closure, reclamation and environmental expenditures at our sites are difficult to estimate, although we anticipate we will incur expenditures relating to these obligations over the next 30 years. For additional information relating to our environmental obligations, see
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
.
Off-Balance Sheet Arrangements
At March 31, 2019, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
Our significant accounting policies are described in
Part IV
,
Note 1
of
Notes to Consolidated Financial Statements
in our annual report filed on Form 10-K for the year ended December 31, 2018
.
As described in
Note 1
of our annual report, we are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.
We believe that our most critical accounting estimates are related to future metals prices; obligations for environmental, reclamation, and closure matters; mineral reserves; and accounting for business combinations, as they require us to make assumptions that are highly uncertain at the time the accounting estimates are made and changes in them are reasonably likely to occur from period to period. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below. In addition, there are other items within our financial statements that require estimation, but are not deemed to be critical. However, changes in estimates used in these and other items could have a material impact on our financial statements.
Future Metals Prices
Metals prices are key components in estimates that determine the valuation of some of our significant assets and liabilities, including properties, plants, equipment and mineral interests, deferred tax assets, and certain accounts receivable. Metals prices are also an important component in the estimation of reserves. As shown under
Part I
,
Item 1. - Business
in our annual report filed on Form 10-K for the year ended December 31, 2018, metals prices have historically been volatile. Silver demand arises from investment demand, particularly in exchange-traded funds, industrial demand, and consumer demand. Gold demand arises primarily from investment and consumer demand. Investment demand for silver and gold can be influenced by several factors, including: the value of the U.S. dollar and other currencies, changing U.S. budget deficits, widening availability of exchange-traded funds, interest rate levels, the health of credit markets, and inflationary expectations. Uncertainty related to the political environment in the U.S., Britain's exit from the European Union and a global economic recovery, including recent uncertainty in China, could result in continued investment demand for precious metals. Industrial demand for silver is closely linked to world Gross Domestic Product growth and industrial fabrication levels, as it is difficult to substitute for silver in industrial fabrication. Consumer demand is driven significantly by demand for jewelry and other retail products. We believe that long-term industrial and economic trends, including urbanization and growth of the middle class in countries such as China and India, will result in continued consumer demand for silver and gold and industrial demand for silver. However, China has recently experienced a lower rate of economic growth which could continue in the near term. There can be no assurance whether these trends will continue or how they will impact prices of the metals we produce. In the past, we have recorded impairments to our asset carrying value because of low prices, and we can offer no assurance that prices will either remain at their current levels or increase.
Processes supporting valuation of our assets and liabilities that are most significantly affected by prices include analysis of asset carrying values, depreciation, reserves, and deferred income taxes. On at least an annual basis - and more frequently if circumstances warrant - we examine our depreciation rates, reserve estimates, and the valuation allowances on our deferred tax assets. We examine the carrying values of our assets as changes in facts and circumstances warrant. In our evaluation of carrying values and deferred taxes, we apply several pricing views to our forecasting model, including current prices, analyst price estimates, forward-curve prices, and historical prices (see
Mineral Reserves
, below, regarding prices used for reserve estimates). Using applicable accounting guidance and our view of metals markets, we use the probability-weighted average of the various methods to determine whether the values of our assets are fairly stated, and to determine the level of valuation allowances, if any, on our deferred tax assets. In addition, estimates of future metals prices are used in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (see
Business Combinations
below).
Sales of concentrates sold directly to customers are recorded as revenues upon completion of the performance obligations and transfer of control of the product to the customer (generally at the time of shipment) using estimated forward metals prices for the estimated month of settlement. Due to the time elapsed between shipment of concentrates to the customer and final settlement with the customer, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales and trade accounts receivable are adjusted to estimated settlement prices until final settlement by the customer. Changes in metals prices between shipment and final settlement result in changes to revenues and accounts receivable previously recorded upon shipment. As a result, our trade accounts receivable balances related to concentrate sales are subject to changes in metals prices until final settlement occurs. For more information, see
Note 6
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
.
We utilize financially-settled forward contracts to manage our exposure to changes in prices for silver, gold, zinc and lead. See
Item 3. – Quantitative and Qualitative Disclosures About Market Risk - Commodity-Price Risk Management
below for more information on our contract programs. These contracts do not qualify for hedge accounting and are therefore marked-to-market through earnings each period. Changes in silver, gold, zinc and lead prices between the dates that the contracts are entered into and their settlements will result in changes to the fair value asset or liability associated with the contracts, with a corresponding gain or loss recognized in earnings.
Obligations for Environmental, Reclamation and Closure Matters
Accrued reclamation and closure costs can represent a significant and variable liability on our balance sheet. We have estimated our liabilities under appropriate accounting guidance, and on at least an annual basis - and more frequently if warranted - management reviews our liabilities with our Audit Committee. However, the ranges of liability could exceed the liabilities recognized. If substantial damages were awarded, claims were settled, or remediation costs incurred in excess of our accruals, our financial results or condition could be materially adversely affected.
Mineral Reserves
Critical estimates are inherent in the process of determining our reserves. Our reserves are affected largely by our assessment of future metals prices, as well as by engineering and geological estimates of ore grade, accessibility and production cost. Metals prices are estimated at long-term averages, as described in
Part I
,
Item 2. - Properties
in our annual report filed on Form 10-K for the year ended December 31, 2018. Our assessment of reserves occurs at least annually, and periodically utilizes external audits.
Reserves are a key component in the valuation of our properties, plants and equipment. Reserve estimates are used in determining appropriate rates of units-of-production depreciation, with net book value of many assets depreciated over remaining estimated reserves. Reserves are also a key component in forecasts, with which we compare future cash flows to current asset values in an effort to ensure that carrying values are reported appropriately. Our forecasts are also used in determining the level of valuation allowances on our deferred tax assets. Reserves also play a key role in the valuation of certain assets in the determination of the purchase price allocations for acquisitions. Annual reserve estimates are also used to determine conversions of mineral assets beyond the known reserve resulting from business combinations to depreciable reserves, in periods subsequent to the business combinations (see
Business Combinations
below). Reserves are a culmination of many estimates and are not guarantees that we will recover the indicated quantities of metals or that we will do so at a profitable level.
Business Combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The valuation of assets acquired and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to long-lived assets (including mineral assets beyond the known reserve). These estimates include future metals prices and mineral reserves, as discussed above. Management may also be required to make estimates related to the valuation of deferred tax assets or liabilities as part of the purchase price allocation for business combinations. In some cases, we use third-party appraisers to determine the fair values of property and other identifiable assets. In addition, costs related to business combinations are included in earnings as incurred, and our financial results for periods in which business combinations are pursued could be adversely affected as a result.