Mr. Market didn't approve of the second-quarter 2017 performance turned in by Hecla Mining Company (HL 6.37%). Aside from a 43% reduction in capital expenditures compared to the year-ago period, there wasn't much to get excited about.
Revenue and profits were significantly lower than during the second quarter of 2016. That also resulted in an astounding 89% decrease in operating cash flow between the comparison periods. The weak operational performance has sent shares down 10% since earnings were announced in early August.
What happened during the quarter that drove the poor performance, and will it impact the long-term fortunes of Hecla Mining stock? Luckily for shareholders, there's a relatively innocent explanation.
Image source: Getty Images.
By the numbers
The mining company produced significantly lower levels of silver during the most recent quarter after workers went on strike at the Lucky Friday mine. That resulted in a production drop of 858,000 ounces compared to the year-ago period, which was worth $23 million in revenue last year.
Adding insult to injury, the company had to pony up $8 million in suspension-related costs. Worse yet, the National Labor Relations Board is investigating the company for unfair labor practices. A hearing is set for September 19.
Simply put, Lucky Friday played a pretty big role in the financial performance Hecla Mining turned in during the second quarter of 2017:
|
Metric |
Q2 2017 |
Q2 2016 |
Change |
|---|---|---|---|
|
Total revenue |
$134.3 million |
$171.3 million |
(22%) |
|
Gross profit |
$31.2 million |
$58.4 million |
(47%) |
|
Operating income |
$3.9 million |
$41.6 million |
(91%) |
|
Net income (loss) |
($24.1 million) |
$24.0 million |
$48.1 million |
|
EPS |
($0.06) |
$0.06 |
$0.12 |
|
Operating cash flow |
$7.5 million |
$67.4 million |
(89%) |
Data source: Securities and Exchange Commission filings.
But Lucky Friday wasn't the only mine contributing to a weak quarter. Hecla Mining reported significantly lower year-over-year contributions from the Casa Berardi and San Sebastian mines as well. That more than offset revenue improvements from Greens Creek:
|
Mine, Metric |
Q2 2017 |
Q2 2016 |
Change |
|---|---|---|---|
|
Greens Creek, revenue |
$71.3 million |
$59.5 million |
19.8% |
|
Lucky Friday, revenue |
($0.187 million) |
$22.7 million |
-- |
|
Casa Berardi, revenue |
$43.8 million |
$53.3 million |
(18%) |
|
San Sebastian, revenue |
$19.3 million |
$35.6 million |
(46%) |
|
Greens Creek, operating income |
$15.4 million |
$14.8 million |
4% |
|
Lucky Friday, operating income |
($8.2 million) |
$4.0 million |
-- |
|
Casa Berardi, operating income |
($1.7 million) |
$10.6 million |
-- |
|
San Sebastian, operating income |
$11.9 million |
$25.5 million |
(53%) |
Data source: SEC filings.
Management provided mine-by-mine updates on the factors that drove quarterly performance:
- Greens Creek benefited from higher production volume of gold, lower cost of sales for silver, and improved margins on lead and zinc.
- Workers at Lucky Friday have been on strike since March 13, which meant no production occurred for the entire second quarter of 2017.
- Casa Berardi was impacted by lower gold production due to lower grades in the new locations being mined.
- San Sebastian was impacted by lower silver production and benefited from increased gold production. It will transition from an open-pit mine to an underground mine by the end of 2017, and new high-grade reserves have been identified that will extend the mine's lifetime.
Despite the short-term drag, Hecla Mining continues to benefit from its relatively low cost of production. In the longer term, each mine's cost profile will benefit from a bevy of improved technologies including autonomous vehicles (higher productivity and improved worker safety) and electric vehicles (lower costs associated with ventilation requirements over diesel vehicles).
Will that change pending the outcome of the investigation by the National Labor Relations Board? Well, if the case continues to the hearing date, then that means Lucky Friday will be offline for almost another full quarter. Meanwhile, the company could face significant fines and/or be forced to make changes to its labor practices for all of its mines. That could result in higher costs and challenge the mining stock's "low-cost" profile -- at least until it moves to autonomous equipment about 10 years from now.
What does it mean for investors?
Put another way, Hecla Mining fully expected the weaker performance in the most recent quarter because of planned transitions in mining activity in Casa Berardi and San Sebastian. That made the timing of the ongoing worker strike even worse for investors. However, the labor dispute still figures to be a short- to medium-term concern for shareholders, and a costly one.
Editor's note: A previous version of this article contained the table header "Q1 2017" instead of "Q2 2017." The Fool regrets the error.
