UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2018
Commission file number | 1-8491 |
HECLA MINING COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 77-0664171 | |||
(State or other jurisdiction of | (I.R.S. Employer | |||
incorporation or organization) | Identification No.) | |||
6500 Mineral Drive, Suite 200 | ||||
Coeur d'Alene, Idaho | 83815-9408 | |||
(Address of principal executive offices) | (Zip Code) | |||
208-769-4100 | ||||
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes XX . No .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes XX . No___.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large Accelerated Filer XX. | Accelerated Filer . | |
Non-Accelerated Filer . | Smaller Reporting Company . | |
Emerging growth company . |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. .
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes . No XX.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Shares Outstanding | |
Common stock, par value $0.25 per share |
|
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended March 31,September 30, 2018
*Items 2, 3 and 5 of Part II are omitted as they are not applicable.
Part I - Financial Information
Hecla Mining Company and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except shares)
September 30, 2018 | December 31, 2017 | |||||||||||||||
March 31, 2018 | December 31, 2017 | Revised | ||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 212,569 | $ | 186,107 | $ | 60,856 | $ | 186,107 | ||||||||
Short-term investments | 34,358 | 33,758 | ||||||||||||||
Investments | — | 33,758 | ||||||||||||||
Accounts receivable: | ||||||||||||||||
Trade | 19,713 | 14,805 | 12,947 | 14,805 | ||||||||||||
Taxes | 10,382 | 10,382 | 19,316 | 10,382 | ||||||||||||
Other, net | 8,911 | 7,003 | 7,612 | 7,003 | ||||||||||||
Inventories: | ||||||||||||||||
Concentrates, doré, and stockpiled ore | 37,024 | 28,455 | 42,464 | 29,366 | ||||||||||||
Materials and supplies | 25,779 | 26,100 | 33,624 | 26,100 | ||||||||||||
Other current assets | 17,369 | 13,715 | 21,510 | 13,715 | ||||||||||||
Total current assets | 366,105 | 320,325 | 198,329 | 321,236 | ||||||||||||
Non-current investments | 7,652 | 7,561 | 7,190 | 7,561 | ||||||||||||
Non-current restricted cash and cash equivalents | 1,005 | 1,032 | ||||||||||||||
Non-current restricted cash and investments | 1,010 | 1,032 | ||||||||||||||
Properties, plants, equipment and mineral interests, net | 2,008,704 | 2,020,021 | 2,487,429 | 1,999,311 | ||||||||||||
Non-current deferred income taxes | 671 | 1,509 | 1,601 | 1,509 | ||||||||||||
Other non-current assets | 13,954 | 14,509 | ||||||||||||||
Other non-current assets and deferred charges | 14,699 | 14,509 | ||||||||||||||
Total assets | $ | 2,398,091 | $ | 2,364,957 | $ | 2,710,258 | $ | 2,345,158 | ||||||||
LIABILITIES | LIABILITIES | LIABILITIES | ||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 51,636 | $ | 46,549 | $ | 65,755 | $ | 46,549 | ||||||||
Accrued payroll and related benefits | 21,420 | 31,259 | 29,488 | 31,259 | ||||||||||||
Accrued taxes | 7,273 | 5,919 | 8,274 | 5,919 | ||||||||||||
Current portion of capital leases | 5,669 | 5,608 | 6,069 | 5,608 | ||||||||||||
Current portion of accrued reclamation and closure costs | 8,315 | 6,679 | 6,621 | 6,679 | ||||||||||||
Accrued interest | 14,555 | 5,745 | 15,044 | 5,745 | ||||||||||||
Other current liabilities | 7,066 | 10,371 | 1,205 | 10,371 | ||||||||||||
Total current liabilities | 115,934 | 112,130 | 132,456 | 112,130 | ||||||||||||
Capital leases | 7,094 | 6,193 | 8,638 | 6,193 | ||||||||||||
Accrued reclamation and closure costs | 78,887 | 79,366 | 99,314 | 79,366 | ||||||||||||
Long-term debt | 533,566 | 502,229 | 534,067 | 502,229 | ||||||||||||
Non-current deferred tax liability | 116,866 | 121,546 | 164,928 | 124,352 | ||||||||||||
Non-current pension liability | 48,459 | 46,628 | 44,097 | 46,628 | ||||||||||||
Other non-current liabilities | 2,784 | 12,983 | ||||||||||||||
Other noncurrent liabilities | 4,689 | 12,983 | ||||||||||||||
Total liabilities | 903,590 | 881,075 | 988,189 | 883,881 | ||||||||||||
Commitments and contingencies (Notes 2, 4, 7, 9, and 11) | ||||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Commitments and contingencies (Notes 3, 5, 8, 10, and 12) | ||||||||||||||||
SHAREHOLDERS’ EQUITY | SHAREHOLDERS’ EQUITY | |||||||||||||||
Preferred stock, 5,000,000 shares authorized: | ||||||||||||||||
Series B preferred stock, $0.25 par value, 157,816 shares issued and outstanding, liquidation preference — $7,891 | 39 | 39 | 39 | 39 | ||||||||||||
Common stock, $0.25 par value, 750,000,000 shares authorized; issued and outstanding March 31, 2018 — 400,301,617 shares and December 31, 2017 — 399,176,425 shares | 101,290 | 100,926 | ||||||||||||||
Common stock, $0.25 par value, authorized 750,000,000 shares; issued and outstanding 2018 — 479,909,466 shares and 2017 — 399,176,425 shares | 121,283 | 100,926 | ||||||||||||||
Capital surplus | 1,626,298 | 1,619,816 | 1,872,946 | 1,619,816 | ||||||||||||
Accumulated deficit | (187,092 | ) | (195,484 | ) | (223,280 | ) | (218,089 | ) | ||||||||
Accumulated other comprehensive loss | (26,767 | ) | (23,373 | ) | (28,183 | ) | (23,373 | ) | ||||||||
Less treasury stock, at cost; March 31, 2018 - 4,864,799 and December 31, 2017 - 4,529,450 shares issued and held in treasury | (19,267 | ) | (18,042 | ) | ||||||||||||
Total stockholders’ equity | 1,494,501 | 1,483,882 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 2,398,091 | $ | 2,364,957 | ||||||||||||
Less treasury stock, at cost; 2018 — 5,226,791 and 2017 — 4,529,450 shares issued and held in treasury | (20,736 | ) | (18,042 | ) | ||||||||||||
Total shareholders’ equity | 1,722,069 | 1,461,277 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,710,258 | $ | 2,345,158 |
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
Hecla Mining Company and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Loss) (Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
Three Months Ended | September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | ||||||||||||||||||||
March 31, 2018 | March 31, 2017 | Revised | Revised | |||||||||||||||||||||
Sales of products | $ | 139,709 | $ | 142,544 | $ | 143,649 | $ | 140,839 | $ | 430,617 | $ | 417,662 | ||||||||||||
Cost of sales and other direct production costs | 72,869 | 78,676 | 93,609 | 68,358 | 246,918 | 224,537 | ||||||||||||||||||
Depreciation, depletion and amortization | 28,054 | 28,952 | 43,464 | 29,518 | 103,335 | 86,986 | ||||||||||||||||||
Total cost of sales | 100,923 | 107,628 | 137,073 | 97,876 | 350,253 | 311,523 | ||||||||||||||||||
Gross profit | 38,786 | 34,916 | 6,576 | 42,963 | 80,364 | 106,139 | ||||||||||||||||||
Other operating expenses: | ||||||||||||||||||||||||
General and administrative | 7,735 | 9,206 | 10,327 | 9,529 | 27,849 | 29,044 | ||||||||||||||||||
Exploration | 7,360 | 4,514 | 12,411 | 7,255 | 27,609 | 17,622 | ||||||||||||||||||
Pre-development | 1,005 | 1,252 | 1,195 | 1,757 | 3,615 | 4,061 | ||||||||||||||||||
Research and development | 1,436 | 683 | 1,269 | 1,130 | 5,042 | 2,125 | ||||||||||||||||||
Other operating expense | 515 | 663 | 448 | 134 | 1,767 | 1,590 | ||||||||||||||||||
Lucky Friday suspension-related costs | 5,017 | 1,581 | ||||||||||||||||||||||
Gain on disposition of properties, plants, equipment and mineral interests | (3,208 | ) | (4,830 | ) | (3,374 | ) | (4,924 | ) | ||||||||||||||||
Provision for closed operations and reclamation | 1,852 | 2,940 | 4,534 | 5,044 | ||||||||||||||||||||
Suspension-related costs | 6,519 | 4,780 | 18,337 | 14,385 | ||||||||||||||||||||
Acquisition costs | 2,507 | 27 | 6,139 | — | 9,656 | 25 | ||||||||||||||||||
Provision for closed operations and environmental matters | 1,262 | 1,119 | ||||||||||||||||||||||
Total other operating expense | 26,837 | 19,045 | 36,952 | 22,695 | 95,035 | 68,972 | ||||||||||||||||||
Income from operations | 11,949 | 15,871 | (30,376 | ) | 20,268 | (14,671 | ) | 37,167 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Loss on disposal of investments | — | (167 | ) | |||||||||||||||||||||
Unrealized gain on investments | 310 | 327 | ||||||||||||||||||||||
Gain (loss) on derivative contracts | 4,007 | (7,809 | ) | 19,460 | (11,226 | ) | 40,271 | (16,548 | ) | |||||||||||||||
Net foreign exchange gain (loss ) | 2,592 | (2,262 | ) | |||||||||||||||||||||
Other (expense) income | (56 | ) | 325 | |||||||||||||||||||||
Interest expense, net of amounts capitalized | (9,794 | ) | (8,522 | ) | ||||||||||||||||||||
Loss on disposition of investments | (36 | ) | — | (36 | ) | (167 | ) | |||||||||||||||||
Unrealized (loss) gain on investments | (2,207 | ) | (124 | ) | (2,461 | ) | (73 | ) | ||||||||||||||||
Foreign exchange (loss) gain | (2,212 | ) | (4,917 | ) | 2,856 | (10,258 | ) | |||||||||||||||||
Interest income and other (expense) income | (346 | ) | 541 | (294 | ) | 1,185 | ||||||||||||||||||
Interest expense, net of amount capitalized | (10,146 | ) | (9,358 | ) | (30,019 | ) | (28,423 | ) | ||||||||||||||||
Total other expense | (2,941 | ) | (18,108 | ) | 4,513 | (25,084 | ) | 10,317 | (54,284 | ) | ||||||||||||||
Income (loss) before income taxes | 9,008 | (2,237 | ) | |||||||||||||||||||||
Income tax (provision) benefit | (768 | ) | 29,071 | |||||||||||||||||||||
Net income (loss) | 8,240 | 26,834 | ||||||||||||||||||||||
(Loss) income before income taxes | (25,863 | ) | (4,816 | ) | (4,354 | ) | (17,117 | ) | ||||||||||||||||
Income tax benefit | 2,679 | 5,130 | 1,484 | 17,564 | ||||||||||||||||||||
Net (loss) income | (23,184 | ) | 314 | (2,870 | ) | 447 | ||||||||||||||||||
Preferred stock dividends | (138 | ) | (138 | ) | (138 | ) | (138 | ) | (414 | ) | (414 | ) | ||||||||||||
Income applicable to common stockholders | $ | 8,102 | $ | 26,696 | ||||||||||||||||||||
Income applicable to common shareholders | $ | (23,322 | ) | $ | 176 | $ | (3,284 | ) | $ | 33 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | $ | 8,240 | $ | 26,834 | ||||||||||||||||||||
Reclassification of disposal and impairment of investments included in net income | — | 167 | ||||||||||||||||||||||
Unrealized holding losses on investments | (31 | ) | (256 | ) | ||||||||||||||||||||
Unrealized gain and amortization of prior service on pension plans | — | 32 | ||||||||||||||||||||||
Net (loss) income | $ | (23,184 | ) | $ | 314 | $ | (2,870 | ) | $ | 447 | ||||||||||||||
Reclassification of loss on disposition or impairment of marketable securities included in net income | — | — | — | 167 | ||||||||||||||||||||
Unrealized loss and amortization of prior service on pension plans | — | (16 | ) | — | — | |||||||||||||||||||
Change in fair value of derivative contracts designated as hedge transactions | (2,073 | ) | 3,261 | 3,743 | 6,760 | (3,533 | ) | 12,068 | ||||||||||||||||
Comprehensive income | $ | 6,136 | $ | 30,038 | ||||||||||||||||||||
Basic income per common share after preferred dividends | $ | 0.02 | $ | 0.07 | ||||||||||||||||||||
Diluted income per common share after preferred dividends | $ | 0.02 | $ | 0.07 | ||||||||||||||||||||
Unrealized holding gains on investments | 3 | 892 | 13 | 1,483 | ||||||||||||||||||||
Comprehensive (loss) income | $ | (19,438 | ) | $ | 7,950 | $ | (6,390 | ) | $ | 14,165 | ||||||||||||||
Basic (loss) income per common share after preferred dividends | $ | (0.05 | ) | $ | — | $ | (0.01 | ) | $ | — | ||||||||||||||
Diluted (loss) income per common share after preferred dividends | $ | (0.05 | ) | $ | — | $ | (0.01 | ) | $ | — | ||||||||||||||
Weighted average number of common shares outstanding - basic | 399,322 | 395,370 | 452,636 | 398,848 | 417,532 | 396,809 | ||||||||||||||||||
Weighted average number of common shares outstanding - diluted | 401,923 | 398,149 | 452,636 | 401,258 | 417,532 | 400,176 | ||||||||||||||||||
Cash dividends declared per common share | $ | 0.0025 | $ | 0.0025 | $ | 0.0075 | $ | 0.0075 |
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
Hecla Mining Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended | ||||||||||||||||
Three Months Ended | September 30, 2018 | September 30, 2017 | ||||||||||||||
March 31, 2018 | March 31, 2017 | Revised | ||||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 8,240 | $ | 26,834 | ||||||||||||
Non-cash elements included in net income: | ||||||||||||||||
Net (loss) income | $ | (2,870 | ) | $ | 447 | |||||||||||
Non-cash elements included in net (loss) income: | ||||||||||||||||
Depreciation, depletion and amortization | 29,490 | 29,590 | 108,814 | 91,255 | ||||||||||||
Unrealized (gain) on investments | (310 | ) | (327 | ) | ||||||||||||
Loss on disposal of investments | — | 167 | ||||||||||||||
Loss on disposition of investments | — | 167 | ||||||||||||||
Unrealized loss on investments | 2,461 | 73 | ||||||||||||||
Adjustment of inventory to market value | 7,232 | — | ||||||||||||||
Gain on disposition of properties, plants, equipment, and mineral interests | (129 | ) | (32 | ) | (3,374 | ) | (4,924 | ) | ||||||||
Provision for reclamation and closure costs | 1,323 | 1,026 | 3,957 | 3,379 | ||||||||||||
Stock compensation | 1,127 | 1,349 | 4,672 | 4,943 | ||||||||||||
Deferred income taxes | (438 | ) | (21,234 | ) | (4,637 | ) | (23,467 | ) | ||||||||
Amortization of loan origination fees | 449 | 480 | 1,471 | 1,415 | ||||||||||||
(Gain) loss on derivative contracts | (9,094 | ) | 7,343 | |||||||||||||
Loss on derivative contracts | (15,208 | ) | 16,718 | |||||||||||||
Foreign exchange (gain) loss | (3,399 | ) | 506 | (2,032 | ) | 10,520 | ||||||||||
Other non-cash items, net | (36 | ) | 2 | (37 | ) | (1 | ) | |||||||||
Change in assets and liabilities: | ||||||||||||||||
Change in assets and liabilities, net of business acquisitions: | ||||||||||||||||
Accounts receivable | (7,266 | ) | (8,738 | ) | (4,424 | ) | 4,903 | |||||||||
Inventories | (6,762 | ) | (3,358 | ) | (18,954 | ) | (9,611 | ) | ||||||||
Other current and non-current assets | (3,171 | ) | 1,363 | (5,569 | ) | (2,685 | ) | |||||||||
Accounts payable and accrued liabilities | 13,956 | (1,510 | ) | 12,308 | (7,759 | ) | ||||||||||
Accrued payroll and related benefits | (3,927 | ) | 6,881 | (4,207 | ) | (913 | ) | |||||||||
Accrued taxes | 218 | 1,754 | 845 | (4,469 | ) | |||||||||||
Accrued reclamation and closure costs and other non-current liabilities | (3,888 | ) | (3,811 | ) | (5,238 | ) | (5,876 | ) | ||||||||
Cash provided by operating activities | 16,383 | 38,285 | 75,210 | 74,115 | ||||||||||||
Investing activities: | ||||||||||||||||
Additions to properties, plants, equipment and mineral interests | (17,635 | ) | (21,658 | ) | (83,285 | ) | (70,390 | ) | ||||||||
Proceeds from disposition of properties, plants and equipment | 151 | 61 | ||||||||||||||
Acquisition of Klondex, net of cash and restricted cash acquired | (139,326 | ) | — | |||||||||||||
Proceeds from disposition of properties, plants, equipment and mineral interests | 722 | 151 | ||||||||||||||
Insurance proceeds received for damaged property | 4,377 | 5,628 | ||||||||||||||
Purchases of investments | (31,182 | ) | (11,113 | ) | (31,971 | ) | (36,916 | ) | ||||||||
Maturities of investments | 30,501 | 3,634 | 64,895 | 31,169 | ||||||||||||
Net cash used in investing activities | (18,165 | ) | (29,076 | ) | (184,588 | ) | (70,358 | ) | ||||||||
Financing activities: | ||||||||||||||||
Proceeds from sale of common stock, net of offering costs | 3,085 | 9,610 | ||||||||||||||
Acquisition of treasury shares | (1,225 | ) | (731 | ) | (2,694 | ) | (2,993 | ) | ||||||||
Dividends paid to common stockholders | (998 | ) | (989 | ) | ||||||||||||
Dividends paid to preferred stockholders | (138 | ) | (138 | ) | ||||||||||||
Credit facility fees paid | — | (91 | ) | |||||||||||||
Dividends paid to common shareholders | (3,193 | ) | (2,978 | ) | ||||||||||||
Dividends paid to preferred shareholders | (414 | ) | (414 | ) | ||||||||||||
Credit availability and debt issuance fees | (2,460 | ) | (476 | ) | ||||||||||||
Borrowings on debt | 31,024 | — | 78,024 | — | ||||||||||||
Repayments of debt | — | (470 | ) | (82,036 | ) | (470 | ) | |||||||||
Repayments of capital leases | (1,322 | ) | (1,595 | ) | (5,992 | ) | (5,065 | ) | ||||||||
Net cash provided by (used in) financing activities | 27,341 | (4,014 | ) | |||||||||||||
Net cash used in financing activities | (15,680 | ) | (2,786 | ) | ||||||||||||
Effect of exchange rates on cash | 876 | 1,814 | (215 | ) | 1,051 | |||||||||||
Net increase in cash, cash equivalents and restricted cash and cash equivalents | 26,435 | 7,009 | ||||||||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents | (125,273 | ) | 2,022 | |||||||||||||
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period | 187,139 | 171,977 | 187,139 | 171,977 | ||||||||||||
Cash, cash equivalents and restricted cash and cash equivalents at end of period | $ | 213,574 | $ | 178,986 | $ | 61,866 | $ | 173,999 | ||||||||
Significant non-cash investing and financing activities: | ||||||||||||||||
Addition of capital lease obligations | $ | 2,446 | $ | 1,798 | $ | 7,008 | $ | 6,439 | ||||||||
Payment of accrued compensation in stock | $ | 4,863 | $ | 4,240 | ||||||||||||
Common stock issued for the acquisition of other companies | $ | 252,544 | $ | — | ||||||||||||
Payment of accrued compensation in restricted stock units | $ | 4,863 | $ | 4,240 |
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
Note 1. Basis of Preparation of Financial Statements
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries ("Hecla"(in this report, "Hecla" or "the Company" or “we” or “our” or “us”) refers to Hecla Mining Company and our subsidiaries, unless the context requires otherwise). These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2017, as it may be amended from time to time.
The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.
Certain condensed consolidated financial statement amounts for the prior period have been reclassified to conform to the current period presentation. These reclassifications had no effect on the net income, comprehensive income, or accumulated deficit as previously reported.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates.
On July 20, 2018, we completed the acquisition of Klondex Mines Ltd. ("Klondex"). The unaudited interim condensed consolidated financial statements included herein reflect our ownership of the assets previously held by Klondex as of the July 20, 2018 acquisition date.
In the third quarter of 2018, we identified errors impacting amounts reported for accumulated depreciation, depletion and amortization ("DDA") and DDA expense for our Casa Berardi unit from June 1, 2013 through June 30, 2018. Certain amounts in the condensed consolidated financial statements and notes thereto for the prior period have been revised to correct these errors. See Note 2 for more information on the errors and revisions made to amounts reported for the prior period.
Note 2. InvestmentsRevision of Previously Issued Financial Statements for Immaterial Misstatements
In the third quarter of 2018, we determined accumulated DDA and DDA expense at Casa Berardi, a business unit within our Hecla Quebec Inc. subsidiary, were understated for the periods from June 1, 2013 through June 30, 2018 as a result of errors in calculation from the date of acquisition of Casa Berardi as noted below:
i. | understatement of DDA by approximately $35.5 million in the aggregate over 5 1/2 years. The error in calculation resulted from the foreign exchange translation of accumulated DDA and DDA expense from Canadian dollars (“CAD”) to U.S. dollars (“USD”), which was incorrectly set up in the financial reporting system to use the average exchange rate for the respective reporting period, when the historical exchange rate should have been used. The CAD to USD exchange rate at June 1, 2013 was 0.9646 and has subsequently weakened over the intervening periods, resulting in an understatement of accumulated DDA and DDA expense during the periods from June 1, 2013 to June 30, 2018. The adjustments in the third quarter of 2018 to record the cumulative amounts related to this understatement for prior periods through June 30, 2018 were: |
Condensed Consolidated Balance Sheet (Unaudited) | (in millions) | |||
Credit - Accumulated DDA (recorded within properties, plants, equipment and mineral interests, net) | $ | (36.2 | ) | |
Debit - Inventories: concentrates, doré, and stockpiled ore | 1.1 | |||
Debit - Accumulated deficit | 30.3 | |||
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) | ||||
Debit - DDA expense | 5.0 | |||
Credit - Net foreign exchange gain (loss) | (0.2 | ) | ||
Net increase to net loss for the nine months ended September 30, 2018 | (4.8 | ) |
ii. | overstatement of DDA of approximately $14.2 million in the aggregate over 5 1/2 years related to the accelerated conversion of costs from the mineral interest asset, which represents the value of the undeveloped mineral interest and is not depletable, to the mineral properties asset, which represents the value of proven and probable reserves and is depletable. The error in calculation arose from the incorrect use of fair value information available on the per ounce value at the date of acquisition and resulted in the overstatement of the proven and probable reserves asset, which is subject to depletion, and an understatement of the undeveloped mineral interest asset, both of which are categories reported within properties, plants, equipment and mineral interests, net on the balance sheet. The overstatement of the conversions to the proven and probable reserves asset during the periods from January 1, 2014 through June 30, 2018 resulted in overstatements of accumulated DDA and DDA expense in each of these periods. The adjustments in the third quarter of 2018 to record the cumulative amounts related to this overstatement for prior periods through June 30, 2018 were: |
Condensed Consolidated Balance Sheet (Unaudited) | (in millions) | |||
Debit - Accumulated DDA (recorded within properties, plants, equipment and mineral interests, net) | $ | 14.2 | ||
Credit - Deferred tax liability | (3.8 | ) | ||
Credit - Accumulated deficit | (7.7 | ) | ||
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) | ||||
Credit - DDA expense | (3.7 | ) | ||
Debit - Income tax provision (benefit) | 1.0 | |||
Net decrease to net loss for the nine months ended September 30, 2018 | 2.7 |
We assessed the materiality of the effect of the errors on our prior quarterly and annual financial statements, both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin ("SAB") No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and concluded the errors were not material to any of our previously issued financial statements. Consequently, we will correct these errors prospectively and revise our financial statements when the consolidated balance sheets, statements of operations and comprehensive income and cash flows for such prior periods are included in future filings (the "Revisions"). The Revisions had no net impact on our sales or net cash provided by operating activities for any period presented.
The following tables present a summary of the impact, by financial statement line item, of the Revisions for the three months ended March 31, 2017, June 30, 2017 and September 30, 2017, the six months ended June 30, 2017, the nine months ended September 30, 2017, as of and for the year ended December 31, 2017, and for the year ended December 31, 2016:
Three Months Ended September 30, 2017 | ||||||||||||
(in thousands, except per share amounts) | As Previously Reported | Adjustment | As Revised | |||||||||
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) | ||||||||||||
Depreciation, depletion and amortization | $ | 28,844 | $ | 674 | $ | 29,518 | ||||||
Total cost of sales | 97,202 | 674 | 97,876 | |||||||||
Gross profit | 43,637 | (674 | ) | 42,963 | ||||||||
Income (loss) from operations | 20,942 | (674 | ) | 20,268 | ||||||||
Foreign exchange (loss) gain | (4,764 | ) | (153 | ) | (4,917 | ) | ||||||
Total other (expense) income | (24,931 | ) | (153 | ) | (25,084 | ) | ||||||
(Loss) income before income taxes | (3,989 | ) | (827 | ) | (4,816 | ) | ||||||
Income tax benefit (provision) | 5,401 | (271 | ) | 5,130 | ||||||||
Net income | $ | 1,412 | $ | (1,098 | ) | $ | 314 | |||||
Income applicable to common shareholders | $ | 1,274 | $ | (1,098 | ) | $ | 176 | |||||
Comprehensive income | 9,048 | (1,098 | ) | 7,950 | ||||||||
Basic income per common share after preferred dividends | $ | — | $ | — | $ | — | ||||||
Diluted income per common share after preferred dividends | $ | — | $ | — | $ | — |
Nine Months Ended September 30, 2017 | ||||||||||||
(in thousands, except per share amounts) | As Previously Reported | Adjustment | As Revised | |||||||||
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) | ||||||||||||
Depreciation, depletion and amortization | $ | 83,365 | $ | 3,621 | $ | 86,986 | ||||||
Total cost of sales | 307,902 | 3,621 | 311,523 | |||||||||
Gross profit | 109,760 | (3,621 | ) | 106,139 | ||||||||
Income (loss) from operations | 40,788 | (3,621 | ) | 37,167 | ||||||||
Foreign exchange (loss) gain | (10,909 | ) | 651 | (10,258 | ) | |||||||
Total other (expense) income | (54,935 | ) | 651 | (54,284 | ) | |||||||
(Loss) income before income taxes | (14,147 | ) | (2,970 | ) | (17,117 | ) | ||||||
Income tax benefit (provision) | 18,377 | (813 | ) | 17,564 | ||||||||
Net income | $ | 4,230 | $ | (3,783 | ) | $ | 447 | |||||
Income applicable to common shareholders | $ | 3,816 | $ | (3,783 | ) | $ | 33 | |||||
Comprehensive income | 17,948 | (3,783 | ) | 14,165 | ||||||||
Basic income per common share after preferred dividends | $ | 0.01 | $ | (0.01 | ) | $ | — | |||||
Diluted income per common share after preferred dividends | $ | 0.01 | $ | (0.01 | ) | $ | — | |||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | ||||||||||||
Net income | $ | 4,230 | $ | (3,783 | ) | $ | 447 | |||||
Depreciation, depletion and amortization | 87,634 | 3,621 | 91,255 | |||||||||
Foreign exchange loss (gain) | 11,171 | (651 | ) | 10,520 | ||||||||
Deferred income taxes | (24,280 | ) | 813 | (23,467 | ) | |||||||
Cash provided by operating activities | $ | 74,115 | $ | — | $ | 74,115 |
As of and for the Year Ended December 31, 2017 | ||||||||||||
(in thousands) | As Previously Reported | Adjustment | As Revised | |||||||||
Condensed Consolidated Balance Sheet | ||||||||||||
Inventories: Concentrate, doré, and stockpiled ore | $ | 28,455 | $ | 911 | $ | 29,366 | ||||||
Total current assets | 320,325 | 911 | 321,236 | |||||||||
Properties, plants, equipment and mineral interests, net | 2,020,021 | (20,710 | ) | 1,999,311 | ||||||||
Total assets | 2,364,957 | (19,799 | ) | 2,345,158 | ||||||||
Deferred tax liability | 121,546 | 2,806 | 124,352 | |||||||||
Total liabilities | 881,075 | 2,806 | 883,881 | |||||||||
Accumulated deficit | (195,484 | ) | (22,605 | ) | (218,089 | ) | ||||||
Total shareholders' equity | 1,483,882 | (22,605 | ) | 1,461,277 | ||||||||
Total liabilities and shareholders' equity | 2,364,957 | (19,799 | ) | 2,345,158 | ||||||||
Consolidated Statements of Operation and Comprehensive (Loss) Income | ||||||||||||
Depreciation, depletion and amortization | $ | 116,062 | $ | 4,537 | $ | 120,599 | ||||||
Total cost of sales | 420,789 | 4,537 | 425,326 | |||||||||
Gross profit | 156,986 | (4,537 | ) | 152,449 | ||||||||
Income (loss) from operations | 64,643 | (4,537 | ) | 60,106 | ||||||||
Foreign exchange (loss) gain | (10,300 | ) | 620 | (9,680 | ) | |||||||
Total other (expense) income | (68,283 | ) | 620 | (67,663 | ) | |||||||
(Loss) income before income taxes | (3,640 | ) | (3,917 | ) | (7,557 | ) | ||||||
Income tax (provision) benefit | (19,879 | ) | (1,084 | ) | (20,963 | ) | ||||||
Net (loss) income | $ | (23,519 | ) | $ | (5,001 | ) | $ | (28,520 | ) | |||
(Loss) income applicable to common shareholders | $ | (24,071 | ) | $ | (5,001 | ) | $ | (29,072 | ) | |||
Comprehensive income (loss) | (12,290 | ) | (5,001 | ) | (17,291 | ) | ||||||
Basic (loss) income per common share after preferred dividends | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||
Diluted (loss) income per common share after preferred dividends | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||
Condensed Consolidated Statements of Cash Flows | ||||||||||||
Net (loss) income | $ | (23,519 | ) | $ | (5,001 | ) | $ | (28,520 | ) | |||
Depreciation, depletion and amortization | 121,930 | 4,537 | 126,467 | |||||||||
Foreign exchange loss (gain) | 10,828 | (620 | ) | 10,208 | ||||||||
Deferred income taxes | 18,308 | 1,084 | 19,392 | |||||||||
Cash provided by operating activities | $ | 115,878 | $ | — | $ | 115,878 |
Three Months Ended March 31, 2017 | ||||||||||||
(in thousands) | As Previously Reported | Adjustment | As Revised | |||||||||
Condensed Consolidated Statements of Operation and Comprehensive Income (Loss) (Unaudited) | ||||||||||||
Depreciation, depletion and amortization | $ | 28,952 | $ | 1,483 | $ | 30,435 | ||||||
Total cost of sales | 107,628 | 1,483 | 109,111 | |||||||||
Gross profit | 34,916 | (1,483 | ) | 33,433 | ||||||||
Income from operations | 15,871 | (1,483 | ) | 14,388 | ||||||||
Foreign exchange gain (loss) | (2,262 | ) | 2 | (2,260 | ) | |||||||
Total other expense | (18,108 | ) | 2 | (18,106 | ) | |||||||
Income (loss) before income taxes | (2,237 | ) | (1,481 | ) | (3,718 | ) | ||||||
Income tax (provision) benefit | 29,071 | (271 | ) | 28,800 | ||||||||
Net income | $ | 26,834 | $ | (1,752 | ) | $ | 25,082 | |||||
Income applicable to common shareholders | $ | 26,696 | $ | (1,752 | ) | $ | 24,944 | |||||
Comprehensive income | 30,038 | (1,752 | ) | 28,286 | ||||||||
Basic income per common share after preferred dividends | $ | 0.07 | $ | — | $ | 0.07 | ||||||
Diluted income per common share after preferred dividends | $ | 0.07 | $ | — | $ | 0.07 | ||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | ||||||||||||
Net income | $ | 26,834 | $ | (1,752 | ) | $ | 25,082 | |||||
Depreciation, depletion and amortization | 29,590 | 1,483 | 31,073 | |||||||||
Foreign exchange (gain) loss | 506 | (2 | ) | 504 | ||||||||
Deferred income taxes | (21,234 | ) | 271 | (20,963 | ) | |||||||
Cash provided by operating activities | $ | 38,285 | $ | — | $ | 38,285 |
Three Months Ended June 30, 2017 | ||||||||||||
(in thousands) | As Previously Reported | Adjustment | As Revised | |||||||||
Condensed Consolidated Statements of Operation and Comprehensive Income (Loss) (Unaudited) | ||||||||||||
Depreciation, depletion and amortization | $ | 25,569 | $ | 1,464 | $ | 27,033 | ||||||
Total cost of sales | 103,072 | 1,464 | 104,536 | |||||||||
Gross profit | 31,207 | (1,464 | ) | 29,743 | ||||||||
Income from operations | 3,975 | (1,464 | ) | 2,511 | ||||||||
Foreign exchange gain (loss) | (3,883 | ) | 803 | (3,080 | ) | |||||||
Total other income (expense) | (11,896 | ) | 803 | (11,093 | ) | |||||||
Income (loss) before income taxes | (7,921 | ) | (661 | ) | (8,582 | ) | ||||||
Income tax (provision) benefit | (16,095 | ) | (271 | ) | (16,366 | ) | ||||||
Net income (loss) | $ | (24,016 | ) | $ | (932 | ) | $ | (24,948 | ) | |||
Income (loss) applicable to common shareholders | $ | (24,154 | ) | $ | (932 | ) | $ | (25,086 | ) | |||
Comprehensive income (loss) | (21,138 | ) | (932 | ) | (22,070 | ) | ||||||
Basic income (loss) per common share after preferred dividends | $ | (0.06 | ) | $ | — | $ | (0.06 | ) | ||||
Diluted income (loss) per common share after preferred dividends | $ | (0.06 | ) | $ | — | $ | (0.06 | ) |
Six Months Ended June 30, 2017 | ||||||||||||
(in thousands) | As Previously Reported | Adjustment | As Revised | |||||||||
Condensed Consolidated Statements of Operation and Comprehensive Income (Loss) (Unaudited) | ||||||||||||
Depreciation, depletion and amortization | $ | 54,521 | $ | 2,947 | $ | 57,468 | ||||||
Total cost of sales | 210,700 | 2,947 | 213,647 | |||||||||
Gross profit | 66,123 | (2,947 | ) | 63,176 | ||||||||
Income from operations | 19,846 | (2,947 | ) | 16,899 | ||||||||
Foreign exchange gain (loss) | (6,145 | ) | 805 | (5,340 | ) | |||||||
Total other income (expense) | (30,004 | ) | 805 | (29,199 | ) | |||||||
Income (loss) before income taxes | (10,158 | ) | (2,142 | ) | (12,300 | ) | ||||||
Income tax (provision) benefit | 12,976 | (542 | ) | 12,434 | ||||||||
Net income (loss) | $ | 2,818 | $ | (2,684 | ) | $ | 134 | |||||
Income (loss) applicable to common shareholders | $ | 2,542 | $ | (2,684 | ) | $ | (142 | ) | ||||
Comprehensive income (loss) | 8,900 | (2,684 | ) | 6,216 | ||||||||
Basic income (loss) per common share after preferred dividends | $ | 0.01 | $ | (0.01 | ) | $ | — | |||||
Diluted income (loss) per common share after preferred dividends | $ | 0.01 | $ | (0.01 | ) | $ | — | |||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | ||||||||||||
Net income | $ | 2,818 | $ | (2,684 | ) | $ | 134 | |||||
Depreciation, depletion and amortization | 56,908 | 2,947 | 59,855 | |||||||||
Foreign exchange (gain) loss | 5,201 | (805 | ) | 4,396 | ||||||||
Deferred income taxes | (22,113 | ) | 542 | (21,571 | ) | |||||||
Cash provided by operating activities | $ | 45,821 | $ | — | $ | 45,821 |
For the Year Ended December 31, 2016 | ||||||||||||
(in thousands) | As Previously Reported | Adjustment | As Revised | |||||||||
Consolidated Statements of Operation and Comprehensive (Loss) Income | ||||||||||||
Depreciation, depletion and amortization | $ | 116,126 | $ | 7,505 | $ | 123,631 | ||||||
Total cost of sales | 454,451 | 7,505 | 461,956 | |||||||||
Gross profit | 191,506 | (7,505 | ) | 184,001 | ||||||||
Income (loss) from operations | 116,944 | (7,505 | ) | 109,439 | ||||||||
Foreign exchange (loss) gain | (2,926 | ) | 189 | (2,737 | ) | |||||||
Total other (expense) income | (19,969 | ) | 189 | (19,780 | ) | |||||||
(Loss) income before income taxes | 96,975 | (7,316 | ) | 89,659 | ||||||||
Income tax (provision) benefit | (27,428 | ) | (662 | ) | (28,090 | ) | ||||||
Net (loss) income | $ | 69,547 | $ | (7,978 | ) | $ | 61,569 | |||||
(Loss) income applicable to common shareholders | $ | 68,995 | $ | (7,978 | ) | $ | 61,017 | |||||
Comprehensive income (loss) | 67,576 | (7,978 | ) | 59,598 | ||||||||
Basic (loss) income per common share after preferred dividends | $ | 0.18 | $ | (0.02 | ) | $ | 0.16 | |||||
Diluted (loss) income per common share after preferred dividends | $ | 0.18 | $ | (0.02 | ) | $ | 0.16 | |||||
Condensed Consolidated Statements of Cash Flows | ||||||||||||
Net (loss) income | $ | 69,547 | $ | (7,978 | ) | $ | 61,569 | |||||
Depreciation, depletion and amortization | 117,413 | 7,505 | 124,918 | |||||||||
Foreign exchange loss (gain) | 4,649 | (189 | ) | 4,460 | ||||||||
Deferred income taxes | 2,112 | 662 | 2,774 | |||||||||
Cash provided by operating activities | $ | 225,328 | $ | — | $ | 225,328 |
Note 3. Investments
Our current investments, which are classified as "available for sale" and consist of bonds having maturities of greater than 90 days and less than 365 days, had a fair value of $34.4 million andwere $33.8 million respectively, at March 31, 2018 and December 31, 2017. We held no such investments as of September 30, 2018. During the first quarternine months of 2018 and 2017, we had purchases of such investments of $31.2 million and $11.1$35.3 million, respectively, and maturities of $30.5$64.9 million and $3.6$31.2 million, respectively. Our current investments at March 31, 2018 and December 31, 2017 consisted of the following:following (in thousands):
March 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Amortized cost | Unrealized loss | Fair market value | Amortized cost | Unrealized loss | Fair market value | |||||||||||||||||||
Corporate bonds | $ | 34,394 | $ | (36 | ) | $ | 34,358 | $ | 33,778 | $ | (20 | ) | $ | 33,758 |
December 31, 2017 | ||||||||||||
Amortized cost | Unrealized+ loss | Fair value | ||||||||||
Corporate bonds | $ | 33,778 | $ | (20 | ) | $ | 33,758 |
At March 31,September 30, 2018 and December 31, 2017, the fair value of our non-current investments was $7.7$7.2 million and $7.6 million, respectively. Our non-current investments consist of marketable equity securities which are carried at fair value, and are primarily classified as “available-for-sale.” The cost basis of our non-current investments was approximately $5.6$7.9 million and $5.7 million at March 31,September 30, 2018 and December 31, 2017, respectively. We had net unrealized gainsIn the first nine months of $2.12018 and 2017, we acquired marketable equity securities having a cost basis of $0.8 million and $1.9$1.6 million, on equity investments held as of March 31, 2018 and December 31, 2017, respectively. During the quarter ended March 31,first nine months of 2018, we recognized $0.3$2.5 million in net unrealized losses in current earnings. During the first nine months of 2017, we recognized $1.5 million in net unrealized gains in current earnings. During the quarter ended March 31, 2017, we recognized $0.3other comprehensive income and $0.1 million in net unrealized losses on equity investments in other comprehensive income and $0.3 million in net unrealized gains in current earnings.
Note 3.4. Income Taxes
Major components of our income tax provision (benefit) for the three and nine months ended March 31,September 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Current: | ||||||||||||||||||||||||
Domestic | $ | — | $ | (12,797 | ) | $ | — | $ | — | $ | 1 | $ | (12,797 | ) | ||||||||||
Foreign | 1,206 | 5,515 | 80 | (3,959 | ) | 4,250 | 17,491 | |||||||||||||||||
Total current income tax provision (benefit) | 1,206 | (7,282 | ) | 80 | (3,959 | ) | 4,251 | 4,694 | ||||||||||||||||
Deferred: | ||||||||||||||||||||||||
Domestic | — | (18,903 | ) | (3,778 | ) | 1,980 | (3,778 | ) | (13,958 | ) | ||||||||||||||
Foreign | (438 | ) | (2,886 | ) | 1,019 | (3,151 | ) | (1,957 | ) | (8,300 | ) | |||||||||||||
Total deferred income tax (benefit) provision | (438 | ) | (21,789 | ) | ||||||||||||||||||||
Total deferred income tax provision (benefit) | (2,759 | ) | (1,171 | ) | (5,735 | ) | (22,258 | ) | ||||||||||||||||
Total income tax provision (benefit) | $ | 768 | $ | (29,071 | ) | $ | (2,679 | ) | $ | (5,130 | ) | $ | (1,484 | ) | $ | (17,564 | ) |
The current income tax provisions for the three and nine months ended March 31,September 30, 2018 and 2017 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the non-utilizationimpact of tax lossestaxation in foreign jurisdictions, a valuation allowance on the majority of U.S. in 2018,deferred taxes and the impact of the change in accounting method treatment of the #4 Shaft development costs in 2017, and the impact of taxation in foreign jurisdictions.2017.
As of March 31,September 30, 2018, we have a net deferred tax liability in the U.S. of $0.3$46.7 million, a net deferred tax liability in Canada of $116.9$118.1 million and a net deferred tax asset in Mexico of $1.0$1.9 million, for a consolidated worldwide net deferred tax liability of $116.2$162.9 million. We
With the acquisition of Klondex on July 20, 2018 (see Note 14), we acquired a U.S. consolidated tax group (the "Klondex U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Legacy Hecla”). Under acquisition accounting, we recorded a net deferred tax liability of $50.1 million. For the three and nine months ended September 30, 2018, we recorded a tax benefit of $3.8 million on a net tax loss of $15.2 million in the Klondex U.S. group.
For Legacy Hecla, we recorded a full valuation allowance in the U.S. in December 2017 as a result of U.S. tax reform. Our circumstances at March 31,September 30, 2018 continuecontinued to support a full valuation allowance in the U.S. where our domestic tax provision is zero.for Legacy Hecla. In the first quarter of 2017, we received consent from the Internal Revenue Service to permit us to take a different income tax position relating to the timing of deductions for the #4 Shaft development costs at Lucky Friday. This tax accounting method change substantially revised the timing of deductions for these costs for regular tax and Alternative Minimum Tax ("AMT") relative to our projected life of mine and projected taxable income. These timing changes caused us to revise our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance release of approximately $15 million. At March 31, 2018 and December 31, 2017, the balances of the valuation allowances on our deferred tax assets were approximately $80.4 million and $78.7 million, respectively.
Note 4.5. Commitments, Contingencies and Obligations
General
We follow U.S. Generally Accepted Accounting PrinciplesGAAP guidance in determining our accruals and disclosures with respect to loss contingencies, and evaluate such accruals and contingencies for each reporting period. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
Rio Grande Silver Guaranty
Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of March 31,September 30, 2018, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, has jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of March 31,September 30, 2018.
Lucky Friday Water Permit Matters
In the past, the Lucky Friday unit experienced multiple regulatory issues relating to its water discharge permits and water management more generally. All of these issues have been resolved except for one: in December 2013, the EPA issued to Hecla Limited a request for information under Section 308 of the Clean Water Act directing Hecla Limited to undertake a comprehensive groundwater investigation of Lucky Friday’s tailings pond no. 3 to evaluate whether the pond is causing the discharge of pollutants via seepage to groundwater that is discharging to surface water. We completed the investigation mandated by the EPA and submitted a draft report to the agency in December 2015. We are waiting for the EPA’s response and we cannot predict what further action, if any, the impact of the investigation will be.agency may take.
Hecla Limited strives to maintain its water discharges at the Lucky Friday unit in full compliance with its permits and applicable laws; however, we cannot provide assurance that in the future it will be able to fully comply with the permit limits and other regulatory requirements regarding water management.
Johnny M Mine Area near San Mateo, McKinley County and San Mateo Creek Basin, New Mexico
In May 2011, the EPA made a formal request to Hecla Mining Company for information regarding the Johnny M Mine Area near San Mateo, McKinley County, New Mexico, and asserted that Hecla Mining Company may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for environmental remediation and past costs the EPA has incurred at the site. Mining at the Johnny M was conducted for a limited period of time by a predecessor of our subsidiary, Hecla Limited. In August 2012, Hecla Limited and the EPA entered into a Settlement Agreement and Administrative Order on Consent for Removal Action (“Consent Order”), pursuant to which Hecla Limited agreed to pay (i) $1.1 million to the EPA for its past response costs at the site and (ii) any future response costs at the site under the Consent Order, in exchange for a covenant not to sue by the EPA. Hecla Limited paid the $1.1 million to the EPA for its past response costs and in December 2014, submitted to EPA the Engineering Evaluation and Cost Analysis (“EE/CA”) for the site. The EE/CA evaluates three alternative response actions: 1) no action, 2) off-site disposal, and 3) on-site disposal. The range in estimated costs of these alternatives is $0 to $221 million. In the EE/CA, Hecla Limited recommended that EPA approve on-site disposal, which is currently estimated to cost $5.6 million, on the basis that it is the most appropriate response action under CERCLA. In June 2015, the EPA approved the EE/CA, with a few minor conditions. The EPA still needs to publish the EE/CA for public notice and comment, and the agency will not make a final decision on the appropriate response action until the public comment process is complete. It is anticipated that Hecla Limited will implement the response action selected by the EPA pursuant to an amendment to the Consent Order or a new order. Based on the foregoing, we believe it is probable that Hecla Limited will incur a liability for remediation at the site. In the fourth quarter of 2014, we accrued $5.6 million, which continues to be our best estimate of that liability as of the date of this report. There can be no assurance that Hecla Limited’s liability will not be more than $5.6 million, or that its ultimate liability will not have a material adverse effect on Hecla Limited’s or our results of operations or financial position.
The Johnny M Mine is in an area known as the San Mateo Creek Basin (“SMCB”), which is an approximately 321 square mile area in New Mexico that contains numerous legacy uranium mines and mills. The EPA is considering listing the entire SMCB on CERCLA’s National Priorities List in order to address perceived groundwater issues within the SMCB. The EE/CA discussed above relates primarily to contaminated rock and soil, not groundwater. In the event that the SMCB is listed as a Superfund site, or for other reasons, it is possible that Hecla Limited’s liability at the Johnny M Site, as well as any other sites within the SMCB at which predecessor companies of Hecla Limited may have been involved, will be greater than our current accrual of $5.6 million due to the increased scope of required remediation.
In July 2018, the EPA informed Hecla Limited that it and several other potentially responsible parties ("PRPs") may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated it has incurred approximately $9.6 million in response costs to date. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning the site, including the relative contributions, if any, of contamination by the various PRPs.
Carpenter Snow Creek and Barker-Hughesville Sites in Montana
In July 2010, the EPA made a formal request to Hecla Mining Company for information regarding the Carpenter Snow Creek Superfund site located in Cascade County, Montana. The Carpenter Snow Creek site is located in a historic mining district, and in the early 1980s Hecla Limited leased 6 mining claims and performed limited exploration activities at the site. Hecla Limited terminated the mining lease in 1988.
In June 2011, the EPA informed Hecla Limited that it believes Hecla Limited, among several other viable companies, may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated in the June 2011 letter that it has incurred approximately $4.5 million in response costs and estimated that total remediation costs may exceed $100 million. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning the site.
In February 2017, the EPA made a formal request to Hecla Mining Company for information regarding the Barker-Hughesville Mining District Superfund site located in Judith Basin and Cascade Counties, Montana. Hecla Limited submitted a response in April 2017. The Barker-Hughesville site is located in a historic mining district, and between approximately June and December 1983, Hecla Limited was party to an agreement with another mining company under which limited exploration activities occurred at or near the site. Neither
In August 2018, the EPA nor any other party has made any claims againstinformed Hecla Limited (or Hecla Mining Company); however,that it is possible that such a claim willand several other PRPs may be madeliable for cleanup of the site or for costs incurred by the EPA in cleaning up the future. Unless and until such a claim is made,site. The EPA did not include an amount of its alleged response costs to date. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter.matter because of, among other reasons, the lack of information concerning past or anticipated future costs at the site and the relative contributions, if any, of contamination by the various PRPs.
Litigation Related to Klondex Acquisition
Following the announcement of our proposed acquisition of Klondex, Klondex and members of the Klondex board of directors were named as defendants in five putative stockholder class actions, brought by purported stockholders of Klondex, challenging the proposed merger. The lawsuits were all filed in the United States District Court for the District of Nevada, but only three cases remain, and they are captioned: Gunderson v. Klondex Mines Ltd., et al., No. 3:18-cv-00256 (D. Nev. May 31, 2018); Nelson Baker v. Klondex Mines Ltd., et al., No. 3:18-cv-00288 (D. Nev. June 15, 2018); and Lawson v. Klondex Mines Ltd., et al., No. 3:18-cv-00284 (D. Nev. June 15, 2018). The Gunderson complaint also named Hecla Mining Company and our subsidiary now known as Klondex Mines Unlimited Liability Company (“Merger Sub”) as defendants. The other two lawsuits were subsequently dismissed.
The plaintiffs generally claim that Klondex issued a proxy statement that included misstatements or omissions, in violation of sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended. The Gunderson complaint also asserts a claim that the individual members of the Klondex board of directors breached their fiduciary duties of care, loyalty and good faith by authorizing the merger with Hecla for what the plaintiff asserts is inadequate consideration, an inadequate process, and with inadequate disclosures. The plaintiffs seek, among other things, to enjoin the merger, rescind the transaction or obtain rescissory damages if the merger is consummated, and recover attorneys’ fees and costs.
On September 21, 2018, Plaintiffs Baker and Lawson each filed motions to consolidate the remaining cases and be appointed lead plaintiff.
Although it is not possible to predict the outcome of litigation matters with certainty, each of Klondex, its directors, Hecla and Merger Sub believe that each of the lawsuits are without merit, and the parties intend to vigorously defend against all claims asserted.
In addition, on September 11, 2018, a lawsuit was filed in the Ontario (Canada) Superior Court of Justice by Waterton Nevada Splitter LLC against Hecla Mining Company, our subsidiary Klondex Mines Unlimited Liability Company and Havilah Mining Corporation, an entity that was formed to own the Canadian assets of Klondex that we did not acquire as part of the Klondex acquisition in July 2018, and of which we own approximately 13%. The lawsuit alleges that Hecla and Havilah are in breach of contract in connection with the issuance to Waterton of warrants to purchase Hecla common stock and Havilah common shares to replace warrants to purchase Klondex common shares that Waterton owned prior to the July 2018 acquisition. The lawsuit claims Hecla and Havilah issued warrants to Waterton valued at $3.7 million but that Waterton was entitled to warrants valued at $8.9 million. We believe the lawsuit is without merit and will vigorously defend it.
Debt
On April 12, 2013, we completed an offering of $500 million aggregate principal amount of 6.875% Senior Notes due 2021 ("Senior Notes"). The net proceeds from the offering of the Senior Notes were used to partially fund the acquisition of Aurizon Mines Ltd. ("Aurizon") and for general corporate purposes, including expenses related to the Aurizon acquisition. Through the acquisition of Aurizon, we acquired our Casa Berardi mine and other interests in Quebec, Canada. In 2014, we completed additional issuances of our Senior Notes in the aggregate principal amount of $6.5 million, which were contributed to one of our pension plans to satisfy the funding requirement for 2014. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013.
On March 5, 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 “Notes”) to Ressources Québec, a subsidiary of Investissment Québec, a financing arm of the Québec government. The Notes were issued at a discount of 0.58%, and bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018. The Notes are senior and unsecured and are pari passu in all material respects with the Senior Notes, including with respect to guarantees of the Notes by certain of our subsidiaries. The net proceeds from the Notes are required to be used for development and expansion of our Casa Berardi mine.
See Note 910 for more information.
Other Commitments
Our contractual obligations as of March 31,September 30, 2018 included approximately $7.1$1.6 million for various costs. In addition, our open purchase orders at March 31,September 30, 2018 included approximately $0.1$0.4 million, $3.1$2.0 million, $14.2 million and $3.3$5.3 million for various capital and non-capital items at the Lucky Friday, Casa Berardi, and Greens Creek and Nevada Operations units, respectively. We also have total commitments of approximately $13.6$15.7 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday, and Casa Berardi and Nevada Operations units (see Note 910 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of March 31,September 30, 2018, we had surety bonds totaling $117.0$181.6 million in place as financial support for future reclamation and closure costs, self-insurance, and employee benefit plans. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.
Other Contingencies
We also have certain other contingencies resulting from litigation, claims, EPA investigations, and other commitments and are subject to a variety of environmental and safety laws and regulations incident to the ordinary course of business. We currently have no basis to conclude that any or all of such contingencies will materially affect our financial position, results of operations or cash flows. However, in the future, there may be changes to these contingencies, or additional contingencies may occur, any of which might result in an accrual or a change in current accruals recorded by us, and there can be no assurance that their ultimate disposition will not have a material adverse effect on our financial position, results of operations or cash flows.
Note 5. Earnings6. (Loss) earnings Per Common Share
We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At March 31,September 30, 2018, there were 405,166,416485,136,257 shares of our common stock issued and 4,864,7995,226,791 shares issued and held in treasury, for a net of 400,301,617479,909,466 shares outstanding. Basic and diluted loss per common share, after preferred dividends, was $(0.05) and $(0.01) for the three- and nine-month periods ended September 30, 2018, respectively. Basic and diluted income per common share, after preferred dividends, was $0.02$0.00 and $0.07$0.00 for the three-monththree- and nine-month periods ended March 31, 2018 andSeptember 30, 2017, respectively.
Diluted (loss) income (loss) per share for the three and nine months ended March 31,September 30, 2018 and 2017 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.
For the three monthsthree-month and nine-month periods ended March 31,September 30, 2018, 1,092,307all restricted share units, deferred shares and warrants were excluded from the computation of diluted loss per share, as our reported loss for that period would cause them to have no effect on the calculation of loss per share. For the three-month and nine-month periods ended September 30, 2017, the calculation of diluted income per share included dilutive (i) restricted stock units that were unvested or which vested in the respective period of 901,047 and 1,857,555, respectively, and (ii) deferred shares of 1,509,159 for each period. There were no warrants outstanding during the quarterthree-month and 1,509,159 deferred shares were included in the calculation of diluted earnings (loss) per share, and there were an additional 539,204 unvested restricted stock units and 212,602 deferred shares which were not dilutive. For the three-month periodnine-month periods ended March 31, 2017, 2,051,734 restricted stock units that were unvested during the quarter and 727,262 in deferred shares were included in the calculation of diluted earnings (loss) per share.
September 30, 2017.
Note 6.7. Business Segments and Sales of Products
We discover, acquire, develop, produce, and market concentrates and doré containing silver, gold, lead and zinc. We are currently organized and managed in four segments, which represent our operating units:five reporting segments: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, and the San Sebastian unit and the Nevada Operations unit.
General corporate activities not associated with operating units and their various exploration activities, as well as discontinued operations and idle properties, are presented as “other.” Interest expense, interest income and income taxes are considered general corporate items, and are not allocated to our segments.
The following tables present information about our reportable segments for the three and nine months ended March 31,September 30, 2018 and 2017 (in thousands):
Three Months Ended March 31, | Three Months Ended | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net sales to unaffiliated customers: | ||||||||||||||||||||||||
Greens Creek | $ | 65,850 | $ | 58,850 | $ | 65,187 | $ | 61,062 | $ | 205,642 | $ | 191,250 | ||||||||||||
Lucky Friday | 4,977 | 20,010 | (11 | ) | 199 | 8,253 | 20,022 | |||||||||||||||||
Casa Berardi | 55,548 | 41,712 | 52,850 | 53,989 | 164,501 | 139,524 | ||||||||||||||||||
San Sebastian | 13,334 | 21,972 | 14,129 | 25,589 | 40,727 | 66,866 | ||||||||||||||||||
Nevada Operations | 11,494 | — | 11,494 | — | ||||||||||||||||||||
$ | 139,709 | $ | 142,544 | $ | 143,649 | $ | 140,839 | $ | 430,617 | $ | 417,662 | |||||||||||||
Income (loss) from operations: | ||||||||||||||||||||||||
Greens Creek | $ | 23,152 | $ | 14,114 | $ | 10,705 | $ | 16,575 | $ | 59,373 | $ | 46,107 | ||||||||||||
Lucky Friday | (4,146 | ) | 3,880 | (5,404 | ) | (4,642 | ) | (14,811 | ) | (8,974 | ) | |||||||||||||
Casa Berardi | 3,250 | (2,245 | ) | (1,146 | ) | 2,208 | 3,118 | (4,692 | ) | |||||||||||||||
San Sebastian | 5,017 | 13,454 | (2,381 | ) | 17,017 | 2,275 | 42,363 | |||||||||||||||||
Nevada Operations | (13,741 | ) | — | (13,741 | ) | — | ||||||||||||||||||
Other | (15,324 | ) | (13,332 | ) | (18,409 | ) | (10,890 | ) | (50,885 | ) | (37,637 | ) | ||||||||||||
$ | 11,949 | $ | 15,871 | $ | (30,376 | ) | $ | 20,268 | $ | (14,671 | ) | $ | 37,167 |
The following table presents identifiable assets by reportable segment as of March 31,September 30, 2018 and December 31, 2017 (in thousands):
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Identifiable assets: | ||||||||||||||||
Greens Creek | $ | 669,042 | $ | 671,960 | $ | 651,814 | $ | 671,960 | ||||||||
Lucky Friday | 432,369 | 432,400 | 429,334 | 432,400 | ||||||||||||
Casa Berardi | 802,017 | 804,505 | 758,415 | 784,706 | ||||||||||||
San Sebastian | 67,576 | 62,198 | 47,352 | 62,198 | ||||||||||||
Nevada Operations | 539,410 | — | ||||||||||||||
Other | 427,087 | 393,894 | 283,933 | 393,894 | ||||||||||||
$ | 2,398,091 | $ | 2,364,957 | $ | 2,710,258 | $ | 2,345,158 |
Our products consist of both metal concentrates, which we sell to custom smelters and brokers, and unrefined bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. Revenue is recognized upon the completion of the performance obligations and transfer of control of the product to the customer.
For sales of metals from refined doré, the performance obligation is met and revenue is recognized at the time of transfer of control of the agreed-upon metal quantities to the customer by the refiner.refiner, and the transaction price is known at that time. For sales of doré, the performance obligation is met, the transaction price is known, and revenue is recognized at the time of transfer of title and control of the doré containing the agreed-upon metal quantities to the customer. Refining, selling and shipping costs related to sales of doré and metals from doré are recorded to cost of sales as incurred.
For concentrate sales, which we currently have at our Greens Creek and Lucky Friday units, the performance obligation is met, the transaction price can be reasonably estimated, and revenue is recognized generally at the time of shipment. Concentrates sold at our Lucky Friday unit typically leave the mine and are received by the customer within the same day. However, there is a period of time between shipment of concentrates from our Greens Creek unit and their physical receipt by the customer, and judgment is required in determining when control has been transferred to the customer for those shipments. We have determined the performance obligation is met and title is transferred to the customer upon shipment of concentrate parcels from Greens Creek because, at that time, 1) legal title is transferred to the customer, 2) the customer has accepted the parcel and obtained the ability to realize all of the benefits from the product, 3) the concentrate content specifications are known, have been communicated to the customer, and the customer has the significant risks and rewards of ownership of it, 4) it is very unlikely a concentrate parcel from Greens Creek will be rejected by a customer upon physical receipt, and 5) we have the right to payment for the parcel.
Judgment is also required in identifying the performance obligations for our concentrate sales. Most of our concentrate sales involve “frame contracts” with smelters that can cover multiple years and specify certain terms under which individual parcels of concentrates are sold. However, some terms are not specified in the frame contracts and/or can be renegotiated as part of annual amendments to the frame contract. We have determined parcel shipments represent individual performance obligations satisfied at a point in time when control of the shipment is transferred to the customer.
OurThe consideration we receive for our concentrate sales involve variable consideration, as they are subjectfluctuates due to changes in metals prices between the time of shipment and their final settlement.settlement with the customer. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and previously recorded sales and accounts receivable are adjusted to estimated settlement metals prices until final settlement with the customer. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur. As such, we use the expected value method to price the parcels until the final settlement date occurs, at which time the final transaction price is known. At March 31,September 30, 2018, metals contained in concentrates and exposed to future price changes totaled 1.51.2 million ounces of silver, 6,1515,734 ounces of gold, 11,0307,277 tons of zinc, and 1,8002,447 tons of lead. However, as discussed in Note 1112, we seek to mitigate the risk of negative price adjustments by using financially-settled forward contracts for some of our sales.
Sales and accounts receivable for concentrate shipments are recorded net of charges for treatment, refining, smelting losses, and other charges negotiated by us with the customers, which represent components of the transaction price. Charges are estimated by us upon shipment of concentrates based on contractual terms, and actual charges typically do not vary materially from our estimates. Costs charged by customers include fixed treatment and refining costs per ton of concentrate and may include price escalators which allow the customers to participate in the increase of lead and zinc prices above a negotiated baseline. Costs for shipping concentrates to customers are recorded to cost of sales as incurred.
Sales of metal concentrates and metal products are made principally to custom smelters, brokers and metals traders. The percentage of sales contributed by each segment is reflected in the following table:
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Greens Creek | 46 | % | 41 | % | 45 | % | 43 | % | 48 | % | 46 | % | ||||||||||||
Lucky Friday | 4 | % | 14 | % | — | % | — | % | 2 | % | 5 | % | ||||||||||||
Casa Berardi | 40 | % | 29 | % | 37 | % | 38 | % | 39 | % | 33 | % | ||||||||||||
San Sebastian | 10 | % | 16 | % | 10 | % | 19 | % | 9 | % | 16 | % | ||||||||||||
Nevada Operations | 8 | % | — | % | 2 | % | — | % | ||||||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Sales of products by metal for the thee-monththree- and nine-month periods ended March 31,September 30, 2018 and 2017 were as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Silver | $ | 35,222 | $ | 51,357 | $ | 38,009 | $ | 43,228 | $ | 111,656 | $ | 140,662 | ||||||||||||
Gold | 73,044 | 62,701 | 82,628 | 73,603 | 233,308 | 203,279 | ||||||||||||||||||
Lead | 9,227 | 13,619 | 7,552 | 6,373 | 27,469 | 28,093 | ||||||||||||||||||
Zinc | 30,109 | 29,865 | 20,990 | 24,327 | 78,714 | 74,692 | ||||||||||||||||||
Less: Smelter and refining charges | (7,893 | ) | (14,998 | ) | (5,530 | ) | (6,692 | ) | (20,530 | ) | (29,064 | ) | ||||||||||||
139,709 | 142,544 | |||||||||||||||||||||||
Sales of products | $ | 143,649 | $ | 140,839 | $ | 430,617 | $ | 417,662 |
The following is sales information by geographic area based on the location of smelters and brokers (for concentrate shipments) and location of parent companies (for doré sales to metals traders) for the three-monththree- and nine-month periods ended March 31,September 30, 2018 and 2017 (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Canada | $ | 88,668 | $ | 100,219 | $ | 83,723 | $ | 79,834 | $ | 266,915 | $ | 263,268 | ||||||||||||
Korea | 32,703 | 28,971 | 35,796 | 27,396 | 110,036 | 75,339 | ||||||||||||||||||
Japan | 13,773 | 12,290 | 3,301 | 14,419 | 20,971 | 38,513 | ||||||||||||||||||
China | — | 16,695 | 66 | 32,047 | ||||||||||||||||||||
United States | 4,081 | 5,205 | 15,807 | 3,121 | 24,296 | 12,407 | ||||||||||||||||||
Other | (131 | ) | (48 | ) | ||||||||||||||||||||
Total, excluding gains/losses on forward contracts | 139,094 | 146,637 | $ | 138,627 | $ | 141,465 | $ | 422,284 | $ | 421,574 |
Sales by significant product type for the three-monththree- and nine-month periods ended March 31,September 30, 2018 and 2017 were as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Doré and metals from doré | $ | 73,492 | $ | 68,981 | $ | 83,068 | $ | 82,764 | $ | 232,085 | $ | 219,276 | ||||||||||||
Lead concentrate | 34,334 | 48,917 | 36,728 | 31,548 | 113,211 | 124,553 | ||||||||||||||||||
Zinc concentrate | 25,652 | 24,218 | 14,965 | 21,278 | 63,197 | 61,841 | ||||||||||||||||||
Bulk concentrate | 5,616 | 4,521 | 3,866 | 5,875 | 13,791 | 15,904 | ||||||||||||||||||
Total, excluding gains/losses on forward contracts | 139,094 | 146,637 | $ | 138,627 | $ | 141,465 | $ | 422,284 | $ | 421,574 |
Sales of products for the first three months ofthree- and nine-month periods ended September 30, 2018 and 2017 included net gains of $0.6$5.0 million and net losses of $4.1$8.3 million, respectively, on financially-settled forward contracts for silver, gold, lead and zinc contained in our concentrate sales. Sales of products for the three- and nine-month periods ended September 30, 2017 included net losses of $0.6 million and $3.9 million, respectively, on the forward contracts. See Note 1112 for more information.
Sales of products to significant customers as a percentage of total sales were as follows for the three-monththree- and nine-month periods ended March 31,September 30, 2018 and 2017:
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
CIBC | 47 | % | 24 | % | 26 | % | 23 | % | 34 | % | 24 | % | ||||||||||||
Scotia | 2 | % | 20 | % | 19 | % | 33 | % | 13 | % | 26 | % | ||||||||||||
Korea Zinc | 23 | % | 20 | % | 15 | % | 25 | % | 22 | % | 20 | % | ||||||||||||
Teck Metals Ltd. | 4 | % | 15 | % | 11 | % | — | % | 11 | % | 10 | % | ||||||||||||
Ocean Partners | 10 | % | 10 | % | ||||||||||||||||||||
Trafigura | 10 | % | — | % | 3 | % | 4 | % | ||||||||||||||||
Louis Dreyfus | — | % | 12 | % | — | % | 4 | % |
Our trade accounts receivable balance related to contracts with customers was $19.7$12.9 million at March 31,September 30, 2018 and 2017 and $14.8 million at December 31, 2017, and included no allowance for doubtful accounts.
We have determined our contracts do not include a significant financing component. For doré sales and sales of metal from doré, payment is received at the time the performance obligation is satisfied. ConsiderationThe amount of consideration for concentrate sales is variable, and we receive payment for a significant portion of the estimated value of concentrate parcels within a relatively short period of time after the performance obligation is satisfied.
We do not incur significant costs to obtain contracts, nor costs to fulfill contracts which are not addressed by other accounting standards. Therefore, we have not recognized an asset for such costs as of March 31,September 30, 2018 or December 31, 2017.
The sales and income (loss) from operations amounts reported above include results from our Lucky Friday segment. The Lucky Friday mine is our only operation where some of our employees are subject to a collective bargaining agreement, and the most recent agreement expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer. Onoffer, and on March 13, 2017 the unionized employees went on strike and have been on strike since that time. Production at Lucky Friday was suspended from the start of the strike until July 2017, when limited production resumed. For the first quarternine months of 2018 and 2017, suspension costs not related to production of $4.1$13.5 million and $1.2$11.5 million, respectively, along with $0.9$3.7 million and $0.4$2.9 million, respectively, in non-cash depreciation expense, are reported in a separate line item on our consolidated statementstatements of operations. 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 ana 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,September 30, 2018 was approximately $422$428.8 million. However, Lucky Friday has significant identified reserves and mineralized material and a current estimated mine life of approximately 22 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. We do not believe the settlement with the NLRB will resolve any of the key differences in the ongoing labor dispute. 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.
Note 7.8. Employee Benefit Plans
We sponsor defined benefit pension plans covering substantially all U.S. employees. Net periodic pension cost for the plans consisted of the following for the three and nine months ended March 31,September 30, 2018 and 2017 (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Service cost | $ | 1,252 | $ | 1,196 | $ | 1,252 | $ | 1,196 | ||||||||
Interest cost | 1,377 | 1,339 | 1,377 | 1,339 | ||||||||||||
Expected return on plan assets | (1,634 | ) | (1,462 | ) | (1,634 | ) | (1,462 | ) | ||||||||
Amortization of prior service benefit | 15 | (84 | ) | |||||||||||||
Amortization of prior service cost | 15 | (84 | ) | |||||||||||||
Amortization of net loss | 931 | 1,033 | 931 | 1,033 | ||||||||||||
Net periodic benefit cost | $ | 1,941 | $ | 2,022 | ||||||||||||
Net periodic pension cost | $ | 1,941 | $ | 2,022 |
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Service cost | $ | 3,756 | $ | 3,588 | ||||
Interest cost | 4,131 | 4,017 | ||||||
Expected return on plan assets | (4,902 | ) | (4,386 | ) | ||||
Amortization of prior service cost | 45 | (252 | ) | |||||
Amortization of net loss | 2,793 | 3,099 | ||||||
Net periodic pension cost | $ | 5,823 | $ | 6,066 |
For the three monthsthree- and nine-month periods ended March 31,September 30, 2018, the service cost component of net periodic benefitpension cost is included in the same line items of our condensed consolidated financial statements as other employee compensation costs, and the net expense of $0.7 million and $2.1 million, respectively, related to all other components of net periodic benefitpension cost is included in other (expense) income on our condensed consolidated statements of operations and comprehensive income (loss). For the three monthsthree- and nine-month periods ended March 31,September 30, 2017, all components of net periodic benefitpension cost are included in the same line items of our condensed consolidated financial statements as other employee compensation costs.
In April 2018 and July 2018, we contributedmade cash contributions of $1.3 million in cashand $1.2 million, respectively, to our defined benefit plans, and expect to contribute an additional $2.6plans. In September 2018 we contributed $5.5 million in cash or shares of our common stockstock. We are not required to make additional contributions to our defined benefit plans in 2018. We expect to contribute approximately $0.5 millionillion to our unfunded supplemental executive retirement plan during 2018.
Note 8. Stockholders’9. Shareholders’ Equity
Stock-based Compensation Plans
We periodically grant restricted stock unit awards, performance-based share awards and shares of common stock to our employees and directors. We measure compensation cost for restricted stock units and stock grants at the closing price of our stock at the time of grant. We measure compensation cost for performance-based grants using a Monte Carlo simulation to estimate their value at grant date. Restricted stock unit and performance-based share grants vest after a specified period with compensation cost amortized over that period. Although we have no current plans to issue stock options, we may do so in the future.
In March 2018, the Board of Directors granted 1,237,369 shares of common stock to employees for payment of long-term incentive compensation for the period ended December 31, 2017. The shares were distributed in March 2018, and $4.9 million in expense related to the stock awards was recognized in the periods prior to March 31, 2018.
In June and August 2018, the Board of Directors granted the following restricted stock unit awards to employees resulting in a total expense of $7.0 million:
• | 1,854,054 restricted stock units, with one third of those vesting in June 2019, one third vesting in June 2020, and one third vesting in June 2021; | |
• | 96,604 restricted stock units, with one half of those vesting in June 2019 and one-half vesting in June 2020; and | |
• | 28,721 restricted stock units that vest in June 2019. |
An expense of $2.5 million related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the twelve months following the date of the award. An expense of $2.4 million related to the unit awards discussed above vesting in 2020 will be recognized on a straight-line basis over the twenty-four months following the date of the award. An expense of $2.2 million related to the unit awards discussed above vesting in 2021 will be recognized on a straight-line basis over the thirty-six-month period following the date of the award.
In June 2018, the Board of Directors granted performance-based share awards to certain executive employees. The value of the awards will be based on the ranking of the market performance of our common stock relative to the performance of the common stock of a group of peer companies over the three-year measurement period ending December 31, 2020. The number of shares to be issued will be based on the value of the awards divided by the share price at grant date. The expense related to the performance-based awards will be recognized on a straight-line base over the thirty months following the date of the award.
Stock-based compensation expense for vesting restricted stock unit and performance-based share grants to employees and shares issued to nonemployee directors totaled $1.1 million forrecorded in the first threenine months of 2018 and $1.3totaled $4.7 million, forcompared to $4.9 million in the first three months of 2017.same period last year.
In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.obligations and pays the obligations in cash. As a result, in the first threenine months of 2018 we withheld 335,349697,341 shares valued at approximately $1.2$2.7 million, or approximately $3.65$3.86 per share. In the first threenine months of 2017 we withheld 154,933588,240 shares valued at approximately $0.7$3.0 million, or approximately $4.67$5.09 per share.
Common Stock Dividends
In September 2011 and February 2012, our Board of Directors adopted a common stock dividend policy that has two components: (1) a dividend that links the amount of dividends on our common stock to our average quarterly realized silver price in the preceding quarter, and (2) a minimum annual dividend of $0.01 per share of common stock, in each case, payable quarterly, if and when declared. For illustrative purposes only, the table below summarizes potential per share dividend amounts at different quarterly average realized price levels according to the first component of the policy:
Quarterly average realized silver price per ounce | Quarterly dividend per share | Annualized dividend per share | |||||
$30 | $0.01 | $0.04 | |||||
$35 | $0.02 | $0.08 | |||||
$40 | $0.03 | $0.12 | |||||
$45 | $0.04 | $0.16 | |||||
$50 | $0.05 | $0.20 |
On May 9,November 6, 2018, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of approximately $1.0$1.2 million payable in JuneDecember 2018. Because the average realized silver price for the firstthird quarter of 2018 was $16.84$14.68 per ounce, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.
At-The-Market Equity Distribution Agreement
Pursuant to an equity distribution agreement dated February 23, 2016, we may issue and sell shares of our common stock from time to time through ordinary broker transactions having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. The terms of sales transactions under the agreement, including trading day(s), number of shares sold in the aggregate, number of shares sold per trading day, and the floor selling price per share, are proposed by us to the sales agent. 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 have any material inside information. The agreement can be terminated by us at any time. The shares issued under the equity distribution agreement are registered under the Securities Act of 1933, as amended, pursuant to our shelf registration statement on Form S-3, which was filed with the SEC on February 23, 2016. As of March 31,September 30, 2018, we had sold 4,608,8475,634,758 shares under the agreement for total proceeds of approximately $17.7$20.8 million, net of commissions of approximately $0.4$0.5 million. NoWe sold 1,025,911 shares were sold under the agreement during the firstthird quarter of 2018.2018 for total proceeds of $3.1 million, net of commissions of approximately $0.1 million.
Common Stock Repurchase Program
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,September 30, 2018, 934,100 shares have been purchased at an average price of $3.99 per share, leaving approximately 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at May 8,November 6, 2018, was $3.97$2.49 per share.
Warrants
As discussed in Note 14, we issued 4,136,000 warrants to purchase one share of Contents
Note 9.10. Debt, Credit FacilitiesFacility and Capital Leases
Senior Notes
On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and in 2014, an additional $6.5 million aggregate principal amount of the Senior Notes were issued to one of our pension plans. The Senior Notes were subsequently exchanged for substantially identical Senior Notes registered with the SEC. The Senior Notes are governed by the Indenture, dated as of April 12, 2013, as amended (the "Indenture"), among Hecla Mining Company ("Hecla") and certain of our subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from the initial offering of the Senior Notes ($490 million) were used to partially fund the acquisition of Aurizon and for general corporate purposes, including expenses related to the Aurizon acquisition.
The Senior Notes are recorded net of a 2% initial purchaser discount totaling $10 million at the time of the April 2013 issuance and having an unamortized balance of $4.0$3.3 million as of March 31,September 30, 2018. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on 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. During the threenine months ended March 31,September 30, 2018 and 2017, interest expense related to the Senior Notes and amortization of the initial purchaser discount and fees related to the issuance of the Senior Notes totaled $9.1$27.2 million and $8.1$26.3 million, respectively. The interest expense related to the Senior Notes for the threenine months ended March 31,September 30, 2017 was net of $0.9 million in capitalized interest, primarily related to the #4 Shaft project at our Lucky Friday unit which was completed in January 2017. Interest expense for the nine months ended September 30, 2017 also included $1.1 million in costs related to our private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.
The Senior Notes are guaranteed on a senior unsecured basis by certain of our subsidiaries (the "Guarantors"). The Senior Notes and the guarantees are, respectively, Hecla's and the Guarantors' general senior unsecured obligations and are subordinated to all of Hecla's and the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Senior Notes are effectively subordinated to all of the liabilities of Hecla's subsidiaries that are not guaranteeing the Senior Notes, to the extent of the assets of those subsidiaries.
The Senior Notes became redeemable in whole or in part, at any time and from time to time after May 1, 2016, on the redemption dates and at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.
Upon the occurrence of a change of control (as defined in the Indenture), each holder of Senior Notes will have the right to require us to purchase all or a portion of such holder's Senior Notes pursuant to a change of control offer (as defined in the Indenture), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase, subject to the rights of holders of the Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.
Ressources Québec Notes
On March 5, 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, a subsidiary of Investissment Québec, a financing arm of the Québec government. The RQ Notes were issued at a discount of 0.58%, or CAD$0.2 million, and bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018. The RQ Notes are senior and unsecured and are pari passu in all material respects with the Senior Notes, including with respect to guarantees of the RQ Notes by certain of our subsidiaries. The net proceeds from the RQ Notes are required to be used for development and expansion of our Casa Berardi mine. During the threenine months ended March 31,September 30, 2018, interest expense related to the RQ Notes, including discount and origination fees, totaled $0.4$1.1 million.
Credit Facilities
In May 2016,July 2018, we entered into a $100$200 million senior secured revolving credit facility withwhich replaced our previous $100 million credit facility and has a three-year term which was amended in July 2017 to extendending on June 14, 2022, provided, however, that if we do not refinance our outstanding Senior Notes due May 1, 2021 by November 1, 2020, the term until July 14,of the credit facility ends on November 1, 2020. The credit facility increased to $250 million in November 2018 upon satisfaction of certain conditions, including adding certain subsidiaries of Klondex as borrowers under the credit facility and pledging the assets of those subsidiaries as additional collateral under the credit facility. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture. This credit facility replaced our previous $100 million credit facility which had the same terms of collateral as described above. Below is information on the interest rates, standby fee, and financial covenant terms under our current credit facility:
facility in place as of September 30, 2018:
Interest rates: | |||||||||||
Spread over the London Interbank Offer Rate | 2.25 | - | 3.25% | ||||||||
Spread over the London Interbank Offered Rate | 2.25 | - | 3.25% | ||||||||
Spread over alternative base rate | 1.25 | - | 2.25% | 1.25 | - | 2.25% | |||||
Standby fee per annum on undrawn amounts | 0.50% | 0.50% | |||||||||
Covenant financial ratios: | |||||||||||
Senior leverage ratio (debt secured by liens/EBITDA) | not more than 2.50:1 | not more than 2.50:1 | |||||||||
Leverage ratio (total debt less unencumbered cash/EBITDA)(1) | not more than 4.00:1 | not more than 4.50:1 | |||||||||
Interest coverage ratio (EBITDA/interest expense) | not less than 3.00:1 | not less than 3.00:1 |
(1) The leverage ratio will change to 4.00:1 effective January 1, 2020.
We are also able to obtain letters of credit under the facility, and for any such letters we are required to pay a participation fee of between 2.25% and 3.25% based on our total leverage ratio, as well as a fronting fee to each issuing bank of 0.20% annually on the average daily dollar amount of any outstanding letters of credit. There were $2.6$3.0 million in letters of credit outstanding as of March 31,September 30, 2018.
We believe we were substantially in compliance with all covenants under the credit agreement and no amounts were outstanding as of March 31,September 30, 2018. We drew $47.0 million on the facility in July 2018 which we repaid in September 2018. With the exception of the $2.6$3.0 million in letters of credit outstanding, at March 31, 2018, we did not have nota balance drawn funds on the current revolving credit facility as of September 30, 2018.
As a result of the filing dateacquisition of this report.Klondex in July 2018 (see Note 14 for more information), we assumed Klondex's revolving credit facility balance outstanding of $35.0 million. We paid the $35.0 million balance, and the Klondex credit facility was terminated, in July 2018.
Capital Leases
We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday, and Casa Berardi and Nevada Operations units, which we have determined to be capital leases. At March 31,September 30, 2018, the total liability balance associated with the capital leases, including certain purchase option amounts, was $12.8$14.7 million, with $5.7$6.1 million of the liability classified as current and $7.1the remaining $8.6 million classified as non-current. At December 31, 2017, the total liability balance associated with capital leases was $11.8 million, with $5.6 million of the liability classified as current and $6.2 million classified as non-current. The total obligation for future minimum lease payments was $13.6$15.7 million at March 31,September 30, 2018, with $0.8$1.0 million attributed to interest.
At March 31,September 30, 2018, the annual maturities of capital lease commitments, including interest, wereare (in thousands):
Twelve-month period ending September 30, | ||||
2019 | $ | 6,182 | ||
2020 | 4,727 | |||
2021 | 3,543 | |||
2022 | 1,214 | |||
2023 | 9 | |||
Total | 15,675 | |||
Less: imputed interest | (1,019 | ) | ||
Net capital lease obligation | $ | 14,656 |
Twelve-month period ending March 31, | ||||
2019 | $ | 5,672 | ||
2020 | 3,771 | |||
2021 | 2,786 | |||
2022 | 1,361 | |||
Total | 13,590 | |||
Less: imputed interest | (826 | ) | ||
Net capital lease obligation | $ | 12,764 |
Note 10.11. Developments in Accounting Pronouncements
Accounting Standards Updates Adopted
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 deferred the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. We adopted ASU No. 2014-09 as of January 1, 2018 using the modified-retrospective transition approach. The impact of adoption of the update to our consolidated financial statements for the threenine months ended March 31,September 30, 2017 would have been a reclassification of $140 thousand$1.2 million in doré refining costs from sales of products to cost of sales and other direct production costs.
We performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it does not change the timing of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from doré are recognized, and the transaction price is known, at the time the metals sold are delivered to the customer. Concentrate revenues are generally recognized at the time of shipment. Concentrates sold at our Lucky Friday unit typically leave the mine and are received by the customer within the same day. There is a period of time between shipment of concentrates from our Greens Creek unit and their physical receipt by the customer. However, based on our assessment, we believe control of the concentrate parcels is generally obtained by the customer at the time of shipment.
Our concentrate sales involve variable consideration, as they are subject to changes in metals prices between the time of shipment and their final settlement. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and we then adjust the values each period until final settlement. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur.
Adoption of ASU No. 2014-09 involves additional disclosures, where applicable, onconcerning (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. See Note 67 for information on our sales of products.
In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires entities to measure equity investments that are not accounted for under the equity method at fair value, with any changes in fair value included in current earnings, and updates certain disclosure requirements. The update is effective for fiscal years beginning after December 15, 2017. We adopted ASU No. 2016-01 as of January 1, 2018 using the modified-retrospective approach, with a cumulative-effect adjustment from accumulated other comprehensive loss to retained deficit on our balance sheet of $1.3 million, net of the income tax effect.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We adopted this update as of January 1, 2018.
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We adopted this update as of January 1, 2018. Cash, cash equivalents, and restricted cash and cash equivalents on the condensed consolidated statement of cash flows includes restricted cash and cash equivalents of $1.0 million as of March 31,September 30, 2018 and December 31, 2017, $1.1 million as of September 30, 2017 and $2.2 million as of March 31, 2017 and December 31, 2016, as well as amounts previously reported for cash and cash equivalents.
In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We applied the applicable provisions of the update to our acquisition of Klondex in July 2018 (see Note 14), which was accounted for as a business acquisition, and will apply the applicable provisions of the update to any acquisitions occurring after the effective date.future acquisitions.
In March 2017, the FASB issued ASU No. 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Period Postretirement Benefit Cost. The update provides specific requirements for classification and disclosure regarding the service cost component and other components of net benefit cost related to pension plans. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We have implemented this update effective January 1, 2018. For the full year of 2018, a total net expense of approximately $2.8 million for the components of net benefit cost, except service cost, is expected to be included in other income (expense) on our consolidated statements of operations, and not reported in the same line items as other employee compensation costs.
Accounting Standards Updates to Become Effective in Future Periods
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently reviewing our leases and compiling the information required to implement the new guidance. See Note 910 for information on future commitments related to our operating leases; the present value of these leases will be recognized on our balance sheet upon implementation of the new guidance. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements, and simplify the application of existing hedge accounting guidance. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.
Note 11.12. Derivative Instruments
Foreign Currency
Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are U.S. dollar ("USD")-functional entities which routinely incur expenses denominated in Canadian dollardollars ("CAD") and Mexican pesopesos ("MXN"), respectively, and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of March 31,September 30, 2018, we have 120had 94 forward contracts outstanding to buy CAD$285.4225.1 million having a notional amount of US$174.0 million, and 30 forward contracts outstanding to buy MXN$178.5 million having a notional amount of USD$220.8 million, and 36 forward contracts outstanding to buy MXN$276.6 million having a notional amount of USD$13.98.8 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2018 through 2022 and have CAD-to-USDUSD-to-CAD exchange rates ranging between 1.2729 and 1.3360.1.3315. The MXN contracts are related to forecasted cash operating costs at San Sebastian forto be incurred from 2018 through 2020 and have MXN-to-USD exchange rates ranging between 19.175019.4400 and 20.8550. Our risk management policy allows forprovides that up to 75% of our planned cost exposure for five years into the future tomay be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.
As of March 31,September 30, 2018, we recorded the following balances for the fair value of the contracts:
a current asset of $1.1 million, which is included in other current assets;
a non-current asset of $2.0 million, which is included in other non-current assets; and
a current liability of $0.2 million, which is included in other current liabilities.
• | a current asset of $1.1 million, which is included in other current assets; | |
• | a non-current asset of $0.7 million, which is included in other non-current assets; and | |
• | a current liability of $0.1 million, which is included in other current liabilities. |
Net unrealized gains of approximately $3.0$1.5 million related to the effective portion of the hedges were included in accumulated other comprehensive incomeloss as of March 31, 2018, and are net of related deferred taxes.September 30, 2018. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $0.8 million in net unrealized gains included in accumulated other comprehensive incomeloss as of March 31,September 30, 2018 would be reclassified to current earnings in the next twelve months. Net realized gains of approximately $0.5$0.2 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the threenine months ended March 31,September 30, 2018. Net unrealized gains of approximately $15$19 thousand related to ineffectiveness of the hedges were included in gain (loss) on derivatives contracts on our consolidated statements of operations and comprehensive income (loss) for the threenine months ended March 31,September 30, 2018.
Metals Prices
At times, we may use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in the market. Our risk management policy allows for up to 75% of our planned metals price exposure for five years into the future, with certain other limitations, to be hedged under such programs. These instruments do, however, expose us to (i) credit risk in the form of non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.
We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, at times we currently use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments. These contracts are not designated as hedges and are marked-to-market through earnings each period.
As of March 31,September 30, 2018, we recorded the following balances for the fair value of the contracts:
a current asset of $0.3 million, which is included in other current assets;
a non-current asset of $0.3 million, which is included in other non-current assets;
a current liability of $6.8 million, which is included in other current liabilities and is net of $0.1 million for contracts in a fair value current asset position; and
a non-current liability of $0.3 million, which is included in other non-current liabilities and is net of $3.1 million for contracts in a fair value non-current asset position.
• | a current asset of $0.3 million, which is included in other current assets; and | |
• | a current liability of $0.6 million, which is included in other current liabilities and is net of $0.2 million for contracts in a fair value current asset position. |
We recognized a $0.6an $8.3 million net gain during the first quarternine months of 2018 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products. The net gain recognized on the contracts offsets losses related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.
We recognized a $4.0$40.3 million net gain during the first quarternine months of 2018 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net gain on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph. The net gain for the first quarternine months of 2018 is the result of decreasing zinc and lead prices. During the third quarter of 2018, we settled, prior to their maturity date, contracts in a gain position for cash proceeds to us of approximately $32.8 million. As a result, there were no metals committed under contracts on forecasted sales as of September 30, 2018. This program, when utilized, is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below). When those prices increase compared to the contracts, we incur losses on the contracts.
The following tables summarize the quantities of metals committed under forward sales contracts at March 31,September 30, 2018 and December 31, 2017:
March 31, 2018 | Ounces/pounds under contract (in 000's) | Average price per ounce/pound | ||||||||||||||||||||||||||||||
Silver | Gold | Zinc | Lead | Silver | Gold | Zinc | Lead | |||||||||||||||||||||||||
(ounces) | (ounces) | (pounds) | (pounds) | (ounces) | (ounces) | (pounds) | (pounds) | |||||||||||||||||||||||||
Contracts on provisional sales | ||||||||||||||||||||||||||||||||
2018 settlements | 543 | 2 | 7,385 | — | $ | 16.91 | $ | 1,342 | $ | 1.52 | N/A | |||||||||||||||||||||
Contracts on forecasted sales | ||||||||||||||||||||||||||||||||
2018 settlements | — | — | 26,841 | 15,598 | N/A | N/A | $ | 1.23 | $ | 1.07 | ||||||||||||||||||||||
2019 settlements | — | — | 48,502 | 20,283 | N/A | N/A | $ | 1.40 | $ | 1.10 | ||||||||||||||||||||||
2020 settlements | — | — | 42,329 | 19,401 | N/A | N/A | $ | 1.40 | $ | 1.13 |
September 30, 2018 | Ounces/pounds under contract (in 000's) | Average price per ounce/pound | ||||||||||||||||||||||||||||||
Silver | Gold | Zinc | Lead | Silver | Gold | Zinc | Lead | |||||||||||||||||||||||||
(ounces) | (ounces) | (pounds) | (pounds) | (ounces) | (ounces) | (pounds) | (pounds) | |||||||||||||||||||||||||
Contracts on provisional sales | ||||||||||||||||||||||||||||||||
2018 settlements | 1,221 | 6 | 10,362 | 4,685 | $ | 14.56 | $ | 1,211 | $ | 1.17 | $ | 0.94 |
December 31, 2017 | Ounces/pounds under contract (in 000's) | Average price per ounce/pound | ||||||||||||||||||||||||||||||
Silver | Gold | Zinc | Lead | Silver | Gold | Zinc | Lead | |||||||||||||||||||||||||
(ounces) | (ounces) | (pounds) | (pounds) | (ounces) | (ounces) | (pounds) | (pounds) | |||||||||||||||||||||||||
Contracts on provisional sales | ||||||||||||||||||||||||||||||||
2018 settlements | 1,447 | 5 | 21,550 | 4,740 | $ | 16.64 | $ | 1,279 | $ | 1.45 | $ | 1.11 | ||||||||||||||||||||
Contracts on forecasted sales | ||||||||||||||||||||||||||||||||
2018 settlements | — | — | 32,187 | 16,645 | N/A | N/A | $ | 1.29 | $ | 1.06 | ||||||||||||||||||||||
2019 settlements | — | — | 23,589 | 18,078 | N/A | N/A | $ | 1.33 | $ | 1.09 | ||||||||||||||||||||||
2020 settlements | — | — | 3,307 | 2,866 | N/A | N/A | $ | 1.27 | $ | 1.08 |
Credit-risk-related Contingent Features
Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contracts.contract. As of March 31,September 30, 2018, we have not posted any collateral related to these agreements.contracts. The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $10.9$1.0 million as of March 31,September 30, 2018. If we were in breach of any of these provisions at March 31,September 30, 2018, we could have been required to settle our obligations under the agreements at their termination value of $10.9$1.0 million.
Note 12.13. Fair Value Measurement
The table below sets forth our assets and liabilities that were accounted for at fair value on a recurring basis and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category (in thousands).
Description | Balance at March 31, 2018 | Balance at December 31, 2017 | Input Hierarchy Level | Balance at September 30, 2018 | Balance at December 31, 2017 | Input Hierarchy Level | ||||||||||||
Assets: | ||||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||
Money market funds and other bank deposits | $ | 212,569 | $ | 186,107 | Level 1 | $ | 60,856 | $ | 186,107 | Level 1 | ||||||||
Available for sale securities: | ||||||||||||||||||
Debt securities – municipal and corporate bonds | 34,358 | 33,758 | Level 2 | |||||||||||||||
Debt securities - municipal and corporate bonds | — | 33,758 | Level 2 | |||||||||||||||
Equity securities – mining industry | 7,652 | 7,561 | Level 1 | 7,190 | 7,561 | Level 1 | ||||||||||||
Trade accounts receivable: | ||||||||||||||||||
Receivables from provisional concentrate sales | 19,713 | 14,805 | Level 2 | 12,947 | 14,805 | Level 2 | ||||||||||||
Restricted cash balances: | ||||||||||||||||||
Certificates of deposit and other bank deposits | 1,005 | 1,032 | Level 1 | 1,010 | 1,032 | Level 1 | ||||||||||||
Derivative contracts: | ||||||||||||||||||
Foreign exchange contracts | 1,760 | 4,943 | Level 2 | |||||||||||||||
Metal forward contracts | 630 | — | Level 2 | 282 | — | Level 2 | ||||||||||||
Foreign exchange contracts | 3,122 | 4,943 | Level 2 | |||||||||||||||
Total assets | $ | 279,049 | $ | 248,206 | $ | 84,045 | $ | 248,206 | ||||||||||
Liabilities: | ||||||||||||||||||
Derivative contracts: | ||||||||||||||||||
Foreign exchange contracts | $ | 136 | $ | — | Level 2 | |||||||||||||
Metal forward contracts | $ | 7,066 | $ | 15,531 | Level 2 | 604 | 15,531 | Level 2 | ||||||||||
Foreign exchange contracts | 248 | — | Level 2 | |||||||||||||||
Total Liabilities | $ | 7,314 | $ | 15,531 | ||||||||||||||
Total liabilities | $ | 740 | $ | 15,531 |
Cash and cash equivalents consist primarily of money market funds and are valued at cost, which approximates fair value, and a small portion consists of municipal bonds having maturities of less than 90 days, which are recorded at fair value.
Current available-for-sale securities consist of municipal and corporate bonds having maturities of more than 90 days, which are recorded at fair value.
Current and non-current restricted cash balances consist primarily of certificates of deposit, U.S. Treasury securities, and other deposits and are valued at cost, which approximates fair value.
Our non-current available for sale securities consist of marketable equity securities of companies in the mining industry which are valued using quoted market prices for each security.
Trade accounts receivable include amounts due to us for shipments of concentrates doré and precipitatedoré sold to customers. Revenues and the corresponding accounts receivable for sales of metals products are recorded when title and risk of loss transfer to the customer (generally at the time of ship loading, or at the time of customer arrival for trucked products). Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment. Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals. We estimate the prices at which sales of our concentrates will be settled due to the time elapsed between shipment and final settlement with the customer. Receivables for previously recorded concentrate sales are adjusted to reflect estimated forward metals prices at the end of each period until final settlement by the customer. We obtain the forward metals prices used each period from a pricing service. Changes in metalmetals prices between shipment and final settlement result in changes to revenues previously recorded upon shipment. The embedded derivative contained in our concentrate sales is adjusted to fair market value through earnings each period prior to final settlement.
We use financially-settled forward contracts to manage exposure to changes in the exchange rate between the USD and CAD and MXN, and the impact on CAD- and MXN-denominated operating costs incurred at our Casa Berardi and San Sebastian units (see Note 1112 for more information). These contracts qualify for hedge accounting, with unrealized gains and losses related to the effective portion of the contracts included in accumulated other comprehensive loss, and unrealized gains and losses related to the ineffective portion of the contracts included in earnings each period. The fair value of each contract represents the present value of the difference between the forward exchange rate for the contract settlement period as of the measurement date and the contract settlement exchange rate.
We use financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments that have not reached final settlement. We also use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead contained in our forecasted future concentrate shipments (see Note 1112 for more information). These contracts do not qualify for hedge accounting, and are marked-to-market through earnings each period. The fair value of each contract represents the present value of the difference between the forward metal price for the contract settlement period as of the measurement date and the contract settlement metal price.
Our Senior Notes, which were recorded at their carrying value of $502.5$503.2 million, net of unamortized initial purchaser discount at March 31,September 30, 2018 of $3.3 million, had a fair value of $516.6$511.4 million at March 31,September 30, 2018. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 910 for more information.
Note 13.14. Acquisition of Klondex Mines Ltd.
On March 16,July 20, 2018, we and Klondex Mines Ltd. ("Klondex") entered into an agreement pursuant to which we would acquireacquired all of the issued and outstanding common shares of Klondex Mines Ltd. ("Klondex") for consideration valued at $2.47$2.24 per Klondex share (the "Arrangement"). The acquisition resulted in our 100% ownership of three producing gold mines, along with interests in various gold exploration properties, in northern Nevada. The acquisition is expected to increase our annual gold production, gives us ownership of operating gold mines and identified gold reserves and other mineralized material, and provides access to a large land package with known mineralization. Under the terms of the Arrangement, each holder of Klondex common shares may electhad the option to receive either (i) $2.47 in cash (the “Cash Alternative”), (ii) 0.6272 of a Hecla share per Klondex share (the “Share Alternative”), or (iii) US $0.8411US$0.8411 in cash and 0.4136 of a Hecla share per Klondex share (the “Combined Alternative”), subject in the case of the Cash Alternative and the Share Alternative to pro-ration based on a maximum cash consideration of $157.4$153.2 million and a maximum number of Hecla shares issued of 77,411,859. If all75,276,176. Klondex shareholders elect either the Cash Alternative or the Share Alternative, each Klondex shareholder would be entitled to receive US$0.8411 in cash and 0.4136 Hecla shares. Klondex shareholders would also receivereceived shares of a newly formed company which would holdholds the Canadian assets of Klondex.previously owned by Klondex (Havilah Mining Corporation (“Havilah”)). Klondex had 179,668,072180,499,319 issued and outstanding common shares asprior to consummation of May 7, 2018.the Arrangement. An additional 7,476,9241,549,626 Klondex common shares would bewere issued immediately prior to consummation of the proposed Arrangement related to conversion of in-the-money Klondex share options and warrants and certain outstanding restricted share units, resulting in a total of 187,144,996182,048,945 issued and outstanding Klondex common shares at the time of consummation of the Arrangement. In connection with the Arrangement, we also issued an aggregate of 4,136,000 warrants to purchase one share of our common stock (“Hecla Warrants”) to holders of warrants to purchase Klondex common shares. Of the Hecla Warrants, 2,068,000 have an exercise price of $8.02 and expire in April 2032, and 2,068,000 have an exercise price of $1.57 and expire in February 2029. In addition, we settled share-based payment awards held by Klondex directors and employees for cash of $2.0 million. Consideration for the Arrangement was cash of $161.7 million, 75,276,176 shares of our common stock valued at $242.4 million, and issuance of the Hecla Warrants valued at $10.2 million, for total consideration of $414.2 million. The actualcash consideration includes $7.0 million for our subscription for common shares of Havilah and $1.5 million for settlement of certain equity compensation instruments.
The following summarizes the preliminary allocation of purchase price to the fair value of consideration transferred will be based in part on the market priceassets acquired and liabilities assumed as of Hecla's common stock on the date of acquisition (in thousands):
Consideration: | ||||
Cash payments | $ | 161,704 | ||
Hecla stock issued (75,276,176 shares at $3.22 per share) | 242,389 | |||
Hecla warrants issued | 10,155 | |||
Total consideration | $ | 414,248 | ||
Fair value of net assets acquired: | ||||
Assets: | ||||
Cash | $ | 12,874 | ||
Accounts receivable | 3,453 | |||
Inventory - supplies | 6,564 | |||
Inventory - finished goods, in-process material and stockpiled ore | 10,302 | |||
Other current assets | 2,583 | |||
Properties, plants, equipment and mineral interests | 502,285 | |||
Non-current investments | 1,596 | |||
Non-current restricted cash and investments | 9,504 | |||
Total assets | 549,161 | |||
Liabilities: | ||||
Accounts payable and accrued liabilities | 17,270 | |||
Accrued payroll and related benefits | 10,352 | |||
Accrued taxes | 421 | |||
Lease liability | 2,080 | |||
Debt | 35,086 | |||
Asset retirement obligation | 19,571 | |||
Deferred tax liability | 50,133 | |||
Total liabilities | 134,913 | |||
Net assets | $ | 414,248 |
We do not believe there are any specific elements of the Arrangementallocation of purchase price above that are subject to change. However, the overall allocation is consummated. Based on the 60-day volume-weighted average price at the time of announcement on March 19, 2018 of $3.94 per share, total consideration would be $462.3 million. A 10% change in the price per share of Hecla stock would result in a $30.5 million change in the amount of total consideration transferred in the Arrangement. The closing price of Hecla’s common stock was $3.97 at May 8, 2018. The Arrangementpreliminary and is subject to approvalchange.
Our results for the nine months ended September 30, 2018 include sales of products of $11.5 million and a net loss of $10.1 million since the acquisition date related to the operations acquired through the Arrangement.
The unaudited pro forma financial information below represents the combined results of our operations as if the acquisition had occurred at least 66 2/3%the beginning of the votes to be cast by Klondex shareholders.
Under the proposed Arrangement, we would also subscribeperiods presented. The unaudited pro forma financial information is presented for US$7.0 million of common sharesinformational purposes only and is not indicative of the new company whichresults of operations that would holdhave occurred if the Canadian assetsacquisition had taken place at the beginning of Klondex.the periods presented, nor is it indicative of future operating results.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Sales | $ | 156,731 | $ | 182,489 | $ | 543,741 | $ | 573,950 | ||||||||
Net (loss) income | (20,735 | ) | (8,877 | ) | 4,694 | 2,523 | ||||||||||
(Loss) income applicable to common shareholders | (20,873 | ) | (9,015 | ) | 4,280 | (2,937 | ) | |||||||||
Basic and diluted (loss) income per common share | (0.04 | ) | (0.02 | ) | 0.01 | (0.01 | ) |
The pro forma financial information includes adjustments to eliminate amounts related to the Canadian assets previously owned by Klondex, which were transferred to Havilah and not acquired by us, and costs related to the acquisition.
Note 14.15. Guarantor Subsidiaries
Presented below are Hecla’s unaudited interim condensed consolidating financial statements as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended, resulting from the guarantees by certain of Hecla's subsidiaries (the "Guarantors") of the Senior Notes and the RQ Notes (see Note 910 for more information). The Guarantors consist of the following of Hecla's 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Mines Management, Inc.; Newhi, Corp.Inc.; Montanore Minerals Corp.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; and Hecla Juneau Mining Company. By November 30, 2018, we expect to add as Guarantors our new domestic Klondex subsidiaries. We completed the initial offering of the Senior Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014. We issued the RQ Notes onin March 5, 2018.
The unaudited interim condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited interim condensed consolidated financial statements set forth elsewhere in this report. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate Hecla, the Guarantors, and our non-guarantor subsidiaries are reflected in the intercompany eliminations column. In the course of preparing consolidated financial statements, we eliminate the effects of various transactions conducted between Hecla and its subsidiaries and among the subsidiaries. While valid at an individual subsidiary level, such activities are eliminated in consolidation because, when taken as a whole, they do not represent business activity with third-party customers, vendors, and other parties. Examples of such eliminations include the following:
• | Investments in subsidiaries. The acquisition of a company results in an investment in debt or equity capital on the records of the parent company and a contribution to debt or equity capital on the records of the subsidiary. Such investments and capital contributions are eliminated in consolidation. |
• | Capital contributions. Certain of Hecla's subsidiaries do not generate cash flow, either at all or sufficient to meet their capital needs, and their cash requirements are routinely met with inter-company advances from their parent companies. On at least an annual basis, when not otherwise intended as debt, the boards of directors of such parent companies declare contributions of capital to their subsidiary companies, which increase the parents' investment and the subsidiaries' additional paid-in capital. In consolidation, investments in subsidiaries and related additional paid-in capital are eliminated. |
• | Debt. Inter-company debt agreements have been established between certain of Hecla's subsidiaries and their parents. The related debt liability and receivable balances, accrued interest expense (if any) and income activity (if any), and payments of principal and accrued interest amounts (if any) by the subsidiary companies to their parents are eliminated in consolidation. |
• | Dividends. Certain of Hecla's subsidiaries which generate cash flow routinely provide cash to their parent companies through inter-company transfers. On at least an annual basis, the boards of directors of such subsidiary companies declare dividends to their parent companies, which reduces the subsidiaries' retained earnings and increases the parents' dividend income. In consolidation, such activity is eliminated. |
• | Deferred taxes. Our ability to realize deferred tax assets and liabilities is considered on a consolidated basis for subsidiaries within the United States, with all subsidiaries' estimated future taxable income contributing to the ability to realize all such assets and liabilities. However, when Hecla's subsidiaries are viewed independently, we use the separate return method to assess the realizability of each subsidiary's deferred tax assets and whether a valuation allowance is required against such deferred tax assets. In some instances, a parent company or subsidiary may possess deferred tax assets whose realization depends on the future taxable incomes of other subsidiaries on a consolidated-return basis, but would not be considered realizable if such parent or subsidiary filed on a separate stand-alone basis. In such a situation, a valuation allowance is assessed on that subsidiary's deferred tax assets, with the resulting adjustment reported in the eliminations column of the guarantor and parent's financial statements, as is the case in the unaudited interim financial statements set forth below. The separate return method can result in significant eliminations of deferred tax assets and liabilities and related income tax provisions and benefits. Non-current deferred tax asset balances are included in other non-current assets on the consolidating balance sheets and make up a large portion of that item, particularly for the guarantor balances. |
Separate financial statements of the Guarantors are not presented because the guarantees by the Guarantors are joint and several and full and unconditional, except for certain customary release provisions, including: (1) the sale or disposal of all or substantially all of the assets of the Guarantor; (2) the sale or other disposition of the capital stock of the Guarantor; (3) the Guarantor is designated as an unrestricted entity in accordance with the applicable provisions of the indenture; (4) Hecla ceases to be a borrower as defined in the indenture; and (5) upon legal or covenant defeasance or satisfaction and discharge of the indenture.
Unaudited Interim
Condensed Consolidating Balance Sheets
As of March 31, 2018 | As of September 30, 2018 | |||||||||||||||||||||||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 137,504 | $ | 21,096 | $ | 53,969 | $ | — | $ | 212,569 | $ | 28,081 | $ | 6,198 | $ | 26,577 | $ | — | $ | 60,856 | ||||||||||||||||||||
Other current assets | 48,067 | 55,771 | 49,767 | (69 | ) | 153,536 | 15,219 | 42,515 | 79,807 | (68 | ) | 137,473 | ||||||||||||||||||||||||||||
Properties, plants, and equipment - net | 1,934 | 1,241,325 | 765,445 | — | 2,008,704 | 1,920 | 1,246,274 | 1,239,235 | — | 2,487,429 | ||||||||||||||||||||||||||||||
Intercompany receivable (payable) | 293,972 | (163,503 | ) | (338,811 | ) | 208,342 | — | 256,831 | (222,897 | ) | (138,477 | ) | 104,543 | — | ||||||||||||||||||||||||||
Investments in subsidiaries | 1,373,604 | — | — | (1,373,604 | ) | — | 1,767,234 | — | — | (1,767,234 | ) | — | ||||||||||||||||||||||||||||
Other non-current assets | 13,807 | 7,370 | 8,325 | (6,220 | ) | 23,282 | 149,034 | 4,390 | 11,670 | (140,594 | ) | 24,500 | ||||||||||||||||||||||||||||
Total assets | $ | 1,868,888 | $ | 1,162,059 | $ | 538,695 | $ | (1,171,551 | ) | $ | 2,398,091 | $ | 2,218,319 | $ | 1,076,480 | $ | 1,218,812 | $ | (1,803,353 | ) | $ | 2,710,258 | ||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
Current liabilities | $ | (203,947 | ) | $ | 67,735 | $ | 38,776 | $ | 213,370 | $ | 115,934 | $ | (79,535 | ) | $ | 77,328 | $ | 55,389 | $ | 79,274 | $ | 132,456 | ||||||||||||||||||
Long-term debt | 533,566 | 3,682 | 3,412 | — | 540,660 | 534,067 | 4,911 | 137,938 | (134,211 | ) | 542,705 | |||||||||||||||||||||||||||||
Non-current portion of accrued reclamation | — | 66,614 | 12,273 | — | 78,887 | — | 67,145 | 32,169 | — | 99,314 | ||||||||||||||||||||||||||||||
Non-current deferred tax liability | — | 11,630 | 116,553 | (11,317 | ) | 116,866 | — | 16,497 | 159,613 | (11,182 | ) | 164,928 | ||||||||||||||||||||||||||||
Other non-current liabilities | 44,768 | 5,384 | 1,091 | — | 51,243 | 41,718 | 5,784 | 1,284 | — | 48,786 | ||||||||||||||||||||||||||||||
Stockholders' equity | 1,494,501 | 1,007,014 | 366,590 | (1,373,604 | ) | 1,494,501 | ||||||||||||||||||||||||||||||||||
Shareholders' equity | 1,722,069 | 904,815 | 862,419 | (1,767,234 | ) | 1,722,069 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,868,888 | $ | 1,162,059 | $ | 538,695 | $ | (1,171,551 | ) | $ | 2,398,091 | $ | 2,218,319 | $ | 1,076,480 | $ | 1,248,812 | $ | (1,833,353 | ) | $ | 2,710,258 |
As of December 31, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 103,878 | $ | 31,016 | $ | 51,213 | $ | — | $ | 186,107 | ||||||||||
Other current assets | 47,555 | 47,608 | 40,541 | (575 | ) | 135,129 | ||||||||||||||
Properties, plants, and equipment - net | 1,946 | 1,244,161 | 753,204 | — | 1,999,311 | |||||||||||||||
Intercompany receivable (payable) | 287,310 | (177,438 | ) | (341,182 | ) | 231,310 | — | |||||||||||||
Investments in subsidiaries | 1,358,025 | — | — | (1,358,025 | ) | — | ||||||||||||||
Other non-current assets | 14,409 | 7,289 | 9,283 | (6,370 | ) | 24,611 | ||||||||||||||
Total assets | $ | 1,813,123 | $ | 1,152,636 | $ | 513,059 | $ | (1,133,660 | ) | $ | 2,345,158 | |||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||
Current liabilities | $ | (226,576 | ) | $ | 66,550 | $ | 37,671 | $ | 234,485 | $ | 112,130 | |||||||||
Long-term debt | 502,229 | 2,303 | 3,890 | — | 508,422 | |||||||||||||||
Non-current portion of accrued reclamation | — | 67,565 | 11,801 | — | 79,366 | |||||||||||||||
Non-current deferred tax liability | — | 10,120 | 124,352 | (10,120 | ) | 124,352 | ||||||||||||||
Other non-current liabilities | 53,588 | 5,185 | 838 | — | 59,611 | |||||||||||||||
Stockholders' equity | 1,483,882 | 1,000,913 | 334,507 | (1,358,025 | ) | 1,461,277 | ||||||||||||||
Total liabilities and stockholders' equity | $ | 1,813,123 | $ | 1,152,636 | $ | 513,059 | $ | (1,133,660 | ) | $ | 2,345,158 |
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2018 | ||||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | 5,020 | $ | 60,155 | $ | 78,474 | $ | — | $ | 143,649 | ||||||||||
Cost of sales | (157 | ) | (39,733 | ) | (53,719 | ) | — | (93,609 | ) | |||||||||||
Depreciation, depletion, amortization | — | (12,427 | ) | (31,037 | ) | — | (43,464 | ) | ||||||||||||
General and administrative | (4,802 | ) | (4,866 | ) | (659 | ) | — | (10,327 | ) | |||||||||||
Exploration and pre-development | (1 | ) | (4,056 | ) | (9,549 | ) | — | (13,606 | ) | |||||||||||
Research and development | — | (444 | ) | (825 | ) | — | (1,269 | ) | ||||||||||||
Loss on derivative contracts | 19,460 | — | — | — | 19,460 | |||||||||||||||
Foreign exchange gain (loss) | 4,640 | 74 | (6,926 | ) | — | (2,212 | ) | |||||||||||||
Lucky Friday suspension-related costs | — | (5,388 | ) | (1,131 | ) | — | (6,519 | ) | ||||||||||||
Acquisition costs | (5,741 | ) | (245 | ) | (153 | ) | — | (6,139 | ) | |||||||||||
Equity in earnings of subsidiaries | (54,618 | ) | — | — | 54,618 | — | ||||||||||||||
Other (expense) income | 13,016 | 881 | (5,900 | ) | (19,824 | ) | (11,827 | ) | ||||||||||||
Income (loss) before income taxes | (23,183 | ) | (6,049 | ) | (31,425 | ) | 34,794 | (25,863 | ) | |||||||||||
(Provision) benefit from income taxes | (1 | ) | (18,552 | ) | 1,408 | 19,824 | 2,679 | |||||||||||||
Net income (loss) | (23,184 | ) | (24,601 | ) | (30,017 | ) | 54,618 | (23,184 | ) | |||||||||||
Preferred stock dividends | (138 | ) | — | — | — | (138 | ) | |||||||||||||
Income (loss) applicable to common shareholders | (23,322 | ) | (24,601 | ) | (30,017 | ) | 54,618 | (23,322 | ) | |||||||||||
Net income (loss) | (23,184 | ) | (24,601 | ) | (30,017 | ) | 54,618 | (23,184 | ) | |||||||||||
Changes in comprehensive income (loss) | 3,746 | — | 3 | (3 | ) | 3,746 | ||||||||||||||
Comprehensive income (loss) | $ | (19,438 | ) | $ | (24,601 | ) | $ | (30,014 | ) | $ | 54,615 | $ | (19,438 | ) |
As of December 31, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 103,878 | $ | 31,016 | $ | 51,213 | $ | — | $ | 186,107 | ||||||||||
Other current assets | 47,555 | 47,608 | 39,630 | (575 | ) | 134,218 | ||||||||||||||
Properties, plants, and equipment - net | 1,946 | 1,244,161 | 773,914 | — | 2,020,021 | |||||||||||||||
Intercompany receivable (payable) | 287,310 | (177,438 | ) | (341,182 | ) | 231,310 | — | |||||||||||||
Investments in subsidiaries | 1,358,025 | — | — | (1,358,025 | ) | — | ||||||||||||||
Other non-current assets | 14,409 | 7,289 | 9,283 | (6,370 | ) | 24,611 | ||||||||||||||
Total assets | $ | 1,813,123 | $ | 1,152,636 | $ | 532,858 | $ | (1,133,660 | ) | $ | 2,364,957 | |||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||
Current liabilities | $ | (226,576 | ) | $ | 66,550 | $ | 37,671 | $ | 234,485 | $ | 112,130 | |||||||||
Long-term debt | 502,229 | 2,303 | 3,890 | — | 508,422 | |||||||||||||||
Non-current portion of accrued reclamation | — | 67,565 | 11,801 | — | 79,366 | |||||||||||||||
Non-current deferred tax liability | — | 10,120 | 121,546 | (10,120 | ) | 121,546 | ||||||||||||||
Other non-current liabilities | 53,588 | 5,185 | 838 | — | 59,611 | |||||||||||||||
Stockholders' equity | 1,483,882 | 1,000,913 | 357,112 | (1,358,025 | ) | 1,483,882 | ||||||||||||||
Total liabilities and stockholders' equity | $ | 1,813,123 | $ | 1,152,636 | $ | 532,858 | $ | (1,133,660 | ) | $ | 2,364,957 |
Nine Months Ended September 30, 2018 | ||||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | 8,332 | $ | 205,563 | $ | 216,722 | $ | — | $ | 430,617 | ||||||||||
Cost of sales | 245 | (111,923 | ) | (135,240 | ) | — | (246,918 | ) | ||||||||||||
Depreciation, depletion, amortization | — | (35,683 | ) | (67,652 | ) | — | (103,335 | ) | ||||||||||||
General and administrative | (13,250 | ) | (12,916 | ) | (1,683 | ) | — | (27,849 | ) | |||||||||||
Exploration and pre-development | (128 | ) | (9,059 | ) | (22,037 | ) | — | (31,224 | ) | |||||||||||
Research and development | — | (2,505 | ) | (2,537 | ) | — | (5,042 | ) | ||||||||||||
Loss on derivative contracts | 40,271 | — | — | — | 40,271 | |||||||||||||||
Foreign exchange gain (loss) | (9,795 | ) | — | 12,651 | — | 2,856 | ||||||||||||||
Lucky Friday suspension-related costs | — | (17,206 | ) | (1,131 | ) | — | (18,337 | ) | ||||||||||||
Acquisition costs | (9,041 | ) | (313 | ) | (302 | ) | — | (9,656 | ) | |||||||||||
Equity in earnings of subsidiaries | (31,105 | ) | — | — | 31,105 | — | ||||||||||||||
Other (expense) income | 11,602 | (2,512 | ) | (15,801 | ) | (29,026 | ) | (35,737 | ) | |||||||||||
Income (loss) before income taxes | (2,869 | ) | 13,446 | (17,010 | ) | 2,079 | (4,354 | ) | ||||||||||||
(Provision) benefit from income taxes | (1 | ) | (27,755 | ) | 214 | 29,026 | 1,484 | |||||||||||||
Net income (loss) | (2,870 | ) | (14,309 | ) | (16,796 | ) | 31,105 | (2,870 | ) | |||||||||||
Preferred stock dividends | (414 | ) | — | — | — | (414 | ) | |||||||||||||
Income (loss) applicable to common shareholders | (3,284 | ) | (14,309 | ) | (16,796 | ) | 31,105 | (3,284 | ) | |||||||||||
Net income (loss) | (2,870 | ) | (14,309 | ) | (16,796 | ) | 31,105 | (2,870 | ) | |||||||||||
Changes in comprehensive income (loss) | (3,520 | ) | — | 41 | (41 | ) | (3,520 | ) | ||||||||||||
Comprehensive income (loss) | $ | (6,390 | ) | $ | (14,309 | ) | $ | (16,755 | ) | $ | 31,064 | $ | (6,390 | ) |
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | (626 | ) | $ | 61,887 | $ | 79,578 | $ | — | $ | 140,839 | |||||||||
Cost of sales | 687 | (29,320 | ) | (39,725 | ) | — | (68,358 | ) | ||||||||||||
Depreciation, depletion, amortization | — | (12,607 | ) | (16,911 | ) | — | (29,518 | ) | ||||||||||||
General and administrative | (4,217 | ) | (4,464 | ) | (848 | ) | — | (9,529 | ) | |||||||||||
Exploration and pre-development | (129 | ) | (4,339 | ) | (4,544 | ) | — | (9,012 | ) | |||||||||||
Research and development | — | (1,130 | ) | — | — | (1,130 | ) | |||||||||||||
Gain on derivative contracts | (11,226 | ) | — | — | — | (11,226 | ) | |||||||||||||
Foreign exchange gain (loss) | 12,153 | — | (17,070 | ) | — | (4,917 | ) | |||||||||||||
Lucky Friday suspension costs | — | (4,780 | ) | — | — | (4,780 | ) | |||||||||||||
Equity in earnings of subsidiaries | (7,369 | ) | — | — | 7,369 | — | ||||||||||||||
Other expense | 11,041 | 1,202 | (4,676 | ) | (14,752 | ) | (7,185 | ) | ||||||||||||
Income (loss) before income taxes | 314 | 6,449 | (4,196 | ) | (7,383 | ) | (4,816 | ) | ||||||||||||
(Provision) benefit from income taxes | — | (1,338 | ) | (8,284 | ) | 14,752 | 5,130 | |||||||||||||
Net income (loss) | 314 | 5,111 | (12,480 | ) | 7,369 | 314 | ||||||||||||||
Preferred stock dividends | (138 | ) | — | — | — | (138 | ) | |||||||||||||
Income (loss) applicable to common shareholders | 176 | 5,111 | (12,480 | ) | 7,369 | 176 | ||||||||||||||
Net income (loss) | 314 | 5,111 | (12,480 | ) | 7,369 | 314 | ||||||||||||||
Changes in comprehensive income (loss) | 7,636 | — | 1,022 | (1,022 | ) | 7,636 | ||||||||||||||
Comprehensive income (loss) | $ | 7,950 | $ | 5,111 | $ | (11,458 | ) | $ | 6,347 | $ | 7,950 |
Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | (3,912 | ) | $ | 215,184 | $ | 206,390 | $ | — | $ | 417,662 | |||||||||
Cost of sales | 353 | (112,908 | ) | (111,982 | ) | — | (224,537 | ) | ||||||||||||
Depreciation, depletion, amortization | — | (41,875 | ) | (45,111 | ) | — | (86,986 | ) | ||||||||||||
General and administrative | (16,407 | ) | (10,877 | ) | (1,760 | ) | — | (29,044 | ) | |||||||||||
Exploration and pre-development | (439 | ) | (8,736 | ) | (12,508 | ) | — | (21,683 | ) | |||||||||||
Research and development | — | (2,125 | ) | — | — | (2,125 | ) | |||||||||||||
Gain/(loss) on derivative contracts | (16,548 | ) | — | — | — | (16,548 | ) | |||||||||||||
Foreign exchange gain (loss) | 22,286 | (43 | ) | (32,501 | ) | — | (10,258 | ) | ||||||||||||
Lucky Friday suspension costs | — | (14,385 | ) | — |
| — | (14,385 | ) | ||||||||||||
Equity in earnings of subsidiaries | (9,708 | ) | — | — | 9,708 | — | ||||||||||||||
Other (expense) income | 24,822 | (1,207 | ) | (14,146 | ) | (38,682 | ) | (29,213 | ) | |||||||||||
Income (loss) before income taxes | 447 | 23,028 | (11,618 | ) | (28,974 | ) | (17,117 | ) | ||||||||||||
(Provision) benefit from income taxes | — | (9,239 | ) | (11,879 | ) | 38,682 | 17,564 | |||||||||||||
Net income (loss) | 447 | 13,789 | (23,497 | ) | 9,708 | 447 | ||||||||||||||
Preferred stock dividends | (414 | ) | — | — | — | (414 | ) | |||||||||||||
Income (loss) applicable to common shareholders | 33 | 13,789 | (23,497 | ) | 9,708 | 33 | ||||||||||||||
Net income (loss) | 447 | 13,789 | (23,497 | ) | 9,708 | 447 | ||||||||||||||
Changes in comprehensive income (loss) | 13,718 | — | 1,780 | (1,780 | ) | 13,718 | ||||||||||||||
Comprehensive income (loss) | $ | 14,165 | $ | 13,789 | $ | (21,717 | ) | $ | 7,928 | $ | 14,165 |
Unaudited Interim Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2018 | ||||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | 615 | $ | 70,211 | $ | 68,883 | $ | — | $ | 139,709 | ||||||||||
Cost of sales | 475 | (34,701 | ) | (38,643 | ) | — | (72,869 | ) | ||||||||||||
Depreciation, depletion, amortization | — | (11,260 | ) | (16,794 | ) | — | (28,054 | ) | ||||||||||||
General and administrative | (3,833 | ) | (3,448 | ) | (454 | ) | — | (7,735 | ) | |||||||||||
Exploration and pre-development | (55 | ) | (1,939 | ) | (6,371 | ) | — | (8,365 | ) | |||||||||||
Research and development | — | (482 | ) | (954 | ) | — | (1,436 | ) | ||||||||||||
Gain on derivative contracts | 4,007 | — | — | — | 4,007 | |||||||||||||||
Acquisition costs | (2,360 | ) | — | (147 | ) | — | (2,507 | ) | ||||||||||||
Equity in earnings of subsidiaries | 17,768 | — | — | (17,768 | ) | — | ||||||||||||||
Other (expense) income | (8,377 | ) | (6,794 | ) | 6,917 | (5,488 | ) | (13,742 | ) | |||||||||||
Income (loss) before income taxes | 8,240 | 11,587 | 12,437 | (23,256 | ) | 9,008 | ||||||||||||||
(Provision) benefit from income taxes | — | (5,488 | ) | (768 | ) | 5,488 | (768 | ) | ||||||||||||
Net income (loss) | 8,240 | 6,099 | 11,669 | (17,768 | ) | 8,240 | ||||||||||||||
Preferred stock dividends | (138 | ) | — | — | — | (138 | ) | |||||||||||||
Income (loss) applicable to common stockholders | 8,102 | 6,099 | 11,669 | (17,768 | ) | 8,102 | ||||||||||||||
Net income (loss) | 8,240 | 6,099 | 11,669 | (17,768 | ) | 8,240 | ||||||||||||||
Changes in comprehensive income (loss) | (2,104 | ) | — | 38 | (38 | ) | (2,104 | ) | ||||||||||||
Comprehensive income (loss) | $ | 6,136 | $ | 6,099 | $ | 11,707 | $ | (17,806 | ) | $ | 6,136 |
Three Months Ended March 31, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues | $ | (4,093 | ) | $ | 82,953 | $ | 63,684 | $ | — | $ | 142,544 | |||||||||
Cost of sales | (148 | ) | (42,772 | ) | (35,756 | ) | — | (78,676 | ) | |||||||||||
Depreciation, depletion, amortization | — | (15,766 | ) | (13,186 | ) | — | (28,952 | ) | ||||||||||||
General and administrative | (6,469 | ) | (2,319 | ) | (418 | ) | — | (9,206 | ) | |||||||||||
Exploration and pre-development | (244 | ) | (1,901 | ) | (3,621 | ) | — | (5,766 | ) | |||||||||||
Gain on derivative contracts | (7,809 | ) | — | — | — | (7,809 | ) | |||||||||||||
Equity in earnings of subsidiaries | 2,701 | — | — | (2,701 | ) | — | ||||||||||||||
Other (expense) income | 42,896 | (3,116 | ) | (9,332 | ) | (44,820 | ) | (14,372 | ) | |||||||||||
Income (loss) before income taxes | 26,834 | 17,079 | 1,371 | (47,521 | ) | (2,237 | ) | |||||||||||||
(Provision) benefit from income taxes | — | (8,969 | ) | (6,780 | ) | 44,820 | 29,071 | |||||||||||||
Net income (loss) | 26,834 | 8,110 | (5,409 | ) | (2,701 | ) | 26,834 | |||||||||||||
Preferred stock dividends | (138 | ) | — | — | — | (138 | ) | |||||||||||||
Income (loss) applicable to common stockholders | 26,696 | 8,110 | (5,409 | ) | (2,701 | ) | 26,696 | |||||||||||||
Net income (loss) | 26,834 | 8,110 | (5,409 | ) | (2,701 | ) | 26,834 | |||||||||||||
Changes in comprehensive income (loss) | 3,204 | — | (89 | ) | 89 | 3,204 | ||||||||||||||
Comprehensive income (loss) | $ | 30,038 | $ | 8,110 | $ | (5,498 | ) | $ | (2,612 | ) | $ | 30,038 |
Unaudited Interim Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | $ | 21,183 | $ | 18,747 | $ | 13,396 | $ | (36,943 | ) | $ | 16,383 | $ | (52,473 | ) | $ | 63,796 | $ | (15,107 | ) | $ | 78,994 | $ | 75,210 | |||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
Additions to properties, plants, and equipment | — | (8,082 | ) | (9,553 | ) | — | (17,635 | ) | — | (39,740 | ) | (43,545 | ) | — | (83,285 | ) | ||||||||||||||||||||||||
Acquisition of Klondex, net of cash acquired | (139,326 | ) | — | — | (139,326 | ) | ||||||||||||||||||||||||||||||||||
Other investing activities, net | (16,260 | ) | 151 | — | 15,579 | (530 | ) | (375,495 | ) | 4,603 | (294 | ) | 409,209 | 38,023 | ||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
Dividends paid to stockholders | (1,136 | ) | — | — | — | (1,136 | ) | |||||||||||||||||||||||||||||||||
Dividends paid to shareholders | (3,607 | ) | — | — | — | (3,607 | ) | |||||||||||||||||||||||||||||||||
Borrowings on debt | 31,024 | — | — | — | 31,024 | 78,024 | — | — | — | 78,024 | ||||||||||||||||||||||||||||||
Payments on debt | — | (644 | ) | (678 | ) | — | (1,322 | ) | ||||||||||||||||||||||||||||||||
Other financing activity | (1,186 | ) | (20,118 | ) | (1,285 | ) | 21,364 | (1,225 | ) | |||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash | — | — | 876 | — | 876 | |||||||||||||||||||||||||||||||||||
Proceeds from (payments on) debt | (47,000 | ) | (3,094 | ) | (37,934 | ) | — | (88,028 | ) | |||||||||||||||||||||||||||||||
Other financing activity, net | 464,080 | (50,409 | ) | 72,463 | (488,203 | ) | (2,069 | ) | ||||||||||||||||||||||||||||||||
Effect of exchange rates on cash | — | — | (215 | ) | — | (215 | ) | |||||||||||||||||||||||||||||||||
Changes in cash, cash equivalents and restricted cash and cash equivalents | 33,625 | (9,946 | ) | 2,756 | — | 26,435 | (75,797 | ) | (24,844 | ) | (24,632 | ) | — | (125,273 | ) | |||||||||||||||||||||||||
Beginning cash, cash equivalents and restricted cash and cash equivalents | 103,878 | 32,048 | 51,213 | — | 187,139 | 103,878 | 32,048 | 51,213 | — | 187,139 | ||||||||||||||||||||||||||||||
Ending cash, cash equivalents and restricted cash and cash equivalents | $ | 137,503 | $ | 22,102 | $ | 53,969 | $ | — | $ | 213,574 | $ | 28,081 | $ | 7,204 | $ | 26,581 | $ | — | $ | 61,866 |
Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Cash flows from operating activities | $ | 35,764 | $ | 41,071 | $ | 21,435 | $ | (24,155 | ) | $ | 74,115 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Additions to properties, plants, and equipment | — | (28,220 | ) | (42,170 | ) | — | (70,390 | ) | ||||||||||||
Acquisitions of other companies, net of cash acquired | — | — | — | — | ||||||||||||||||
Other investing activities, net | 176 | 5,779 | (584 | ) | (5,339 | ) | 32 | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Dividends paid to shareholders | (3,392 | ) | — | — | — | (3,392 | ) | |||||||||||||
Proceeds from (payments on) debt | — | (4,518 | ) | (1,017 | ) | — | (5,535 | ) | ||||||||||||
Other financing activity, net | (44,762 | ) | (21,500 | ) | 42,909 | 29,494 | 6,141 | |||||||||||||
Effect of exchange rates on cash | — | — | 1,051 | — | 1,051 | |||||||||||||||
Changes in cash, cash equivalents and restricted cash and cash equivalents | (12,214 | ) | (7,388 | ) | 21,624 | — | 2,022 | |||||||||||||
Beginning cash, cash equivalents and restricted cash and cash equivalents | 113,275 | 26,588 | 32,114 | — | 171,977 | |||||||||||||||
Ending cash, cash equivalents and restricted cash and cash equivalents | $ | 101,061 | $ | 19,200 | $ | 53,738 | $ | — | $ | 173,999 |
Three Months Ended March 31, 2017 | ||||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Cash flows from operating activities | $ | 40,953 | $ | 11,508 | $ | 15,642 | $ | (29,818 | ) | $ | 38,285 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Additions to properties, plants, and equipment | — | (7,540 | ) | (14,118 | ) | — | (21,658 | ) | ||||||||||||
Other investing activities, net | (7,479 | ) | 61 | — | — | (7,418 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Dividends paid to stockholders | (1,127 | ) | — | — | — | (1,127 | ) | |||||||||||||
Payments on debt | — | (1,658 | ) | (407 | ) | — | (2,065 | ) | ||||||||||||
Other financing activity | (41,096 | ) | 3,025 | 7,431 | 29,818 | (822 | ) | |||||||||||||
Effect of exchange rate changes on cash | — | — | 1,814 | — | 1,814 | |||||||||||||||
Changes in cash, cash equivalents and restricted cash and cash equivalents | (8,749 | ) | 5,396 | 10,362 | — | 7,009 | ||||||||||||||
Beginning cash, cash equivalents and restricted cash and cash equivalents | 113,275 | 26,588 | 32,114 | — | 171,977 | |||||||||||||||
Ending cash, cash equivalents and restricted cash and cash equivalents | $ | 104,526 | $ | 31,984 | $ | 42,476 | $ | — | $ | 178,986 |
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 1A1A. – Business – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2017, as updated in Part II, Item 1A –- Risk Factors in this quarterly report and in our quarterly reports on Form 10-Q for the quarterquarters ended March 31, 2018 and June 30, 2018. 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 producemarket silver, gold, lead and zinc.
We produce lead, zinc and bulk concentrates, which we sell to custom smelters and brokers, and unrefined precipitate and bullion bars (doré)doré containing gold and silver, which are further refined before sale to precious metals traders. We are organized into fourfive segments that encompass our operating and development units: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and San Sebastian.Nevada Operations. The map below shows the locations of our operating units, and 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:
operating our properties safely, in an environmentally responsible manner, and cost-effectively;
continuing to optimize and improve operations at our units, which includes incurring research and development expenditures that may not result in tangible benefits;
expanding our proven and probable reserves and production capacity at our units;
conducting our business with financial stewardship to preserve our financial position in varying metals price environments;
advance permitting of the Rock Creek and Montanore projects. We acquired Rock Creek as part of the acquisition of Revett Mining Company, Inc. ("Revett") in June 2015, and we acquired Montanore through the acquisition of Mines Management, Inc. ("Mines Management") in September 2016;
maintaining and investing in exploration and pre-development projects in the vicinities of six mining districts and projects 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; the Rock Creek and Montanore projects in northwestern Montana; and the Creede district of southwestern Colorado. If the proposed acquisition of Klondex Mines Ltd. ("Klondex") is approved by the shareholders of Klondex and consummated, our exploration and pre-development efforts will also be focused on Klondex's projects in northern Nevada; and
continuing to seek opportunities to acquire and invest in mining properties and companies, including the proposed acquisition of Klondex discussed further below.
• | operating our properties safely, in an environmentally responsible manner, and cost-effectively; | |
• | fully integrating the acquisition in July 2018 of Klondex Mines Ltd. ("Klondex") discussed further below, which gives us ownership of a mill, operating mines and other mineral interests in northern Nevada; | |
• | continuing to optimize and improve operations at our units, which includes incurring research and development expenditures that may not result in tangible benefits; | |
• | expanding our proven and probable reserves and production capacity at our units; | |
• | conducting our business with financial stewardship to preserve our financial position in varying metals price environments; | |
• | advance permitting of the Rock Creek and Montanore projects; | |
• | 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 newly-acquired projects in northern Nevada; the Rock Creek and Montanore projects in northwestern Montana; and the Creede district of southwestern Colorado; and | |
• | continuing to seek opportunities to acquire or invest in mining properties and companies. |
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 gold, lead, and zinc in the first threenine months of 2018 were higher than their levels from the comparable period last year, with the average silver price lower, 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 are required to be used for development and expansion of our Casa Berardi unit. See Note 910 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 and RQ Notes; however, a number of factors could impact our ability to meet the debt obligations and fund our other projects.
On March 16,July 20, 2018, we entered into an agreement to acquirecompleted the acquisition of all of the issued and outstanding common shares of Klondex for total consideration valued at approximately $462$414.2 million at the time of consummation of the agreement.acquisition. See Note 1314 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. Klondex ownsAs a result of the acquisition, we own 100% of three producing gold mines, along with interests in various gold exploration properties, in the northern Nevada, as well as other properties in Canada which we would not be acquiring.Nevada. The acquisition is expected to increase our annual gold production, givegives us ownership of operating gold mines and identified gold reserves and other mineralized material, and provideprovides access to a large land package with known mineralization. Should the transaction be approved and consummated, we would beWe are faced with the challenge of integrating the acquisition and assuming operating responsibility for Klondex's mines and other operations. See Part II, Item 1A – Risk Factors – Operating, Development, Exploration and Acquisition Risks in our quarterly report filed on Form 10-Q for the quarter ended March 31, 2018 for risks associated with our proposed 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. In addition, 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, and there can be no assurance that we will be able to obtain the permits required to develop these projects. InSee Part I,II, Item 1A – Risk Factorsin our annual report filed on Form 10-K for the year ended December 31, 2017, 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 salarysalaried employees commencing at that time. We cannot predict how long the strike will last or whether an agreement will be reached. We expect to incur cash expenditures of approximately $1.0about $1.5 million to $1.5$2.0 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 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"(“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.1A – Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2017 and above in Note 45 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 termsto us as possible.
Results of Operations
Sales of products by metal for the three-monththree- and nine-month periods ended March 31,September 30, 2018 and 2017 were as follows:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Silver | $ | 35,222 | $ | 51,357 | $ | 38,009 | $ | 43,228 | $ | 111,656 | $ | 140,662 | ||||||||||||
Gold | 73,044 | 62,701 | 82,628 | 73,603 | 233,308 | 203,279 | ||||||||||||||||||
Lead | 9,227 | 13,619 | 7,552 | 6,373 | 27,469 | 28,093 | ||||||||||||||||||
Zinc | 30,109 | 29,865 | 20,990 | 24,327 | 78,714 | 74,692 | ||||||||||||||||||
Less: Smelter and refining charges | (7,893 | ) | (14,998 | ) | (5,530 | ) | (6,692 | ) | (20,530 | ) | (29,064 | ) | ||||||||||||
Sales of products | $ | 139,709 | $ | 142,544 | $ | 143,649 | $ | 140,839 | $ | 430,617 | $ | 417,662 |
The fluctuations$2.8 million and $13.0 million increases in sales forof products in the third quarter and first quarternine months of 2018, respectively, compared to the same periodperiods of 2017 wereare primarily due to:
• |
|
Three Months Ended | |||||||||
2018 | 2017 | ||||||||
Silver - | Ounces produced | 2,534,095 | 3,369,427 | ||||||
Payable ounces sold | 2,091,464 | 2,869,114 | |||||||
Gold - | Ounces produced | 57,808 | 56,113 | ||||||
Payable ounces sold | 54,839 | 51,371 | |||||||
Lead - | Tons produced | 5,627 | 8,636 | ||||||
Payable tons sold | 3,868 | 6,426 | |||||||
Zinc - | Tons produced | 15,211 | 15,537 | ||||||
Payable tons sold | 10,104 | 11,847 |
Three Months Ended | Nine Months Ended | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||
Silver - | Ounces produced | 2,523,691 | 3,323,157 | 7,654,118 | 9,500,058 | ||||||||||||
Payable ounces sold | 2,588,478 | 2,540,817 | 6,993,695 | 8,098,652 | |||||||||||||
Gold - | Ounces produced | 72,995 | 63,046 | 191,116 | 171,720 | ||||||||||||
Payable ounces sold | 68,568 | 57,380 | 183,050 | 161,921 | |||||||||||||
Lead - | Tons produced | 4,238 | 5,370 | 15,387 | 18,426 | ||||||||||||
Payable tons sold | 3,986 | 2,936 | 12,599 | 13,612 | |||||||||||||
Zinc - | Tons produced | 12,795 | 14,497 | 42,312 | 43,000 | ||||||||||||
Payable tons sold | 9,282 | 8,444 | 30,072 | 29,269 |
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.
HigherLower average realized prices forsilver, gold, lead and zinc prices in the third quarter of 2018 compared to the same period in 2017. For the first nine months of 2018, average gold, lead and zinc prices were higher, while average silver prices were lower, average realized prices for silver.compared to the same period of 2017. These price variances are illustrated in the table below.
Three months ended March 31, | |||||||||
2018 | 2017 | ||||||||
Silver – | London PM Fix ($/ounce) | $ | 16.77 | $ | 17.42 | ||||
Realized price per ounce | $ | 16.84 | $ | 17.90 | |||||
Gold – | London PM Fix ($/ounce) | $ | 1,329 | $ | 1,219 | ||||
Realized price per ounce | $ | 1,332 | $ | 1,221 | |||||
Lead – | LME Final Cash Buyer ($/pound) | $ | 1.14 | $ | 1.03 | ||||
Realized price per pound | $ | 1.19 | $ | 1.06 | |||||
Zinc – | LME Final Cash Buyer ($/pound) | $ | 1.55 | $ | 1.26 | ||||
Realized price per pound | $ | 1.49 | $ | 1.26 |
Three Months Ended | Nine Months Ended | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||
Silver – | London PM Fix ($/ounce) | $ | 14.99 | $ | 16.83 | $ | 16.10 | $ | 17.17 | ||||||||
Realized price per ounce | $ | 14.68 | $ | 17.01 | $ | 15.97 | $ | 17.37 | |||||||||
Gold – | London PM Fix ($/ounce) | $ | 1,213 | $ | 1,278 | $ | 1,283 | $ | 1,251 | ||||||||
Realized price per ounce | $ | 1,205 | $ | 1,283 | $ | 1,275 | $ | 1,255 | |||||||||
Lead – | LME Final Cash Buyer ($/pound) | $ | 0.95 | $ | 1.06 | $ | 1.06 | $ | 1.02 | ||||||||
Realized price per pound | $ | 0.95 | $ | 1.09 | $ | 1.09 | $ | 1.03 | |||||||||
Zinc – | LME Final Cash Buyer ($/pound) | $ | 1.15 | $ | 1.34 | $ | 1.37 | $ | 1.26 | ||||||||
Realized price per pound | $ | 1.13 | $ | 1.44 | $ | 1.31 | $ | 1.28 |
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 metalmetals prices each period through final settlement. For the third quarter and first quarternine months of 2018, we recorded net negative price adjustments to provisional settlements of $0.1$0.6 million and $3.3 million, respectively, compared to net positive price adjustments to provisional settlements of $1.2 million and $0.6 million, respectively, in the third quarter and first quarternine months of 2017. The price adjustments related to silver, gold, zinclead and leadzinc contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period. See Note 1112 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 third quarter and first quarternine months of 2018, we recorded incomelosses applicable to common stockholdersshareholders of $8.1$23.3 million ($0.020.05 per basic common share) and $3.3 million ($0.01 per basic common share), respectively, compared to income applicable to common shareholders of $26.7$0.2 million ($0.070.00 per basic common share) duringand $0.0 million ($0.00 per basic common share), respectively, for the third quarter and first quarternine months of 2017. The following factors contributed toimpacted the results for the third quarter and first threenine months of 2018 compared to the same periodperiods in 2017:
An income tax provision of $0.8 million in first quarter of 2018 compared to an income tax benefit of $29.1 million in the first quarter of 2017. The benefit in the 2017 period is primarily the result of a change in income tax position relating to the timing of deduction for #4 Shaft development costs at Lucky Friday.
Lucky Friday suspension costs of $4.1 million, along with $0.9 million in non-cash depreciation expense, in the first quarter of 2018 compared to $1.2 million in suspension costs and $0.4 million in non-cash depreciation in the same period of 2017. These costs were incurred during the suspension of full production resulting from the strike, which started in March 2017.
Exploration and pre-development expense increased by $2.6 million in the first quarter of 2018 compared to the first quarter of 2017. In 2018, we have continued exploration work at our Greens Creek, San Sebastian, and Casa Berardi 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 $1.0 million in the first quarter of 2018 was related to advancement of our Montanore and Rock Creek projects.
$2.5 million in costs in the first quarter of 2018 related to our proposed acquisition of Klondex.
Higher interest expense by $1.3 million in the first
• | Lower gross profit for the third quarter and first nine months of 2018 compared to the same periods in 2017 at our San Sebastian unit by $19.1 million and $38.9 million, respectively, and at our Lucky Friday unit by $0.2 million and $3.1 million, respectively; and a gross loss at our newly-acquired Nevada Operations unit of $7.8 million in the third quarter. Gross profit at our Greens Creek unit was lower by $6.1 million for the third quarter of 2018, but higher by $12.9 million for the first nine month of 2018, compared to the same periods of 2017. Gross profit for the third quarter of 2018 was also lower at our Casa Berardi unit compared to 2017 by $3.1 million; however, it was higher by $11.2 million for the first nine months of 2018 compared to the same period of 2017.
The Greens Creek Segment
The
The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits,
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:
The
Mining and milling costs
Other cash costs per ounce for the third quarter and first
Treatment costs were lower in the third quarter and first
By-product credits per ounce were lower in the third quarter of 2018 compared to the same period of 2017 due to lower gold, zinc and lead prices and production. By-product credits per ounce were higher in the first
The difference between what we report as
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:
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
Gross profit decreased by Mining and milling cost per ton were lower by
The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits,
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
The following table summarizes the components of AISC, After By-product Credits, per Silver
Similar to the Greens Creek segment, the difference between what we report as “production” and “payable metal quantities sold” is due essentially 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.
While value from lead and zinc is significant, we believe that identification of silver as the primary product of the Lucky Friday unit is appropriate because:
Likewise, we believe the identification of 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 do not receive 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 and lead 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.
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
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.
See Note
The Casa Berardi Segment
Gross profit decreased by $3.1 million and increased by
Mining costs per ton were lower by 20% and 12% and milling
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits,
The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:
The following table summarizes the components of AISC, After By-product Credits, per Gold Ounce:
The decrease in Cash Cost, After By-product Credits, per Gold Ounce for the third quarter and first
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
The
Mining
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Silver Ounce for the third quarter and first
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:
The increase in Cash Cost, After By-product Credits, per Silver Ounce in the third quarter and first
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 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 $414.2 million. See Note 14 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. The tabular information below reflects our ownership of the Nevada Operations commencing on July 20, 2018.
Cost of sales and other direct production costs for the period from July 20 to September 30, 2018 includes write-downs of the values of stockpile, in-process and finished goods inventory to their net realizable value, totaling $7.2 million. The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Gold Ounce for the third quarter and first nine months of 2018: The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:
The following table summarizes the components of AISC, After By-product Credits, per Gold Ounce:
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, progress on construction of a new tailings dam, and work to install a carbon-in-leach circuit in order to improve recoveries at the Midas mill, where ore from each of the mines is processed. In addition, we decided to curtail production at the Midas mine, and are utilizing some of the equipment and employees from that location for production and development at the Fire Creek and Hollister mines. 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
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. consolidated group did not join the existing U.S. consolidated tax group for Hecla Mining Company and subsidiaries (“Legacy Hecla”). A net deferred tax liability of $50.1 million was recorded for the fair market value of assets acquired in excess of carryover tax basis. See Note 14 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 Legacy Hecla U.S. net deferred tax assets at the end of 2017 based on results of tax law
Our net Canadian deferred tax liability at
Our Mexican net deferred tax asset at
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,
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,
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 have recently started reporting AISC, After By-product Credits, per Ounce which we use 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
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,
Financial Liquidity and Capital Resources
Our liquid assets include (in millions):
Cash and cash equivalents
As further discussed in Note
As discussed in Note
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
Pursuant to our common stock dividend policy described in Note
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
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 approximately
Cash provided by operating activities in the first
We had a cash outflow of $139.3 million for the acquisition of Klondex, net of their cash balance acquired, in July 2018. During the first
Exchange rate fluctuations between the U.S. dollar and the Canadian dollar and Mexican peso resulted in a decrease in our cash balance of $0.2 million during the nine months ended September 30, 2018 and an increase of $1.1 million during the nine months ended September 30, 2017, respectively.
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
We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters. At
Off-Balance Sheet Arrangements
At
Critical Accounting Estimates
Our significant accounting policies are described in Part IV, Note 1 of Notes to Consolidated Financial Statementsin our annual report filed on Form 10-K for the year ended December 31, 2017. 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
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
Sales of concentrates sold directly to customers are recorded as revenues when title and risk of loss transfer 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 part N. Revenue Recognition of Note 1 of Notes to Consolidated Financial Statements in our annual report filed on Form
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
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
Reserves are a key component in the valuation of our properties, plants, equipment and
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our risk management activities includes forward-looking statements that involve
Provisional Sales
Sales of all metals products sold directly to customers, including by-product metals, are recorded as revenues
Commodity-Price Risk Management
At times, we may use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in
We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, at times we
As of
We recognized
We recognized a
The following tables summarize the quantities of metals committed under forward sales contracts at
Foreign Currency
We operate or have mining interests in Canada and Mexico, which exposes us to risks associated with fluctuations in the exchange rates between the U.S. dollar ("USD") and the Canadian dollar ("CAD") and Mexican peso ("MXN"). We have determined the functional currency for our Canadian and Mexican operations is the USD. As such, foreign exchange gains and losses associated with the re-measurement of monetary assets and liabilities from CAD and MXN to USD are recorded to earnings each period. For the
In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of
As of
Net unrealized gains of approximately
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as required by Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, including controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management (including our CEO and CFO), were effective, as of
Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.
For information concerning legal proceedings, refer to Note
Part I, Item
The proposed development of our Rock Creek project has been challenged by several regional and national conservation groups at various times since the U.S. Forest Service (“USFS”) issued its initial Record of Decision (“ROD”) in 2003 approving Revett Mining Company’s plan of operation (Revett is now our wholly-owned subsidiary, named Hecla Montana, Inc.). Some of these challenges have alleged violations of a variety of federal and state laws and regulations pertaining to Revett’s permitting activities at Rock Creek, including the Endangered Species Act, the National Environmental Policy Act (“NEPA”), the General Mining Law of 1872, the Federal Land Policy Management Act, the Wilderness Act, the National Forest Management Act, the Clean Water Act, the Clean Air Act, the Forest Service Organic Act of 1897, and the Administrative Procedure Act. Although Revett successfully addressed most of these challenges, Revett was directed by the Montana Federal District Court in May 2010 to produce a Supplemental Environmental Impact Statement (“SEIS”) to address NEPA procedural deficiencies that were identified by the court, which SEIS was posted to the Federal Register on July 20, 2018. We cannot predict how possible future challenges will be resolved. Possible new court challenges in the future to the final SEIS and ROD may delay the planned development at Rock Creek. If we are successful in completing the SEIS and defending any challenges to our Rock Creek project, we would still be required to comply with a number of requirements and conditions as development progresses, failing which could make us unable to continue with development activities. A joint final Environmental Impact Statement with respect to our Montanore project was issued in December 2015 by the USFS and Montana Department of Environmental Quality, and each agency issued a ROD in February 2016 providing approval for development of the Montanore project. However, private conservation groups have taken and may in the future take actions to oppose or delay the Montanore project. On May 30, 2017, the Montana Federal District Court issued Opinions and Orders in three lawsuits challenging previously granted environmental approvals for the Montanore project. The Orders overturned the approvals for the project granted by the USFS and the United States Fish and Wildlife Service, and in each case remanded the ROD and associated planning documents for further review by the agencies consistent with the Court's Opinions. In June 2017, the Court vacated the agencies’ approvals for the project. As
Item 4. Mine Safety Disclosures
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in exhibit 95 to this Quarterly Report.
Hecla Mining Company and Subsidiaries
Form 10-Q Index to Exhibits
___________________
* Filed herewith.
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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