June 8, 2005
Via Overnight Courier and EDGAR
Mr. H. Roger Schwall
Assistant Director
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W., Mail Stop 4-6
Washington, D.C. 20549-0405
Re: | Hecla Mining Company Form 10-K for the fiscal year ended December 31, 2004 Response letter dated April 27, 2005 Form 10-Q for the first quarter ended March 31, 2005 File No. 001-08491 |
Dear Mr. Schwall:
Hecla Mining Company (“we” or “our”) hereby submits this response to the comments of the Staff, as set forth in your letter dated May 24, 2005 to Mr. Lewis E. Walde, Chief Financial Officer, on the referenced Annual Report on Form 10-K, response letter dated April 27, 2005 and the Quarter Report on Form 10-Q. This letter should be read in conjunction with the blacklined version of Form 10-K/A-1 that accompanies it.
We have supplied the supplemental information set forth in this letter for use herein, and have reviewed and approved all of the responses set forth herein to the Staff’s comments. For convenience, each of the Staff’s consecutively numbered comments is set forth in italics, followed by our response. In this letter, all page references in our responses refer to page numbers in the blacklined version of Form 10-K/A-1. All new text is underlined, while deleted text displays a strikethrough font.
10-K for the year ended December 31, 2004
Management’s Discussion and Analysis, page 52
General |
1. | Comment: We have given consideration to your response to prior comment 5 regarding your treatment of gold as a by-product at the San Sebastian unit and believe that, in addition to your non-GAAP reconciliation table, you should expand your MD&A to clearly indicate that you generate by-product revenues on certain of your operating units. In addition, explain why you believe that presentation of these revenue streams as a by-product is appropriate, given the percentages at the San Sebastian unit of the by-product to total revenue previously identified in our prior comment 5. |
Response: We have expanded our MD&A to indicate that we generate by-product revenues from our Lucky Friday and Greens Creek units, in the same manner as our prior disclosure for San Sebastian. In addition, we have explained why we believe that the presentation of these revenues as by-products is appropriate. Please see the text under the MD&A headingsThe Mexico Segment,Greens Creek,Lucky Friday,andBy-Product Credits, beginning on pages 62, 63, 64, and 84 within the 10-K/A-1, reproduced below: |
The Mexico Segment |
The total cash cost per silver ounce at San Sebastian increased during 2004 to $0.21, from a negative $0.25 during 2003.While value from by-product gold is significant, contributing 45% and 50% of revenues in 2003 and 2004 for San Sebastian , we believe that identification of silver as the primary product, with gold as a by-product, is appropriate because: |
• | We have historically presented San Sebastian as a producer primarily of silver based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors, regardless of the relationships of metals prices and production from year to year; |
• | San Sebastian is in a mining district historically identified with silver; |
• | Exploration has been directed toward silver, and recent exploration results have shown a predominant silver content; and |
• | Our mining methods and production planning target silver as our primary product which has been accompanied by a significant gold presence. |
In addition to our treatment of gold as a by-product, we disclose an analysis of San Sebastian total cash cost per ounce on a co-product basis, in which our total cash costs are allocated to silver and gold based on the revenues generated by each. Please refer to Note 3 of our Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion, and Amortization (GAAP). |
Because we consider gold to be a by-product of our silver production, it offset the increase in average totalcash costs during the comparable periods due primarily to a higher average gold price than in 2003. For the years ended December 31, 2004 and 2003, gold by-product credits were approximately $6.61 per silver ounce and $4.25 per silver ounce, respectively. |
Greens Creek |
The total cash costs per silver ounce decreased by approximately 4%, to $1.13 per silver ounce during 2004, from $1.18 per silver ounce during 2003. The decrease inthe cost |
• | We have historically presented Greens Creek as a producer primarily of silver based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors, regardless of the relationships of metals prices and production from year to year; |
• | Silver accounts for a higher proportion of revenue than any other metal and is expected to do so in the future; |
• | Metallurigal treatment maximizes silver recovery; |
• | The Greens Creek deposit is a massive sulfide deposit containing an unusually high propertion of silver; and |
• | In most of its working araes, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery. |
We periodically review our proven and probable reserves 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 increases in operating costs due to increased prices from 2003 to 2004. For the years ended December 31, 2004 and 2003, zinc, lead, and gold by-product credits net of treatment and freight costs, totaled $5.27 per silver ounce and $4.02 per silver ounce, respectively. |
2
For the year ending December 31, 2005, we forecast production to total approximately 2.8 million silver ounces, 23,000 gold ounces, and 6,900 tons of lead, and 21,000 tons of zinc. |
Lucky Friday |
Due primarily to increases in operating costs and longer ore haulage, partially offset by higher prices for lead and zinc by-products, the total cash costs per silver ounce for 2004 increased to $5.12, compared to $4.86 during 2003. While value from lead and zinc by-products is significant, we believe that identification of silver as the primary product, with zinc and lead as by-products, is appropriate because: |
• | Silver accounts for a higher proportion of revenue than any other metal and is expected to do so in the future; |
• | The Lucky Friday unit is situated in a mining district long associated with silver production; and |
• | The Lucky Friday unit utilizes selective mining methods to target silver production. |
We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Because we consider lead and zinc to be by-products of our silver production, the values of these metals offset increases in operating costs due to increased prices from 2003 to 2004. For the years ended December 31, 2004 and 2003, lead and zinc by-product credits, net of treatment and freight costs, totaled $3.29 per silver ounce and $2.52 per silver ounce, respectively. |
For the year ending December 31, 2005, we forecast production from the Lucky Friday mine to total approximately 3.0 million silver ounces, 16,000 tons of lead and 4,000 tons of zinc. |
By-product Credits |
Cash costs per ounce of silver include significant credits from by-product metals production, including gold, lead, and zinc. Our current view of our proven and probable reserves indicates that our treatment of gold, lead, and zinc as by-products at the San Sebastian, Greens Creek, and Lucky Friday units continues to be appropriate. However, management periodically assesses the relationships between metals produced to ensure that presentation of by-product credits in our calculation of cash costs per ounce remains appropriate. |
3
Cash costs per ounce of silver at the San Sebastian unit include significant by-product credits from gold production and the continued increase in the price of gold. Cash costs per ounce are calculated pursuant to standards of the Gold Institute and are consistent with how costs per ounce are calculated within the mining industry. For the year ended December 31, 2004, the total cash cost was $0.21 per silver ounce, compared to a negative $0.25 per silver ounce in 2003, and $1.09 per silver ounce in 2002. For the years ended December 31, 2004, 2003 and 2002, gold by-product credits were approximately $6.61, $4.25, and $3.76 per silver ounce, respectively. By-product credits at the San Sebastian unit are deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy were changed to treat gold production as a co-product, the following total cash costs per ounce would be reported: |
2004 | 2003 | 2002 | |||||||||
Silver | $ | 3.42 | $ | 2.14 | $ | 2.67 | |||||
Gold | $ | 208 | $ | 160 | $ | 181 |
Significant by-product credits are also used in calculation of cash costs per ounce of silver at the Greens Creek and Lucky Friday units. For these operations, we view zinc, lead, and gold strictly as by-products because: |
• | We have historically presented San Sebastian, Greens Creek, and Lucky Friday as producers primarily of silver based on the original analyses that justified putting the projects into production, and believe that consistency in disclosure is important to our investors, regardless of the relationships of metals prices and production from year to year; |
• | Silver represents a higher value than any other metal; |
• | Silver is the primary object of the cost structures at Greens Creek and Lucky Friday, which utilize selective mining methods for recovery of silver rather than bulk methods for recovery of lower-value base metals; and |
• | By-products include two other metals for Lucky Friday, and three other metals for Greens Creek. |
The values of all by-products per ounce of silver produced, net of treatment and freight costs, were: |
2004 | 2003 | 2002 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Greens Creek | $ | 5.27 | $ | 4.02 | $ | 2.80 | |||||
Lucky Friday | $ | 2.26 | $ | 0.62 | $ | 0.23 |
4
Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of |
2. | Comment: Include a trend analysis to identify the amount and type of by-product revenue generated for each period presented and indicate whether or not you believe, based on your best estimate, that presentation of these revenue streams as by-products will continue to be appropriate in the future. Refer to Item 303(a)(3)(ii) of Regulation S-K for guidance. |
Response: We have included a trend analysis showing the effect by-products have on costs per ounce for all operations with by-products in the four sections of the MD&A reproduced in the foregoing response. We have also indicated in the sectionBy-product Creditsthat management periodically assesses the relationships between metals produced to ensure that presentation of by-product credits in calculation of cash costs per ounce remains appropriate. |
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs (GAAP), pages 67-69 |
3. | Comment: We have reviewed the revised reconciliation that you will present in an amendment to your 2004 Form 10-K in response to prior comment 4 and continue to believe that presenting a reconciliation to a GAAP measure that is not fully burdened with depreciation, depletion and amortization is not the most directly comparable GAAP measure and is not contemplated by SAB Topic 11:B. |
Response: We have amended the document as indicated below, to reconcile total cash costs (non-GAAP) to cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP): |
On pages ii, 4, 28, 37, 40, 43, 61, 74 and 86 within the document, the sentence …Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs (GAAP)has been changed to read …Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP). |
5
On pages 4, 28, 37, 40, 43, 61, 74 and 86 within the document, the sentenceA reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure…,has been changed to readA reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure... |
On pages 75 and 76 within the reconciliations, depreciation, depletion and amortization expense has been added directly beneath total cash costs to arrive atCost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP). |
On pages 75 and 76 within the reconciliations, both treatment and freight costs and by-product credits have been increased by the same amount, for Lucky Friday and Greens Creek, with no effect on reported costs per ounce within the document. During the course of an examination of costs per ounce, we determined that smelter deductions related to silver had been attributed to by-product values and believe it is more appropriate to display these costs as a component of treatment and freight charges. The resulting change does not affect the reported costs per ounce within the document. |
On page 74, the opening paragraph as amended in the referenced Response letter has been changed to the following: |
The following tables present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) for our gold (the Venezuela segment only) and silver operations (the Mexico and United States segments), as well as a reconciliation for each individual silver operating |
6
4. | Comment: Tell us and clarify within your disclosure whether the non-GAAP measure, Total Cash Costs, is a liquidity or a performance measure. |
Response: We believe the non-GAAP measure, Total Cash Costs, is primarily a performance measure. Total cash costs 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 and marketing expense, on-site general and administrative costs, royalties and mining production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit. Management uses this measurement for the comparative monitoring of performance of our mining operations from period-to-period, both from a performance and an industry position perspective. Total cash costs also provide to management and investors an indication of net cash flow, after consideration of the realized price received for production sold. The disclosure has been updated accordingly, as reflected in the above paragraph. |
Critical Accounting Policies, page 73
Revenue Recognition |
5. | Comment: We note your intention to change your accounting policy footnote to accurately describe your current use of the forward rate for provisionally priced contracts at the Greens Creek unit and for the Lucky Friday unit, beginning January 1, 2005. Please submit a sample of your intended disclosure. Note that we believe a description of how provisionally priced sales contracts are accounted for is beneficial to the reader and should include a description of how the embedded derivative is separated from the host contract and accounted for as a derivative instrument pursuant to SFAS 133. |
Response: |
The following is an example of additional disclosure we propose to add: |
Our sales are based on a provisional sales price containing an embedded derivative that is required to be separated from the host contract foraccounting purposes. The host contract is the receivable from the sale of the concentrates at the forward price at the time of the sale. Theembedded derivative, which does not qualify for hedge accounting is adjusted to market through earnings each period prior to final settlement. |
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Note 1: Summary of Significant Accounting Policies, page F-8
Revenue Recognition and Accounts Receivable, page F-13 |
6. | Comment: We note from your response to prior comment 5 that you will expand your revenue recognition policy to indicate that your by-product sales are also recorded as revenues. Please expand this policy footnote to identify the operating units that generate by-product revenue. |
Response: |
We have further revised Note 1L as follows: |
Sales of all metal products sold directly to smelters , |
10-Q for the quarter ended March 31, 2005
Controls and Procedures, page 45 |
7. | Comment: We note from your disclosure that based on your evaluation of the design and operation of your disclosure controls and procedures, your Chief Executive Officer and Chief Financial Officer concluded that your disclosure controls and procedures “were effective as of March 31, 2005, in ensuring that material information required to be disclosed in this report has been properly recorded, processed, summarized and reported within the required time periods.” Revise to clarify, if true, that your officers concluded that your disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that you file or submit under the Exchange Act is accumulated and communicated to your management, including your chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. See Exchange Act Rule 13a-15(e). |
8
Response: |
We have revised the referenced paragraph as follows: |
(a) Disclosure and controls 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. Based on that evaluation, our |
We hereby acknowledge: |
• | We are responsible for the adequacy and accuracy of the disclosure in the Form 10-K/A-1. |
• | Staff comments or changes to our disclosure in response to staff comments do not foreclose the Securities and Exchange Commission from taking any action with respect to the Form 10-K/A-1. |
• | We may not assert staff comments as a defense in any proceeding initiated by the Securities and Exchange Commission or any person under the federal securities laws of the United States. |
If I can be of assistance in your review of the above, please do not hesitate to call. |
Sincerely,
/s/ Lewis E. Walde
Lewis E. Walde
Vice President and Chief Financial Officer
9
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
x | Annual report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
Commission file no. | 1-8491 |
HECLA MINING COMPANY |
Delaware | 82-0126240 | |
(State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.) | |
6500 N. 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) |
Title of each class | ||
Common Stock, par value $0.25 per share Preferred Share Purchase Rights for Series A Junior Participating Preferred Stock, par value $0.25 per share Series B Cumulative Convertible Preferred Stock, par value $0.25 per share | ) ) ) ) ) ) ) ) ) | Name of each exchange on which registered New York Stock Exchange |
Section | Page No |
Special Note on Forward Looking Statements | 1 |
Part I | |
Item 1. Business and Item 2. Properties | 1 |
Products and Segments | 4 |
Employees | 5 |
Available Information | 6 |
Risk Factors | 6 |
Glossary of Certain Terms | 20 |
Operating Properties | 23 |
La Camorra Unit | 23 |
-La Camorra Mine | 24 |
-Block B | 27 |
-Custom Milling Business | 30 |
San Sebastian Unit | 31 |
Greens Creek Unit | 35 |
Lucky Friday Unit | 39 |
Exploration | 41 |
Hollister Development Block | 42 |
Noche Buena | 44 |
Discontinued Properties | 44 |
Idle Properties | 44 |
Grouse Creek Mine | 44 |
Republic Mine | 45 |
Item 3. Legal Proceedings | 46 |
Item 4. Submission of Matters to a Vote of Security Holders | 46 |
Part II | |
Item 5. Market Price of and Dividends on the Registrant’s Common Equity and Related Stock - Holders Matters | 47 |
Item 6. Selected Financial Data | 50 |
Item 7. Analysis of Financial Condition and Results of Operations | 52 |
Overview | 52 |
Results of Operations | 56 |
2004 Compared to 2003 | 56 |
Mexico Segment | 56 |
United States Segment | 57 |
-Greens Creek | 57 |
-Lucky Friday | 57 |
Venezuelan Segment | 58 |
Corporate Matters | 61 |
2003 Compared to 2002 | 62 |
Mexico Segment | 63 |
United States Segment | 64 |
-Greens Creek | 64 |
-Lucky Friday | 64 |
Venezuelan Segment | 65 |
Corporate Matters | 65 |
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other | |
Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) | 67 |
Financial Condition and Liquidity | 70 |
Contractual Obligations and Contingent Liabilities and Commitments | 70 |
Operating Activities | 71 |
Investing Activities | 71 |
Financing Activities | 72 |
Other | 72 |
Critical Accounting Policies | 73 |
Revenue Recognition | 73 |
Proven & Probable Ore Reserves | 74 |
Depreciation & Depletion | 75 |
Impairment of Long Lived Assets | 75 |
Environmental Matters | 75 |
Foreign Exchange in Venezuela | 76 |
Byproduct Credits at the San Sebastian Unit in Mexico | 77 |
Value Added Taxes | 77 |
New Accounting Pronouncements | 78 |
Forward Looking Statements | 80 |
Item7A.Quantitative and Qualitative Disclosures About Market Risk | 81 |
Interest Rate Risk Management | 81 |
Commodity Price Risk Management | 81 |
Item 8. Financial Statements and Supplemental Data | 83 |
Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosures | 83 |
Item 9A. Controls and Procedures | 83 |
Management’s Report on Internal Controls over Financial Reporting | 85 |
Report of Independent Registered Public Accounting Firm | 86 |
Item 9B. Other Information | 88 |
Part III | |
Item 10. Directors and Executive Officers of the Registrant | 89 |
Item 11. Executive Compensation | 92 |
Item 12. Security Ownership of Certain Beneficial Owners and Management | 92 |
Item 13. Certain Relationships and Related Transactions | 93 |
Item 14. Principal Accounting Fees and Services | 93 |
Part IV | |
Item 15. Exhibit Financial Statement Schedules and Reports on Form 8K | 94 |
Signatures | 95 |
Index to Consolidated Financial Statements | F-1 |
Exhibit Index | F-55 |
Year | ||||||||||
2004 | 2003 | 2002 | ||||||||
Silver (ounces) | 6,960,580 | 9,817,324 | 8,681,293 | |||||||
Gold (ounces) | 189,860 | 204,091 | 239,633 | |||||||
Lead (tons) | 19,558 | 21,224 | 18,291 | |||||||
Zinc (tons) | 25,644 | 25,341 | 26,134 | |||||||
Average cost per ounce of silver produced: | ||||||||||
Cash operating cost (1,2) | $ | 1.87 | $ | 1.31 | $ | 2.16 | ||||
Total cash cost (1,2) | $ | 2.02 | $ | 1.43 | $ | 2.25 | ||||
Total production cost (1,2) | $ | 3.57 | $ | 2.70 | $ | 3.68 | ||||
Average cost per ounce of gold produced: | ||||||||||
Cash operating cost (2) | $ | 176 | $ | 154 | $ | 137 | ||||
Total cash cost (2) | $ | 180 | $ | 154 | $ | 137 | ||||
Total production cost (2) | $ | 271 | $ | 222 | $ | 206 | ||||
Average metals prices: | ||||||||||
Silver - Handy & Harman ($/oz.) | $ | 6.69 | $ | 4.91 | $ | 4.63 | ||||
Gold - Realized ($/oz.) | $ | 379 | $ | 339 | $ | 303 | ||||
Gold - London Final ($/oz.) | $ | 409 | $ | 364 | $ | 310 | ||||
Lead - LME Cash ($/pound) | $ | 0.402 | $ | 0.233 | $ | 0.205 | ||||
Zinc - LME Cash ($/pound) | $ | 0.475 | $ | 0.375 | $ | 0.353 |
(1) | Includes by-product credits from gold, lead and zinc production and are calculated pursuant to standards of the Gold Institute. |
(2) | Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations, which are not in accordance with GAAP. We believe cash costs per ounce of silver or gold produced provide management and investors an indicat ion of net cash flow , after consideration of the realized price received for production sold. Management also uses this measurement for the comparative monitoring of performance of our mining operations from period-to-period from a cash flow perspective . A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure, can be found in Item 7 — Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization . |
· | the San Sebastian unit, located in the State of Durango, Mexico, which is 100% owned by us through our wholly owned subsidiary, Minera Hecla, S.A. de C.V. The San Sebastian mine is 56 miles northeast of the city of Durango on concessions acquired in 1999. During 2004, San Sebastian contributed $30.2 million, or 23.1%, to our consolidated sales. Although a strike at the mill which processes the ore mined as San Sebastian has halted such processing since October 2004, the mine is operating and ore is being stockpiled for future processing. The current mine plan estimates that mining will cease near the middle of 2005. |
· | the La Camorra unit, located in the eastern Venezuelan State of Bolivar, has been 100% owned by us through our wholly owned subsidiary, Minera Hecla Venezolana, C.A., since June 1999. During 2004, La Camorra contributed $47.9 million, or 36.6%, to our consolidated sales; |
· | the Greens Creek unit, a 29.73% owned joint-venture arrangement with Kennecott Greens Creek Mining Company, the manager of Greens Creek, and Kennecott Juneau Mining Company, both wholly owned subsidiaries of Kennecott Minerals. Greens Creek is located on Admiralty Island, near Juneau, Alaska, and has been in production since 1989, with a temporary shutdown from April 1993 through July 1996. During 2004, Greens Creek contributed $34.2 million, or 26.1%, to our consolidated sales; and |
· | the Lucky Friday unit located in northern Idaho. Lucky Friday is 100% owned and has been a producing mine for us since 1958. During 2004, Lucky Friday contributed $18.5 million, or 14.2%, to our consolidated sales. |
Year | ||||||||||
2004 | 2003 | 2002 | ||||||||
Silver | 63.4 | % | 65.9 | % | 53.4 | % | ||||
Gold | 36.6 | % | 33.7 | % | 46.6 | % | ||||
Other | -- | 0.4 | % | -- | ||||||
Year | ||||||||||
Segment | 2004 | 2003 | 2002 | |||||||
United States | 40.3 | % | 35.9 | % | 31.1 | % | ||||
Venezuela | 36.6 | % | 33.7 | % | 46.6 | % | ||||
Mexico | 23.1 | % | 30.0 | % | 22.3 | % | ||||
Other | -- | 0.4 | % | -- |
1985 | 1990 | 1995 | 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||||||||||
Silver (1) (per oz.) | $ | 6.14 | $ | 4.82 | $ | 5.19 | $ | 5.00 | $ | 4.36 | $ | 4.63 | $ | 4.91 | $ | 6.69 | |||||||||
Gold (2) (per oz.) | 317.26 | 383.46 | 384.16 | 279.03 | 272.00 | 309.97 | 363.51 | 409.21 | |||||||||||||||||
Lead (3) (per lb.) | 0.18 | 0.37 | 0.29 | 0.21 | 0.22 | 0.21 | 0.23 | 0.40 | |||||||||||||||||
Zinc (4) (per lb.) | 0.36 | 0.69 | 0.47 | 0.51 | 0.40 | 0.35 | 0.38 | 0.48 | |||||||||||||||||
(1) | Handy & Harman |
(2) | London Final |
(3) | London Metals Exchange -- Cash |
(4) | London Metals Exchange -- Special High Grade - Cash |
· | the effects of local political, labor and economic developments and unrest; |
· | significant or abrupt changes in the applicable regulatory or legal climate; |
· | exchange controls and export or sale restrictions; |
· | currency fluctuations and repatriation restrictions; |
· | invalidation of governmental orders, permits, or agreements; |
· | corruption, demands for improper payments, expropriation, and uncertain legal enforcement and physical security; |
· | fuel or other shortages; |
· | taxation and laws or policies of foreign countries and the United States affecting trade, investment and taxation; and |
· | civil disturbances, war, and terrorist actions. |
· | the rights issued in connection with the stockholder rights plan that will substantially dilute the ownership of any person or group that acquires 15% or more of our outstanding common stock unless the rights are first redeemed by our board of directors, in its discretion. Furthermore, our board of directors may amend the terms of these rights, in its discretion, including an amendment to lower the acquisition threshold to any amount greater than 10% of the outstanding common stock; |
· | the classification of our board of directors into three classes serving staggered three-year terms; |
· | the ability of our board of directors to issue shares of preferred stock with rights as it deems appropriate without stockholder approval; |
· | a provision that special meetings of our board of directors may be called only by our chief executive officer or a majority of our board of directors; |
· | a provision that special meetings of stockholders may only be called pursuant to a resolution approved by a majority of our entire board of directors; |
· | a prohibition against action by written consent of our stockholders; |
· | a provision that our board members may only be removed for cause and by an affirmative vote of at least 80% of the outstanding voting stock; |
· | a provision that our stockholders comply with advance-notice provisions to bring director nominations or other matters before meetings of our stockholders; |
· | a prohibition against certain business combinations with an acquirer of 15% or more of our common stock for three years after such acquisition unless the stock acquisition or the business combination is approved by our board prior to the acquisition of the 15% interest, or after such acquisition our board and the holders of two-thirds of the other common stock approve the business combination; and |
· | a prohibition against our entering into certain business combinations with interested stockholders without the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of voting stock. |
· | Cash Operating Costs -- Includes 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 and marketing expense and on-site general and administrative costs, net of by-product revenues earned from all metals other than the primary metal produced at each unit. |
· | GAAP -- United States generally accepted accounting principles. |
· | Doré -- Unrefined gold and silver bullion bars consisting of approximately 90% precious metals, which will be further refined. |
· | Mineralized Material -- Estimates of mineralization that have been sufficiently drilled and geologically understood to allow the assumption of continuity between samples, but for which an economically viable plan has not been formulated. |
· | Ore -- A mixture of valuable minerals and gangue (valueless minerals) from which at least one of the minerals or metals, combined with by-products, can be extracted at a profit. |
· | Orebody -- A continuous, well-defined mass of material of sufficient ore content to make extraction economically feasible. |
· | Primary Development -- The initial access to an orebody through adits, shafts, declines, ramps and winzes. |
· | Proven and Probable Ore Reserves -- Reserves that reflect estimates of the quantities and grades of mineralized material at our mines which we believe can be recovered and sold at prices in excess of the total cash cost associated with extracting and processing the ore. The estimates are based largely on current costs and on metals prices and demand for our products. Mineral reserves are stated separately for each of our properties based upon factors relevant to each location. Reserves represent diluted in-place grades and do not reflect losses in the recovery process. Our estimates of proven and probable reserves for the Lucky Friday unit, the San Sebastian unit and the La Camorra unit are based on the following metals prices: |
December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Silver | $ | 5.60 | $ | 4.95 | $ | 4.75 | ||||
Gold | $ | 350 | $ | 335 | $ | 300 | ||||
Lead | $ | 0.28 | $ | 0.24 | $ | 0.21 | ||||
Zinc | $ | 0.42 | $ | 0.40 | $ | 0.44 |
December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Silver | $ | 5.00 | $ | 5.00 | $ | 5.00 | ||||
Gold | $ | 338 | $ | 300 | $ | 300 | ||||
Lead | $ | 0.25 | $ | 0.24 | $ | 0.24 | ||||
Zinc | $ | 0.46 | $ | 0.45 | $ | 0.46 |
· | Probable Reserves -- A portion of a mineralized deposit that can be extracted or produced economically and legally at the time of the reserve determination. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. |
· | Proven Reserves -- A portion of a mineralized deposit that can be extracted or produced economically and legally at the time of the reserve determination. Reserves for which; (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well-defined that size, shape, depth and mineral content of reserves are well established. |
· | Sands -- In Venezuela, the term “sands” is used in reference to the processing of waste, or tailings, from small mining and milling operations. These operations generally employ old technology and achieve relatively low gold recoveries. Minera Hecla will, from time to time, purchase these sands for further processing at our La Camorra mill. |
· | Secondary Development -- The preparation of the orebody for production through crosscuts, raises and stope preparation. |
· | Stope -- An underground excavation from which ore has been extracted either above or below a level in a mine. A level is the distance below the collar of the shaft where an opening is driven. |
· | Total Cash Costs - -- Includes 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 and marketing expense, on-site general and administrative costs, royalties and mine production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit. |
· | Total Production Costs -- Includes total cash costs, as defined above, plus depreciation, depletion, amortization and accretion of asset retirement obligations relating to each operating unit. |
· | Total Production Costs Per Ounce -- Calculated based upon total production costs, as defined above, net of by-product revenues earned from all metals other than the primary metal produced at each unit, divided by the total ounces of the primary metal produced. |
· | Unpatented Mining Claim -- A parcel of property located on federal lands pursuant to the General Mining Law and the requirements of the state in which the unpatented claim is located, the paramount title of which remains with the federal government. The holder of a valid, unpatented lode-mining claim is granted certain rights including the right to explore and mine such claim under the General Mining Law. |
Years Ended December 31, | ||||||||||
Production | 2004 | 2003 | 2002 | |||||||
Ore processed (tons) | 199,453 (1 | ) | 197,591 (1 | ) | 194,960 | |||||
Gold (ounces) | 130,436 (1 | ) | 126,567 (1 | ) | 167,386 |
Average Cost per Ounceof Gold Produced (2) | ||||||||||
Cash operating costs | $ | 176 | $ | 154 | $ | 137 | ||||
Total cash costs | $ | 180 | $ | 154 | $ | 137 | ||||
Total production costs | $ | 271 | $ | 222 | $ | 206 |
Proven and ProbableOre Reserves (3,4,5,6 ,7 ) | 12/31/04 | 12/31/03 | 12/31/02 | |||||||
Total tons | 356,192 | 318,644 | 453,224 | |||||||
Gold (ounces per ton) | 0.60 | 0.69 | 0.91 | |||||||
Contained gold (ounces) | 213,244 | 220,552 | 412,332 |
(1) | During 2004, 24,264 tons milled and 4,789 gold ounces produced included in the production figures were generated from Hecla’s custom milling business and other purchases of ore from third-parties. During 2003, 15,155 tons milled and 3,049 gold ounces produced included in the production figures listed above were generated from tailings from outside small third-party milling operations in the local area and other gold-bearing quartz material not mined at La Camorra. |
(2) | Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure, can be found in Item 7 - Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization . |
(3) | For proven and probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Terms. |
(4) | The 2004 year-end reserves show an increase in tonnage and decrease in grade resulting in a decrease in ounces when compared to the 2003 year-end reserves. The changes are a result of a combination of new drill data and underground sampling information, a revision of ore shoot limits and the increase in mine dilution being applied to the Betzy vein material together with a depletion of reserves by mining. |
(5) | The decrease in tons of proven and probable ore reserves in 2003 compared to 2002 is primarily due to the depletion of reserves by mining and other factors, including a reinterpretation of the La Camorra mine ore shoot geometry and a revised mine plan. Mining in the Betzy vein encountered changes in orebody geometry and more extensive waste zones than expected. |
(6) | Proven and probable ore reserves at the La Camorra mine are based on drill spacing of 30 to 50 meters and closely spaced chip sample information. Cutoff grade assumptions are developed based on reserve prices, anticipated mill recoveries and cash operating costs. The cutoff grade at La Camorra is 8 grams of gold per tonne. |
(7) | An independent audit of the 2001 year end reserves at La Camorra mine was completed in 2002. |
Proven and ProbableOre Reserves (1,2,3 ,4 ) | 12/31/04 | 12/31/03 | |||||
Total tons | 338,965 | 500,011 | |||||
Gold (ounces per ton) | 1.03 | 0.66 | |||||
Contained gold (ounces) | 350,547 | 327,303 |
(1) | For proven and probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Terms. |
(2) | Proven and probable ore reserves at Mina Isidora are based on diamond drilling spaced at approximately 30 meters, geostatistical modeling and a feasibility study. Cutoff grade assumptions are developed based on reserve prices, anticipated mill recoveries and cash operating costs. |
(3) | The changes to the Mina Isidora ore reserves in 2004 compared to 2003 can be attributed to additional drill data, changes in resource modeling techniques and changes in mining assumptions. Many of the modeling changes are the direct result of the independent audit of the 2003 reserves that we commissioned. |
(4) | An independent audit of the 2003 year end reserves for the Mina Isidora property was completed in 2004. |
Years Ended December 31, | ||||||||||
Production | 2004 | 2003 | 2002 | |||||||
Ore milled (tons) | 128,711 | 150,717 | 156,532 | |||||||
Silver (ounces) | 2,042,173 | 4,085,038 | 3,432,394 | |||||||
Gold (ounces) | 33,563 | 47,721 | 41,510 |
Average Cost per Ounceof Silver Produced (1,2) | ||||||||||
Cash operating costs | $ | (0.10 | ) | $ | (0.46 | ) | $ | 0.91 | ||
Total cash costs | $ | 0.21 | $ | (0.25 | ) | $ | 1.09 | |||
Total production costs | $ | 2.11 | $ | 0.71 | $ | 2.06 |
Proven and ProbableOre Reserves (3,4,5,6 ,7 ) | 12/31/04 | 12/31/03 | 12/31/02 | |||||||
Total tons | 30,300 | 170,711 | 369,556 | |||||||
Silver (ounces per ton) | 15.4 | 22.3 | 23.7 | |||||||
Gold (ounces per ton) | 0.29 | 0.26 | 0.24 | |||||||
Contained silver (ounces) | 465,400 | 3,812,503 | 8,761,109 | |||||||
Contained gold (ounces) | 8,600 | 43,731 | 88,269 |
(1) | The continued low costs per silver ounce during 2004 and 2003, compared to 2002, are due in part to significant by-product credits from gold production and a higher average gold price. Costs per ounce amounts are calculated pursuant to standards of the Gold Institute. For the years ended December 31, 2004, 2003 and 2002, gold by-product credits were approximately $6.61, $4.25 and $3.76 per silver ounce, respectively. By-product credits are deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy was changed to treat gold production as a co-product, the following total cash costs per ounce would be reported: |
2004 | 2003 | 2002 | ||||||||
Silver | $ | 3.42 | $ | 2.14 | $ | 2.67 | ||||
Gold | $ | 208 | $ | 160 | $ | 181 | ||||
(2) | Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure, can be found in Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization . |
(3) | For proven and probable ore reserve assumptions and definitions, including assumed metals prices, see Glossary of Certain Terms. |
(4) | Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Mill recoveries of ore reserve grades are expected to be approximately 90% for gold and 89% for silver. Returnable metal recoveries by smelters and refiners for doré toll treatment of gold and silver are expected to be 99.50% for silver and 99.50% for gold. Proven and probable reserves at San Sebastian are based on drill spacing of 35 meters. Cutoff grade assumptions are developed based on reserve prices, anticipated mill recoveries, royalties and cash operating costs. The cutoff grade at San Sebastian is 4.5 grams per tonne of gold equivalent. |
(5) | By the end of 2004 essentially all of proven and probable ore reserves have been exhausted. The current mine plan estimates mining of remaining resources at the San Sebastian unit will cease in third quarter of 2005. |
(6) | Mining depletion accounts for the majority of the changes in proven and probable ore reserves from 2002 to 2003. A revised 2004 mine plan removed some ore pillars from reserves offset by new reserve additions. A small block of ore from the Don Sergio vein was added based on new underground development exposures. |
(7) | An independent audit of the 2001 year end reserves at San Sebastian was completed in 2002. |
Years Ended December 31, (reflects 29.73% interest) | ||||||||||
Production | 2004 | 2003 | 2002 | |||||||
Ore milled (tons) | 239,456 | 232,297 | 218,072 | |||||||
Silver (ounces) | 2,886,264 | 3,480,800 | 3,244,495 | |||||||
Gold (ounces) | 25,624 | 29,564 | 30,531 | |||||||
Zinc (tons) | 22,649 | 22,809 | 23,875 | |||||||
Lead (tons) | 7,384 | 8,289 | 8,200 |
Average Cost per Ounceof Silver Produced (1,2) | ||||||||||
Cash operating costs | $ | 0.98 | $ | 1.10 | $ | 1.76 | ||||
Total cash costs | $ | 1.13 | $ | 1.18 | $ | 1.81 | ||||
Total production costs | $ | 3.47 | $ | 3.64 | $ | 4.28 |
Proven and ProbableOre Reserves (3,4,5,6 ,7 ) | 12/31/04 | 12/31/03 | 12/31/02 | |||||||
Total tons | 2,358,189 | 2,226,361 | 2,095,703 | |||||||
Silver (ounces per ton) | 14.1 | 14.1 | 14.9 | |||||||
Gold (ounces per ton) | 0.11 | 0.12 | 0.13 | |||||||
Zinc (percent) | 10.2 | 10.7 | 11.4 | |||||||
Lead (percent) | 3.9 | 4.0 | 4.2 | |||||||
Contained silver (ounces) | 33,334,025 | 31,386,366 | 31,252,609 | |||||||
Contained gold (ounces) | 261,604 | 256,726 | 268,603 | |||||||
Contained zinc (tons) | 240,467 | 237,202 | 238,029 | |||||||
Contained lead (tons) | 92,916 | 89,422 | 88,574 |
(1) | Includes by-product credits from gold, lead and zinc production and are calculated pursuant to standards of the Gold Institute. Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure, can be found in Item 7 - Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization . |
(2) | For proven and probable ore reserve assumptions and definitions, including assumed metals prices, see Glossary of Certain Terms. |
(3) | Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Mill recoveries of ore reserve grades differ by ore zones and are expected to be in the range of 72-80% for silver, 65-73% for gold, 83-92% for zinc and 72-82% for lead. |
(4) | The changes in reserves in 2004 versus 2003 are due to addition of new drill data increases in forecast precious metals prices, which has resulted in the addition of new reserves based on updated resource estimates for certain orebodies, partially offset by depletion due to production. |
(5) | The changes in reserves in 2003 versus 2002 are due to increases in forecast metals prices and additions of new reserves based on updated resource estimates for certain orebodies, partially offset by depletion due to production. |
(6) | Proven and probable reserves at the Greens Creek unit are based on average drillspacing of 50 to 100 feet. Cutoff grade assumptions vary by orebody and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs. Cutoff grades range from $70 per ton net smelter return to $100 per ton net smelter return. |
(7) | Independent reviews were completed for Greens Creek 2002 year end reserves, and of the reserve and resource models for the 9A and Northwest West Zones in 2003. |
Years Ended December 31, | ||||||||||
Production | 2004 | 2003 | 2002 | |||||||
Ore milled (tons) | 166,866 | 151,991 | 159,651 | |||||||
Silver (ounces) | 2,032,143 | 2,251,486 | 2,004,404 | |||||||
Gold (ounces) | 236 | 239 | 206 | |||||||
Lead (tons) | 12,174 | 12,935 | 10,091 | |||||||
Zinc (tons) | 2,995 | 2,532 | 2,259 |
Average Cost per Ounceof Silver Produced (1,2) | ||||||||||
Cash operating costs | $ | 5.12 | $ | 4.86 | $ | 4.97 | ||||
Total cash costs | $ | 5.12 | $ | 4.86 | $ | 4.97 | ||||
Total production costs | $ | 5.17 | $ | 4.88 | $ | 5.49 |
Proven and ProbableOre Reserves (3,4,5,6 ,7 ) | 12/31/04 | 12/31/03 | 12/31/02 | |||||||
Total tons | 757,700 | 659,380 | - - | |||||||
Silver (ounces per ton) | 14.7 | 15.4 | - - | |||||||
Lead (percent) | 7.9 | 8.4 | - - | |||||||
Zinc (percent) | 2.4 | 2.4 | - - | |||||||
Contained silver (ounces) | 11,150,368 | 10,154,299 | - - | |||||||
Contained lead (tons) | 59,888 | 55,192 | - - | |||||||
Contained zinc (tons) | 18,047 | 15,715 | - - |
(1) | Includes by-product credits from gold, lead and zinc production and are calculated pursuant to standards of the Gold Institute. |
(2) | Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure, can be found in Item 7 - Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization . |
(3) | For proven and probable ore reserve assumptions and definitions including metals prices, see Glossary of Certain Terms. |
(4) | Reserves are in-place material that incorporate estimates of the amount of waste that must be mined along with the ore and expected mining recovery. Mill recoveries are expected to be 93% for silver, 93% for lead and 76% for zinc. |
(5) | The changes in reserves in 2004 versus 2003 are due to addition of data from new drill holes and development work together with increases in forecast metals prices, which has resulted in the addition of new reserves based on updated resource estimates, partially offset by depletion due to production. |
(6) | As of December 31, 2002, it was determined the Lucky Friday mineralized material did not meet all the criteria established for disclosure of reserves by the Securities and Exchange Commissions Industry Guide 7. At December 31, 2002, the estimated mineralized material included 1,082,000 tons with 13.2 ounces per ton silver, 8.5% lead and 1.7% zinc. |
(7) | An independent audit of the 2001 year end reserves at Lucky Friday was completed in 2002. |
Part I.
(a) | (i) | Shares of our common stock are traded on the New York Stock Exchange, Inc. |
(ii) | Our common stock quarterly high and low sale prices, based on the New York Stock Exchange composite transactions as reported by NYSEnet.com, for the past two years were as follows: |
First | Second | Third | Fourth | ||||||||||
Quarter | Quarter | Quarter | Quarter | ||||||||||
2004 - High | $ | 9.31 | $ | 8.55 | $ | 7.48 | $ | 7.50 | |||||
- Low | $ | 7.10 | $ | 5.00 | $ | 4.83 | $ | 5.30 | |||||
2003 - High | $ | 5.86 | $ | 4.34 | $ | 7.11 | $ | 8.72 | |||||
- Low | $ | 2.60 | $ | 2.90 | $ | 4.20 | $ | 4.88 | |||||
(b) | As of February 28, 2005, there were 7,811 shareholders of record of the Common Stock. |
(c) | We have not declared or paid any cash dividends on our common stock for several years and do not anticipate paying any such cash dividends in the foreseeable future. We are currently restricted from paying dividends on our common stock or repurchasing common stock until such time as we have paid the cumulative dividends on our Series B preferred stock. At December 31, 2004, the cumulative dividend for the preferred stock was $2.3 million. On January 3, 2005, the company paid the regularly scheduled dividend on outstanding preferred stock and dividends were approved for the first quarter of 2005, payable April 1, 2005. Dividends were not paid for the prior 17 quarters and remain unpaid. |
(d) | On August 2, 2002, through our wholly owned subsidiary Hecla Ventures Corporation, we entered into an earn-in agreement with Rodeo Creek Gold, Inc., a wholly owned subsidiary of Great Basin Gold Ltd. (“Great Basin”). Pursuant to the agreement, Great Basin was issued a warrant to purchase 2,000,000 shares of our common stock as of the date of execution of the Earn-in Agreement, which was exercised during 2003 at a price of $3.73 per share. Neither the warrant nor the underlying common stock was registered under the Securities Act of 1933 pursuant to Section 4(2) of such Act. In the event that we elect to conduct certain development activities, Great Basin will receive an additional warrant to purchase 1,000,000 shares of common stock, at the then market value, and, upon completion of development activities, Great Basin will receive a final warrant to purchase 1,000,000 shares of our common stock at the then market value. |
(e) | The following table provides information as of December 31, 2004, regarding our compensation plans under which equity securities are authorized for issuance: |
Number of Securities To | Weighted-Average | Number of Securities | ||||||||
Be Issued Upon Exercise | Exercise Price | Remaining Available For | ||||||||
of Outstanding Options, | of Outstanding Options, | Future Issuance Under | ||||||||
Warrants and Rights | Warrants and Rights | Equity Compensation Plans | ||||||||
Equity Compensation Plans Approved by Security Holders: | ||||||||||
1987 and 1995 Stock Incentive Plans | 2,412,668 | $ | 5.37 | 5,071,360 | ||||||
Stock Plan for Nonemployee Directors | 111,884 | N/A | 843,946 | |||||||
Key Employee Deferred Compensation Plan (1) | 798,672 | $ | 5.46 | 5,149,728 | ||||||
Equity Compensation Plans Not Approved by Security Holders | - - | - - | - - |
Total | 3,323,224 | $ | 5.39 | 11,065,034 |
(1) | The number of securities to be issued include 254,325 shares. The issuance of 68,825 shares requires no future service or payment of any exercise price. The balance of 185,500 shares will vest over a service period. |
Item 6. | Selected Financial Data |
2004 | 2003 (1) | 2002 | 2001 | 2000 | ||||||||||||
Sales of products | $ | 130,826 | $ | 116,353 | $ | 105,700 | $ | 85,247 | $ | 75,850 | ||||||
Income (loss) from continuingoperations before cumulative | ||||||||||||||||
effect of change in accountingprinciple (1) | $ | (6,134 | ) | $ | (7,088 | ) | $ | 10,863 | $ | (9,582 | ) | $ | (84,847 | ) | ||
Income (loss) from discontinued operations (2) | - - | -- | (2,224 | ) | 11,922 | 1,529 | ||||||||||
Net income (loss) | (6,134 | ) | (6,016 | ) | 8,639 | 2,340 | (83,965 | ) | ||||||||
Preferred stock dividends (3) | (11,602 | ) | (12,154 | ) | (23,253 | ) | (8,050 | ) | (8,050 | ) | ||||||
Loss applicable to common shareholders (3) | $ | (17,736 | ) | $ | (18,170 | ) | $ | (14,614 | ) | $ | (5,710 | ) | $ | (92,015 | ) | |
Loss from continuing operationsper common share (1) | $ | (0.15 | ) | $ | (0.16 | ) | $ | (0.15 | ) | $ | (0.25 | ) | $ | (1.39 | ) | |
Basic and diluted loss percommon share | $ | (0.15 | ) | $ | (0.16 | ) | $ | (0.18 | ) | $ | (0.08 | ) | $ | (1.38 | ) | |
Total assets | $ | 279,448 | $ | 278,195 | $ | 160,141 | $ | 153,116 | $ | 194,836 | ||||||
Accrued reclamation & closure costs | $ | 75,188 | $ | 70,632 | $ | 49,723 | $ | 52,481 | $ | 58,710 | ||||||
Noncurrent portion of debt | $ | - - | $ | 2,341 | $ | 4,657 | $ | 11,948 | $ | 10,041 | ||||||
Cash dividends paid per commonshare | $ | - - | $ | - - | $ | - - | $ | - - | $ | -- | ||||||
Cash dividends paid per preferredshare (3) | $ | - - | $ | - - | $ | - - | $ | -- | $ | 1.75 | ||||||
Common shares issued | 118,350,861 | 115,543,695 | 86,187,468 | 73,068,796 | 66,859,752 | |||||||||||
Shareholders of record | 7,853 | 8,203 | 8,584 | 8,926 | 9,273 | |||||||||||
Employees | 1,417 | 1,074 | 720 | 701 | 1,195 |
(1) | On January 1, 2003, we adopted SFAS No. 143 “Accounting for Asset Retirement Obligations,” which resulted in a positive cumulative effect of a change in accounting principle of $1.1 million. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. SFAS No. 143 requires us to record a liability for the present value of an estimated environmental remediation cost and the related asset created with it. |
(2) | During 2000, in furtherance of our determination to focus our operations on silver and gold mining and to raise cash to reduce debt and provide working capital, our board of directors made the decision to sell our industrial minerals segment. As such, the industrial minerals segment has been recorded as a discontinued operation as of and for each of the three years in the period ended December 31, 2002. The balance sheets for December 31, 2001 and 2000 have been reclassified to reflect the net assets of the industrial minerals segment as a discontinued operation. |
Year Ended December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Number of shares of Series B preferred stock exchanged for shares of common stock | 306,961 | 288,625 | 1,546,598 | |||||||
Number of shares of common stock issued | 2,436,098 | 2,183,719 | 10,826,186 | |||||||
Non-cash preferred stock dividend incurred in exchange (millions of dollars)(a) | $ | 10.9 | $ | 9.6 | $ | 17.6 |
(a) | The non-cash dividend represents the difference between the value of the common stock issued in the exchange offer and the value of the shares that were issuable under the stated conversion terms of the Series B preferred stock. The non-cash dividend had no impact on our total shareholders’ equity as the offset was an increase in common stock and surplus. |
(3) | As of December 31, 2004, we have not declared or paid $2.3 million of Series B preferred stock dividends. As the dividends are cumulative, they continue to be reported in determining the income (loss) applicable to common stockholders, but are excluded in the amount reported as cash dividends paid per preferred share. |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
2004 Price | High | Low | Average | |||||||
Gold, per ounce | $ | 454 | $ | 375 | $ | 409 | ||||
Silver, per ounce | $ | 8.29 | $ | 5.50 | $ | 6.69 | ||||
Lead, per tonne | $ | 1,040 | $ | 690 | $ | 960 | ||||
Zinc, per tonne | $ | 1,260 | $ | 940 | $ | 1,110 |
· | The United States segment - silver operations |
o | The Lucky Friday unit in Idaho (metal concentrates) |
o | The Greens Creek unit in Alaska (metal concentrates and doré) |
· | The Mexico segment - silver operation |
o | The San Sebastian unit (doré and precipitate) |
· | The Venezuela segment - gold operation |
o | The La Camorra unit (doré) |
· | Maintaining our production and cost profile; |
· | Significantly increasing our proven and probable reserves via investment in exploration and acquisitions; |
· | Positioning the company to double our silver and gold production; |
· | Maintaining our financial strength; and |
· | Focusing on silver and gold assets and production. |
Projected | Actual | ||||||||||||
2005 | 2004 | 2003 | 2002 | ||||||||||
Silver ounce production: | |||||||||||||
San Sebastian unit (1) | 1,200 | 2,042 | 4,085 | 3,432 | |||||||||
Greens Creek unit (2) | 2,800 | 2,887 | 3,481 | 3,245 | |||||||||
Lucky Friday unit | 3,000 | 2,032 | 2,251 | 2,004 | |||||||||
Total silver ounces | 7,000 | 6,961 | 9,817 | 8,681 | |||||||||
Gold ounce production: | |||||||||||||
La Camorra unit | 140 | 130 | 127 | 167 | |||||||||
San Sebastian unit (1) | 27 | 34 | 48 | 42 | |||||||||
Greens Creek unit (2) | 23 | 26 | 29 | 31 | |||||||||
Total gold ounces | 190 | 190 | 204 | 240 |
(1) | Our mill that processes ore from our San Sebastian mine has experienced a strike by employees since mid-October 2004, which has continued into 2005. The production estimates for San Sebastian assume that a timely, satisfactory resolution to the strike can be reached in 2005. The mine plan for San Sebastian estimates that mining will cease in the middle of 2005. |
(2) | Reflects our 29.73% portion. |
2004 | 2003 | 2002 | ||||||||
Average costs per ounce of silver produced: | ||||||||||
Total cash costs per ounce ($/oz.) (1,3) | 2.02 | 1.43 | 2.25 | |||||||
Total production costs per ounce ($/oz.) (1,3) | 3.57 | 2.70 | 3.68 | |||||||
Average costs per ounce of gold produced: | ||||||||||
Total cash costs per ounce ($/oz.) (2,3) | 180 | 154 | 137 | |||||||
Total production costs per ounce ($/oz.) (2,3) | 271 | 222 | 206 | |||||||
Average Metals Prices: | ||||||||||
Silver-Handy & Harman ($/oz.) | 6.69 | 4.91 | 4.63 | |||||||
Gold-Realized ($/oz.) | 379 | 339 | 303 | |||||||
Gold-London Final ($/oz.) | 409 | 364 | 310 | |||||||
Lead-LME Cash ($/pound) | 0.402 | 0.234 | 0.205 | |||||||
Zinc-LME Cash ($/pound) | 0.475 | 0.375 | 0.353 |
(1) | The higher costs per silver ounce during 2004 compared to 2003 are due in part to lower grades affecting production at all three silver operations and greater depth of mining at the Lucky Friday mine which increased costs, partly offset by significant by-product credits from an increased gold price and base metals prices. Strike-related costs associated with our mill in Mexico totaling $777,000, have been excluded from silver costs per ounce. Our costs per ounce amounts are calculated pursuant to standards of the Gold Institute. |
(2) | Costs per ounce of gold are based on the gold produced from our gold operating properties only. Gold produced from San Sebastian and Greens Creek is treated as a by-product credit in calculating silver costs per ounce. Gold produced from ores purchased from third parties is treated as a by-product credit in calculating gold costs per ounce. |
(3) | Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold provide management and investors an indicat ion of net cash flow , after consideration of the realized price received for production sold. Management also uses this measurement for the comparative monitoring of performance of our mining operations from period-to-period from a cash flow perspective . A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization , the most comparable GAAP measure, can be found below under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP). |
• | We have historically presented San Sebastian as a producer primarily of silver based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors, regardless of the relationships of metals prices and production from year to year; |
• | San Sebastian is in a mining district historically identified with silver; |
• | Exploration has been directed toward silver, and recent exploration results have shown a predominant silver content; and |
• | Our mining methods and production planning target silver as our primary product, which has been accompanied by a significant gold presence. |
• | We have historically presented Greens Creek as a producer primarily of silver based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors, regardless of the relationships of metals prices and production from year to year; |
• | Silver accounts for a higher proportion of revenue than any other metal and is expected to do so in the future; |
• | Metallurgical treatment maximizes silver recovery; |
• | The Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and |
• | In most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery. |
• | Silver accounts for a higher proportion of revenue than any other metal and is expected to do so in the future; |
• | The Lucky Friday unit is situated in a mining district long associated with silver production; and |
• | The Lucky Friday unit utilizes selective mining methods to target silver production. |
2004 | 2003 | 2002 | ||||||||
Mexico & United States Segments (combined) (1) | ||||||||||
Total cash costs | $ | 14,078 | $ | 14,041 | $ | 19,569 | ||||
Divided by silver ounces produced | 6,961 | 9,817 | 8,681 | |||||||
Total cash cost per ounce produced | $ | 2.02 | $ | 1.43 | $ | 2.25 | ||||
Reconciliation to GAAP: | ||||||||||
Total cash costs | $ | 14,078 | $ | 14,041 | $ | 19,569 | ||||
Depreciation, depletion and amortization | 10,113 | 11,583 | 11,263 | |||||||
Treatment & freight costs | (22,964 | ) | (21,810 | ) | (20,987 | ) | ||||
By-product credits | 54,260 | 50,336 | 41,071 | |||||||
Change in product inventory | 1,395 | 33 | (2,734 | ) | ||||||
Strike-related costs | 777 | - - | - - | |||||||
Reclamation and other costs | 407 | 869 | 1,156 | |||||||
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) | $ | 58,066 | $ | 55,052 | $ | 49,338 | ||||
San Sebastian Unit (1,2,3) | ||||||||||
Total cash costs | $ | 421 | $ | (1,007 | ) | $ | 3,737 | |||
Divided by silver ounces produced | 2,042 | 4,085 | 3,432 | |||||||
Total cash cost per ounce produced | $ | 0.21 | $ | (0.25 | ) | $ | 1.09 | |||
Reconciliation to GAAP: | ||||||||||
Total cash costs | $ | 421 | $ | (1,007 | ) | $ | 3,737 | |||
Depreciation, depletion and amortization | 3,659 | 3,597 | 2,921 | |||||||
Treatment & freight costs | (1,069 | ) | (2,158 | ) | (2,224 | ) | ||||
By-product credits | 13,493 | 17,367 | 12,909 | |||||||
Change in product inventory | 1,476 | 597 | (2,089 | ) | ||||||
Strike-related costs | 777 | - - | - - | |||||||
Reclamation and other costs | 224 | 294 | 403 | |||||||
Cost of sales and other direct production costs and depreciation, depletion, and amortization (GAAP) | $ | 18,981 | $ | 18,690 | $ | 15,657 | ||||
Greens Creek Unit (1) | ||||||||||
Total cash costs | $ | 3,257 | $ | 4,108 | $ | 5,872 | ||||
Divided by silver ounces produced | 2,886 | 3,481 | 3,245 | |||||||
Total cash cost per ounce produced | $ | 1.13 | $ | 1.18 | $ | 1.81 | ||||
Reconciliation to GAAP: | ||||||||||
Total cash costs | $ | 3,257 | $ | 4,108 | $ | 5,872 | ||||
Depreciation, depletion and amortization | 6,594 | 7,986 | 7,404 | |||||||
Treatment & freight costs | (15,218 | ) | (13,990 | ) | (14,148 | ) | ||||
By-product credits | 29,486 | 25,893 | 23,244 | |||||||
Change in product inventory | (231 | ) | (472 | ) | (690 | ) | ||||
Reclamation and other costs | 157 | 575 | 611 | |||||||
Cost of sales and other direct production costs and depreciation, depletion, and amortization (GAAP) | $ | 24,045 | $ | 24,100 | $ | 22,293 |
2004 | 2003 | 2002 | ||||||||
Lucky Friday Unit (1) | ||||||||||
Total cash costs | $ | 10,400 | $ | 10,940 | $ | 9,960 | ||||
Divided by silver ounces produced | 2,032 | 2,251 | 2,004 | |||||||
Total cash cost per ounce produced | $ | 5.12 | $ | 4.86 | $ | 4.97 | ||||
Reconciliation to GAAP: | ||||||||||
Total cash costs | $ | 10,400 | $ | 10,940 | $ | 9,960 | ||||
Depreciation, depletion and amortization | (140 | ) | - - | 938 | ||||||
Treatment & freight costs | (6,677 | ) | (5,662 | ) | (4,615 | ) | ||||
By-product credits | 11,281 | 7,076 | 4,918 | |||||||
Change in product inventory | 150 | (92 | ) | 45 | ||||||
Reclamation and other costs | 26 | - - | 142 | |||||||
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) | $ | 15,040 | $ | 12,262 | $ | 11,388 | ||||
Venezuela Segment (1) | ||||||||||
Total cash costs | $ | 22,617 | $ | 19,498 | $ | 22,879 | ||||
Divided by gold ounces produced | 126 | 127 | 167 | |||||||
Total cash cost per ounce produced | $ | 180 | $ | 154 | $ | 137 | ||||
Reconciliation to GAAP: | ||||||||||
Total cash costs | $ | 22,617 | 19,498 | 22,879 | ||||||
Depreciation, depletion and amortization | 11,439 | 8,538 | 11,273 | |||||||
Treatment & freight costs | (1,980 | ) | (1,634 | ) | (1,840 | ) | ||||
By-product credits | 1,892 | - - | - - | |||||||
Change in product inventory | 1,383 | (810 | ) | (53 | ) | |||||
Reclamation and other costs | 3 | 70 | 388 | |||||||
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) | $ | 35,354 | $ | 25,662 | $ | 32,647 | ||||
Reconciliation to GAAP, All Locations: | ||||||||||
Total cash costs | $ | 36,695 | $ | 33,539 | $ | 42,448 | ||||
Depreciation, depletion and amortization | 21,552 | 20,121 | 22,536 | |||||||
Treatment & freight costs | (24,944 | ) | (23,444 | ) | (22,827 | ) | ||||
By-product credits | 56,152 | 50,336 | 41,071 | |||||||
Change in product inventory | 2,778 | (777 | ) | (2,787 | ) | |||||
Strike-related costs | 777 | - - | - - | |||||||
Cost of goods sold, industrial minerals | - - | 604 | - - | |||||||
Reclamation and other costs | 410 | 939 | 1,544 | |||||||
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) | $ | 93,420 | $ | 81,318 | $ | 81,985 |
(1) | See Glossary of Certain Terms for definition of “Total Cash Costs”. |
(2) | Costs totaling $777,000 have been excluded from the determination of silver costs per ounce in 2004 as they relate to the strike at the Velardeña mill and are not representative of normal operating costs. |
(3) | Gold is accounted for as a by-product at the San Sebastian unit whereby revenues from gold are deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy was changed to treat gold production as a co-product, the following costs per ounce would be reported: |
2004 | 2003 | 2002 | ||||||||
Total cash costs (in thousands) | $ | 13,914 | $ | 16,360 | $ | 16,646 | ||||
Revenue | ||||||||||
Silver | 49.9 | % | 53.4 | % | 55.0 | % | ||||
Gold | 50.1 | % | 46.6 | % | 45.0 | % | ||||
Ounces produced (in thousands) | ||||||||||
Silver | 2,042 | 4,085 | 3,432 | |||||||
Gold | 34 | 48 | 42 | |||||||
Total cash cost per ounce produced | ||||||||||
Silver | $ | 3.42 | $ | 2.14 | $ | 2.67 | ||||
Gold | $ | 208 | $ | 160 | $ | 181 | ||||
Payments Due By Period | ||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||
Purchase obligations | $ | 12,987 | - - - | - - - | - - - | - - - | $ | 12, 987 | ||||||||||||||
Contractual obligations (1) | 2,828 | 2,828 | ||||||||||||||||||||
Earn-in agreement (2) | 4,288 | - - - | - - - | - - - | - - - | 4,288 | ||||||||||||||||
Operating lease commitments (3) | 731 | 611 | 146 | 19 | 15 | 1,522 | ||||||||||||||||
Total contractual cash obligations | $ | 20,834 | $ | 611 | $ | 146 | $ | 19 | $ | 15 | $ | 21,625 |
(1) | As of December 31, 2004, we were committed to approximately $0.6 million for the construction of a shaft at the La Camorra mine $1.7 million for transportation, and $0.5 million for other capital projects. |
(2) | In August 2002, we entered into an earn-in agreement with Rodeo Creek Gold, Inc., a wholly owned subsidiary of Great Basin Gold Ltd. (“Great Basin”), concerning exploration, development and production on Great Basin’s Hollister Development Block gold property. The agreement provides us with an option to earn a 50% working interest in the Hollister Development Block in return for funding a two-stage, advanced exploration and development program leading to commercial production. As of December 31, 2004, we were contractually committed to fund approximately $4.3 million, which represents the remaining portion of the first stage of the agreement. The $4.3 million has not been recorded in our Consolidated Financial Statements; although project to date, we have incurred expenditures of $6.1 million, which has been recorded in our Consolidated Financial Statements as pre-development expenditures. |
(3) | We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements. |
2004 | 2003 | 2002 | ||||||||
Silver | $ | 3.42 | $ | 2.14 | $ | 2.67 | ||||
Gold | $ | 208 | $ | 160 | $ | 181 | ||||
• | We have historically presented San Sebastian, Greens Creek and Lucky Friday as producers primarily of silver based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors, regardless of the relationships of metals prices and production from year to year; |
• | Silver represents a higher value than any other metal; |
• | Silver is the primary object of the cost structures at Greens Creek and Lucky Friday, which utilize selective mining methods for recovery of silver rather than bulk methods for recovery of lower-value base metals; and |
• | By-products include two other metals for Lucky Friday, and three other metals for Greens Creek. |
2004 | 2003 | 2002 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Greens Creek | $ | 5.27 | $ | 4.02 | $ | 2.80 | |||||
Luck Friday | $ | 2.26 | $ | 0.62 | $ | 0.23 |
Expected Maturity Date | Fair | |||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Total | Value | ||||||||||||||||
Short-term investments | $ | 18,478 | - - - | - - - | - - - | - - - | $ | 18,478 | $ | 18,478 | ||||||||||||
Average interest rate | 1.996 | % | - - - | - - - | - - - | - - - | ||||||||||||||||
Expected Maturity | ||||
Date | ||||
2005 | ||||
Forward contracts: | ||||
Lead tonnes | 4,050 | |||
Future price (per tonne) | $ | 782.40 | ||
Contract amount (in thousands) | $ | 3,169 | ||
Estimated fair value | $ | (904 | ) | |
Estimated % of annual production committed to contracts | 19 | % |
Item 8. Financial Statements and Supplementary Data
First | Second | Third | Fourth | |||||||||||||
2004 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||
Sales of products | $ | 36,650 | $ | 31,712 | $ | 33,718 | $ | 28,746 | $ | 130,826 | ||||||
Gross profit | $ | 13,409 | $ | 10,071 | $ | 6,905 | $ | 7,021 | $ | 37,406 | ||||||
Net income (loss) | $ | 6,180 | $ | 2,748 | $ | (11,292 | ) | $ | (3,770 | ) | $ | (6,134 | ) | |||
Preferred stock dividends | $ | (11,188 | ) | $ | (138 | ) | $ | (138 | ) | $ | (138 | ) | $ | (11,602 | ) | |
Income (loss) applicable tocommon shareholders |
(1) | On January 1, 2003, we adopted SFAS No. 143 “Accounting for Asset Retirement Obligations,” which resulted in a positive cumulative effect of change in accounting principle of $1.1 million. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. SFAS No. 143 requires us to record a liability for the present value of estimated environmental remediation costs and the related asset created with it. |
· | In planning its assessment of internal control, management determined that controls over the processes at the Velardeña mill (the “Mill”) in Mexico should be documented and tested. Employees at the Mill have been on strike since October 16, 2004. The strike was not anticipated by management. As a result of this strike and the resulting shutdown in operations at the Mill, management was not able to complete all the testing of controls that it had planned to perform. Management successfully completed tests of the controls relating to the processing costs at the Mill, but management’s testing of controls over the determination of the quantity of metal ounces in the Mill work-in-process inventory was not completed before the strike occurred. Processing costs incurred at the Mill represent approximately 6% of Cost of Sales during the year ended December 31, 2004. The Mill work-in-process inventory as of December 31, 2004 is zero due to the circumstances described in the following paragraph. Management believes that its inability to test these controls as planned is a material weakness in its control environment and monitoring components of internal control as defined by the COSO framework. |
· | When the strike occurred, the Mill supervisors determined the inventory quantities and reported them to accounting personnel. Subsequently, certain shutdown procedures were performed at the Mill, which included emptying work-in-process inventory into the tailings impoundment. The emptying of the work-in-process inventory was not reported to accounting personnel who would have adjusted the Mill inventory balance to zero had the information been reported. This discrepancy was discovered by our independent auditors during their year end audit. As a result, management recorded an adjustment of $421,000 to properly reflect the work in process inventory balance. This adjustment is reflected in the 2004 financial statements presented in this annual report on Form 10-K/A-1 . Management considers the failure of the accounting personnel to be properly notified of the Mill activity a material weakness under the information and communication component of the COSO framework. |
· | At our Mexican operations, certain vendor balances in accounts payable were not reviewed and adjusted on a timely basis to proper balances. The Company failed to have an appropriate control in place for oversight and monitoring of the detail of accounts payable balances. The result was four errors in recorded balances, none of which alone, or in the aggregate, was material to the financial statements of the Company; however, the lack of a control over the monitoring of the detail of accounts payable records cannot ensure that a material misstatement in the financial statements would be prevented or detected under normal operating conditions. Accordingly, the Company views the lack of a control to monitor the detail of accounts payable records as a material weakness in financial reporting. |
Age at | |||
May 6, 2005 | Position and Committee Assignments | ||
Ian Atkinson | 55 | Vice President - Exploration and Strategy | |
Phillips S. Baker, Jr. | 45 | President and Chief Executive Officer, Director (1,6) | |
Michael H. Callahan | 41 | Vice President - Corporate Development | |
Ronald W. Clayton | 46 | Vice President - North American Operations | |
Thomas F. Fudge, Jr. | 50 | Vice President - Operations | |
Vicki Veltkamp | 48 | Vice President - Investor and Public Relations | |
Lewis E. Walde | 38 | Vice President and Chief Financial Officer | |
Arthur Brown | 64 | Chairman of the Board (1,7) | |
David J. Christensen | 43 | Director (2,3,8) | |
John E. Clute | 70 | Director (1,4,5) | |
Ted Crumley | 60 | Director (1,2,4,5) | |
Charles L. McAlpine | 71 | Director (3,4,5,7) | |
George R. Nethercutt, Jr. | 60 | Director | |
Jorge E. Ordoñez C. | 65 | Director (2,3,4,7) | |
Dr. Anthony P. Taylor | 63 | Director (7,8) |
(1) | Member of Executive Committee |
(2) | Member of Finance Committee |
(3) | Member of Audit Committee |
(4) | Member of Corporate Governance and Directors Nominating Committee |
(5) | Member of Compensation Committee |
(6) | Member of Retirement Board |
(7) | Member of Technical Committee |
(8) | Elected by holders of Series B preferred stock |
(a) | (1) Financial Statements |
(a) | (2) Financial Statement Schedules |
(a) | (3) Exhibits |
HECLA MINING COMPANY | ||
| | |
By: | /s/ Phillips S. Baker, Jr. | |
Phillips S. Baker, Jr. Chief Executive Officer and Director | ||
Date: | March 16, 2005 | |
/s/ Phillips S. Baker, Jr. | 3/16/05 | /s/ Ted Crumley | 3/16/05 | |||
Phillips S. Baker, Jr. | Date | Ted Crumley | Date | |||
President, Chief Executive Officer | Director | |||||
and Director | ||||||
(principal executive officer) | ||||||
/s/ Lewis E. Walde | 3/16/05 | /s/ Charles L. McAlpine | 3/16/05 | |||
Lewis E. Walde | Date | Charles L. McAlpine | Date | |||
Vice President andChief Financial Officer | Director | |||||
(principal financial and accountingofficer) | ||||||
/s/ Arthur Brown | 3/16/05 | /s/ George R. Nethercutt, Jr. | 3/16/05 | |||
Arthur Brown | Date | George R. Nethercutt, Jr. | Date | |||
Chairman and Director | Director | |||||
/s/ David J. Christensen | 3/16/05 | /s/ Jorge E. Ordoñez | 3/16/05 | |||
David J. Christensen | Date | Jorge E. Ordoñez | Date | |||
Director | Director | |||||
/s/ John E. Clute | 3/16/05 | /s/ Anthony P. Taylor | 3/16/05 | |||
John E. Clute | Date | Anthony P. Taylor | Date | |||
Director | Director |
Index to Consolidated Financial Statements
Consolidated Financial Statements | Page | ||
Reports of Independent Registered Public Accounting Firms | F-2 to F-3 | ||
Consolidated Balance Sheets at December 31, 2004 and 2003 | F-4 | ||
Consolidated Statements of Operations and Comprehensive Income (Loss) | |||
for the Years Ended December 31, 2004, 2003 and 2002 | F-5 | ||
Consolidated Statements of Cash Flows for the Years Ended | |||
December 31, 2004, 2003 and 2002 | F-6 | ||
Consolidated Statements of Changes in Shareholders’ Equity for the | |||
Years Ended December 31, 2004, 2003 and 2002 | F-7 | ||
Notes to Consolidated Financial Statements | F-8 to F-54 | ||
Hecla Mining Company and Subsidiaries
December 31, | |||||||||||
2004 | 2003 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 52,610 | $ | 105,387 | |||||||
Short-term investments | 28,178 | 18,003 | |||||||||
Accounts and notes receivable: | |||||||||||
Trade | 6,911 | 6,975 | |||||||||
Other | 15,025 | 9,343 | |||||||||
Inventories | 20,250 | 16,936 | |||||||||
Deferred income taxes | - - - | 1,427 | |||||||||
Other current assets | 5,607 | 3,174 | |||||||||
Total current assets | 128,581 | 161,245 | |||||||||
Investments | 1,657 | 722 | |||||||||
Restricted cash and investments | 19,789 | 6,447 | |||||||||
Properties, plants and equipment, net | 114,515 | 95,315 | |||||||||
Deferred income taxes | - - - | 896 | |||||||||
Other noncurrent assets | 14,906 | 13,570 | |||||||||
Total assets | $ | 279,448 | $ | 278,195 | |||||||
LIABILITIES | |||||||||||
Current liabilities: | |||||||||||
Accounts payable and accrued liabilities | $ | 16,042 | $ | 13,847 | |||||||
Accrued payroll and related benefits | 9,405 | 7,307 | |||||||||
Current portion of debt | - - - | 2,332 | |||||||||
Accrued taxes | 2,379 | 3,193 | |||||||||
Current portion of accrued reclamation and closure costs | 9,237 | 7,400 | |||||||||
Total current liabilities | 37,063 | 34,079 | |||||||||
Long-term debt | - - - | 2,341 | |||||||||
Accrued reclamation and closure costs | 65,951 | 63,232 | |||||||||
Other noncurrent liabilities | 7,107 | 7,114 | |||||||||
Total liabilities | 110,121 | 106,766 | |||||||||
Commitments and contingencies (Notes 2, 3, 4, 5, 8 and 11) | |||||||||||
SHAREHOLDERS’ EQUITY | |||||||||||
Preferred stock, $0.25 par value, authorized 5,000,000 shares; | |||||||||||
issued 2004 - 157,816 shares and 2003 - 464,777 shares, | |||||||||||
liquidation preference 2004 - $10,238 and 2003 - $28,932 | 39 | 116 | |||||||||
Common stock, $0.25 par value, authorized 200,000,000 shares; | |||||||||||
issued 2004 - 118,350,861 shares and issued 2003 - 115,543,695 shares | 29,588 | 28,886 | |||||||||
Capital surplus | 506,630 | 504,858 | |||||||||
Accumulated deficit | (367,832 | ) | (361,560 | ) | |||||||
Accumulated other comprehensive income (loss) | 1,020 | (753 | ) | ||||||||
Less treasury stock, at cost; 8,274 common shares | (118 | ) | (118 | ) | |||||||
Total shareholders’ equity | 169,327 | 171,429 | |||||||||
Total liabilities and shareholders’ equity | $ | 279,448 | $ | 278,195 |
Year Ended December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Sales of products | $ | 130,826 | $ | 116,353 | $ | 105,700 | ||||
Cost of sales and other direct production costs | 71,868 | 61,197 | 59,449 | |||||||
Depreciation, depletion and amortization | 21,552 | 20,121 | 22,536 | |||||||
93,420 | 81,318 | 81,985 | ||||||||
Gross profit | 37,406 | 35,035 | 23,715 | |||||||
Other operating expenses: | ||||||||||
General and administrative | 8,731 | 8,407 | 7,121 | |||||||
Exploration | 15,995 | 9,608 | 5,172 | |||||||
Pre-development expense | 4,227 | 1,395 | 653 | |||||||
Depreciation and amortization | 326 | 341 | 116 | |||||||
Other operating expense (income) | 1,723 | (1,439 | ) | 414 | ||||||
Provision for closed operations and environmental matters | 11,170 | 23,777 | 898 | |||||||
42,172 | 42,089 | 14,374 | ||||||||
Income (loss) from operations | (4,766 | ) | (7,054 | ) | 9,341 | |||||
Other income (expense): | ||||||||||
Interest income | 1,923 | 2,590 | 420 | |||||||
Interest expense | (500 | ) | (1,407 | ) | (1,816 | ) | ||||
1,423 | 1,183 | (1,396 | ) | |||||||
Income (loss) from continuing operations before income taxes and | ||||||||||
items shown below | (3,343 | ) | (5,871 | ) | 7,945 | |||||
Income tax benefit (provision) | (2,791 | ) | (1,217 | ) | 2,918 | |||||
Income (loss) from continuing operations before items shown below | (6,134 | ) | (7,088 | ) | 10,863 | |||||
Cumulative effect of change in accounting principle, net of income tax | - - - | 1,072 | - - - | |||||||
Discontinued operations, net of income tax | - - - | - - - | (2,224 | ) | ||||||
Net income (loss) | (6,134 | ) | (6,016 | ) | 8,639 | |||||
Preferred stock dividends | (11,602 | ) | (12,154 | ) | (23,253 | ) | ||||
Loss applicable to common shareholders | $ | (17,736 | ) | $ | (18,170 | ) | $ | (14,614 | ) | |
Net income (loss) | $ | (6,134 | ) | $ | (6,016 | ) | $ | 8,639 | ||
Minimum pension liability adjustment | 32 | (1,400 | ) | - - - | ||||||
Change in derivative contracts | (761 | ) | - - - | (256 | ) | |||||
Unrealized holding gains on investments | 2,481 | 645 | 9 | |||||||
Other | 21 | 38 | 38 | |||||||
Comprehensive income (loss) | $ | (4,361 | ) | $ | (6,733 | ) | $ | 8,430 | ||
Basic and diluted income (loss) per common share: | ||||||||||
Loss from operations after preferred stock dividends | $ | (0.15 | ) | $ | (0.17 | ) | $ | (0.15 | ) | |
Cumulative effect of change in accounting principle | - - - | 0.01 | - - - | |||||||
Loss from discontinued operations | - - - | - - - | (0.03 | ) | ||||||
Basic and diluted loss per common share | $ | (0.15 | ) | $ | (0.16 | ) | $ | (0.18 | ) | |
Weighted average number of common | ||||||||||
shares outstanding - basic and diluted | 118,048 | 110,610 | 80,250 |
Year Ended December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Operating activities: | ||||||||||
Net income (loss) | $ | (6,134 | ) | $ | (6,016 | ) | $ | 8,639 | ||
Non-cash elements included in net income (loss): | ||||||||||
Depreciation, depletion and amortization | 21,878 | 20,462 | 22,652 | |||||||
Cumulative effect of change in accounting principle | - - - | (1,072 | ) | - - - | ||||||
Gain on disposition of properties, plants and equipment | (222 | ) | (350 | ) | (329 | ) | ||||
Provision for reclamation and closure costs | 10,271 | 24,086 | 1,931 | |||||||
Deferred income taxes | 2,323 | 677 | (3,300 | ) | ||||||
Stock compensation | 495 | - - - | - - - | |||||||
Change in assets and liabilities: | ||||||||||
Accounts and notes receivable | (5,618 | ) | (6,164 | ) | (3,506 | ) | ||||
Inventories | (3,314 | ) | (2,178 | ) | (3,890 | ) | ||||
Other current and noncurrent assets | (3,163 | ) | (2,051 | ) | 575 | |||||
Accounts payable and accrued expenses | 1,690 | 2,154 | 1,581 | |||||||
Accrued payroll and related benefits | 1,859 | 396 | 312 | |||||||
Accrued taxes | (814 | ) | 1,621 | 395 | ||||||
Accrued reclamation and closure costs and other noncurrent liabilities | (5,917 | ) | (5,588 | ) | (4,825 | ) | ||||
Net cash provided by operating activities | 13,334 | 25,977 | 20,235 | |||||||
Investing activities: | ||||||||||
Proceeds from sale of discontinued operations | - - - | - - - | 1,585 | |||||||
Additions to properties, plants and equipment | (41,371 | ) | (19,535 | ) | (11,219 | ) | ||||
Proceeds from disposition of properties, plants and equipment | 352 | 486 | 5,710 | |||||||
Increase in restricted investments | (13,433 | ) | (19 | ) | (3 | ) | ||||
Purchases of short-term investments | (35,034 | ) | (21,053 | ) | - - - | |||||
Maturities of short-term investments | 26,404 | 3,050 | - - - | |||||||
Other, net | (2 | ) | 8 | (285 | ) | |||||
Net cash used by investing activities | (63,084 | ) | (37,063 | ) | (4,212 | ) | ||||
Financing activities: | ||||||||||
Common stock issued under warrants and stock option plans | 1,646 | 14,218 | 2,925 | |||||||
Issuance of common stock, net of offering costs | - - - | 91,243 | 72 | |||||||
Borrowings on debt | 2,430 | 1,350 | 3,317 | |||||||
Repayments on debt | (7,103 | ) | (9,880 | ) | (10,355 | ) | ||||
Net cash provided (used) by financing activities | (3,027 | ) | 96,931 | (4,041 | ) | |||||
Change in cash and cash equivalents: | ||||||||||
Net increase (decrease) in cash and cash equivalents | (52,777 | ) | 85,845 | 11,982 | ||||||
Cash and cash equivalents at beginning of year | 105,387 | 19,542 | 7,560 | |||||||
Cash and cash equivalents at end of year | $ | 52,610 | $ | 105,387 | $ | 19,542 | ||||
Supplemental disclosure of cash flow information: | ||||||||||
Cash paid during year for: | ||||||||||
Interest, net of amount capitalized | $ | 1,312 | $ | 707 | $ | 1,174 | ||||
Income tax payments, net | $ | 413 | $ | 148 | $ | 9 | ||||
See Notes 2, 4, 9 10 and 11 for non-cash investing and financing activities. |
Accumulated | Stock | ||||||||||||||||||||||||||||||
Other | Held by | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Capital | Accumulated | Comprehensive | Grantor | Unearned | Treasury | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Surplus | Deficit | Income (Loss) | Trust | Compensation | Stock | ||||||||||||||||||||||
Balances, January 1, 2002 | 2,300 | $ | 575 | 73,069 | $ | 18,267 | $ | 404,354 | $ | (364,183 | ) | $ | 173 | $ | (330 | ) | $ | (6 | ) | $ | (886 | ) | |||||||||
Net income | 8,639 | ||||||||||||||||||||||||||||||
Preferred stock exchange | (1,547 | ) | (387 | ) | 10,826 | 2,707 | (2,320 | ) | |||||||||||||||||||||||
Stock issued as compensation | 429 | 108 | 332 | �� | |||||||||||||||||||||||||||
Stock issued to directors | 73 | 18 | 52 | ||||||||||||||||||||||||||||
Stock disbursed by grantor trust | (264 | ) | 264 | ||||||||||||||||||||||||||||
Stock issued under stock option and warrant plans | 1,733 | 433 | 2,493 | ||||||||||||||||||||||||||||
Warrants issued under warrant plans | 1,936 | ||||||||||||||||||||||||||||||
Issuance of restricted stock | 57 | 14 | 42 | (56 | ) | ||||||||||||||||||||||||||
Amortization of unearned compensation | 62 | ||||||||||||||||||||||||||||||
Stock issued as contribution to benefit plan | (666 | ) | 768 | ||||||||||||||||||||||||||||
Other comprehensive loss | (209 | ) | |||||||||||||||||||||||||||||
Balances, December 31, 2002 | 753 | 188 | 86,187 | 21,547 | 405,959 | (355,544 | ) | (36 | ) | (66 | ) | - - | (118 | ) | |||||||||||||||||
Net loss | (6,016 | ) | |||||||||||||||||||||||||||||
Stock issued for cash, net of issuance costs | 23,000 | 5,750 | 85,493 | ||||||||||||||||||||||||||||
Preferred stock exchange | (288 | ) | (72 | ) | 2,184 | 546 | (473 | ) | |||||||||||||||||||||||
Stock issued as compensation | 186 | 47 | 555 | ||||||||||||||||||||||||||||
Stock issued to directors | 19 | 5 | 73 | ||||||||||||||||||||||||||||
Stock disbursed by grantor trust | (66 | ) | 66 | ||||||||||||||||||||||||||||
Stock issued under stock option and warrant plans | 3,968 | 991 | 13,227 | ||||||||||||||||||||||||||||
Stock options issued for deferred compensation | 90 | ||||||||||||||||||||||||||||||
Other comprehensive loss | (717 | ) | |||||||||||||||||||||||||||||
Balances, December 31, 2003 | 465 | 116 | 115,544 | 28,886 | 504,858 | (361,560 | ) | (753 | ) | - - - | - - - | (118 | ) | ||||||||||||||||||
Net loss | (6,134 | ) | |||||||||||||||||||||||||||||
Preferred stock exchange | (307 | ) | (77 | ) | 2,436 | 609 | (532 | ) | |||||||||||||||||||||||
Stock issued to directors | 14 | 4 | 84 | ||||||||||||||||||||||||||||
Modification of stock option awards | 441 | ||||||||||||||||||||||||||||||
Stock issued under stock option plans | 357 | 89 | 1,520 | ||||||||||||||||||||||||||||
Stock options issued for deferred compensation | 259 | ||||||||||||||||||||||||||||||
Preferred stock dividends | (138 | ) | |||||||||||||||||||||||||||||
Other comprehensive income | 1,773 | ||||||||||||||||||||||||||||||
Balances, December 31, 2004 | 158 | $ | 39 | 118,351 | $ | 29,588 | $ | 506,630 | $ | (367,832 | ) | $ | 1,020 | $ | - | $ | - | $ | (118 | ) | |||||||||||
Year Ended December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Loss applicable to common shareholders: | ||||||||||
As reported | $ | (17,736 | ) | $ | (18,170 | ) | $ | (14,614 | ) | |
Stock-based employee compensation expense included in | ||||||||||
reported loss(a) | 583 | 1,130 | 1,455 | |||||||
Total stock-based employee compensation expense determined | ||||||||||
under fairvalue based method for all awards | (3,344 | ) | (3,694 | ) | (3,012 | ) | ||||
Pro forma loss applicable to common Shareholders | $ | (20,497 | ) | $ | (20,734 | ) | $ | (16,171 | ) |
Loss applicable to commonShareholders per share: | ||||||||||
As reported | $ | (0.15 | ) | $ | (0.16 | ) | $ | (0.18 | ) | |
Pro forma | $ | (0.17 | ) | $ | (0.19 | ) | $ | (0.20 | ) |
2004 | 2003 | ||||||
Certificates of deposit | $ | 6,498 | $ | 3,094 | |||
United States government and federal agency securities | 9,500 | 5,616 | |||||
Municipal securities | 1,480 | 6,091 | |||||
Corporate bonds | 1,000 | 3,202 | |||||
Marketable equity security (cost - $7,807) | 9,700 | - - - | |||||
$ | 28,178 | $ | 18,003 | ||||
December 31, | |||||||
2004 | 2003 | ||||||
Concentrates, doré, bullion, metals in transitand other products | $ | 4,965 | $ | 7,745 | |||
Stockpiled ore | 2,782 | 43 | |||||
Materials and supplies | 12,503 | 9,148 | |||||
$ | 20,250 | $ | 16,936 | ||||
December 31, | |||||||
2004 | 2003 | ||||||
Mining properties | $ | 13,127 | $ | 13,947 | |||
Development costs | 118,411 | 109,734 | |||||
Plants and equipment | 183,581 | 176,369 | |||||
Land | 857 | 655 | |||||
Mineral interests | 7,338 | 6,722 | |||||
Construction in progress | 31,159 | 8,796 | |||||
354,473 | 316,223 | ||||||
Less accumulated depreciation,depletion and amortization | 239,958 | 220,908 | |||||
Net carrying value | $ | 114,515 | $ | 95,315 |
Year ending December 31, | ||||
2005 | $ | 731 | ||
2006 | 611 | |||
2007 | 146 | |||
2008 | 19 | |||
2009 | 15 | |||
Total | $ | 1,522 |
Operating properties: | 2004 | 2003 | |||||
Greens Creek | $ | 4,746 | $ | 4,486 | |||
La Camorra unit | 1,475 | 1,240 | |||||
San Sebastian | 1,917 | 1,812 | |||||
Lucky Friday | 498 | 677 | |||||
Hollister | 630 | - - - | |||||
Nonoperating properties: | |||||||
Grouse Creek | 31,734 | 32,154 | |||||
Coeur d’Alene Basin | 23,600 | 18,000 | |||||
Bunker Hill | 4,533 | 6,831 | |||||
Republic | 2,600 | 2,594 | |||||
All other sites | 3,455 | 2,838 | |||||
Total | 75,188 | 70,632 | |||||
Amount reflected as current | (9,237 | ) | (7,400 | ) | |||
Amount reflected as long-term | $ | 65,951 | $ | 63,232 | |||
Balance at January 1, 2002 | $ | 52,481 | ||
Accruals for estimated costs | 2,514 | |||
Payment of reclamation obligations | (5,272 | ) | ||
Balance at December 31, 2002 | 49,723 | |||
Accruals for estimated costs | 24,086 | |||
Adoption of SFAS No. 143 andsubsequent additions due to changes in reclamation plans | 1,744 | |||
Payment of reclamation obligations | (4,921 | ) | ||
Balance at December 31, 2003 | 70,632 | |||
Accruals for estimated costs | 10,271 | |||
Revision of estimated cash flows due to changes in reclamation plans | 569 | |||
Payment of reclamation obligations | (6,284 | ) | ||
Balance at December 31, 2004 | $ | 75,188 | ||
1. | An increase of approximately $0.7 million to accrued reclamation and closure costs to reflect the estimated present value of reclamation liabilities based on the discounted fair market value of future cash flows to settle the obligation; |
2. | An increase to the carrying amounts of the associated long-lived assets of approximately $3.3 million to capitalize the present value of the liabilities as of the date the obligation occurred, offset by $1.5 million of accumulated depletion through January 1, 2003; and |
3. | A cumulative effect of change in accounting principle of $1.1 million gain, reflecting the difference between those amounts and amounts previously recorded in our consolidated financial statements at January 1, 2003. |
2004 | 2003 | ||||||
Balance January 1 | $ | 7,631 | $ | 6,053 | |||
Changes in obligations due to changes inreclamation plans | (15 | ) | 1,031 | ||||
Accretion expense | 263 | 747 | |||||
Payment of reclamation obligations | (17 | ) | (200 | ) | |||
Balance December 31 | $ | 7,862 | $ | 7,631 |
For the Year Ended December 31, | ||||
2002 | ||||
Reported loss applicable to common shareholders | $ | (14,614 | ) | |
Adjustment to cost of sales and other directproduction costs | 1,038 | |||
Adjustment to depreciation, depletionand amortization | (523 | ) | ||
Pro forma loss applicable to common shareholders | $ | (14,099 | ) | |
Basic and diluted loss per share: | ||||
As reported | $ | (0.18 | ) | |
Pro forma | $ | (0.18 | ) |
2004 | 2003 | 2002 | ||||||||
Current: | ||||||||||
Federal | $ | 117 | $ | - - - | $ | - - - | ||||
State | 4 | 6 | - - - | |||||||
Foreign | 347 | 534 | 382 |
Total current income tax provision | 468 | 540 | 382 | |||||||
Deferred: | ||||||||||
Federal | - - - | - - - | - - - | |||||||
Foreign | 2,323 | 677 | (3,300 | ) | ||||||
Total deferred income tax provision(benefit) | 2,323 | 677 | (3,300 | ) |
Total income tax provision (benefit) | $ | 2,791 | $ | 1,217 | $ | (2,918 | ) |
2004 | 2003 | 2002 | ||||||||
Domestic | $ | (9,144 | ) | $ | (26,973 | ) | $ | (11,234 | ) | |
Foreign | 5,801 | 21,102 | 19,179 | |||||||
Total | $ | (3,343 | ) | $ | (5,871 | ) | $ | 7,945 |
December 31, | |||||||
2004 | 2003 | ||||||
Deferred tax assets: | |||||||
Accrued reclamation costs | $ | 26,043 | $ | 23,273 | |||
Investment valuation differences | 710 | 1,357 | |||||
Postretirement benefits other than pensions | 1,462 | 1,099 | |||||
Deferred compensation | 897 | 282 | |||||
Foreign net operating losses | 3,872 | 2,796 | |||||
Federal net operating losses | 110,399 | 118,014 | |||||
State net operating losses | 13,547 | 14,518 | |||||
Tax credit carryforwards | 2,604 | 1,362 | |||||
Miscellaneous | 2,973 | 1,663 | |||||
Total deferred tax assets | 162,507 | 164,364 | |||||
Valuation allowance | (155,968 | ) | (156,463 | ) | |||
Total deferred tax assets | 6,539 | 7,901 | |||||
Deferred tax liabilities: | |||||||
Pension costs | (4,783 | ) | (4,266 | ) | |||
Properties, plants and equipment | (699 | ) | (1,312 | ) | |||
Inventory | (1,057 | ) | - - - | ||||
Total deferred tax liabilities | (6,539 | ) | (5,578 | ) | |||
Net deferred tax asset | $ | - - - | $ | 2,323 |
2004 | 2003 | 2002 | ||||||||
Balance at beginning of year | $ | (156,463 | ) | $ | (150,165 | ) | $ | (153,214 | ) | |
Increase related to nonutilization of net operating loss carryforwards and nonrecognition of deferred tax assets due to uncertainty of recovery | (5,768 | ) | (12,408 | ) | - - - | |||||
(Increase) decrease related to net recognition of foreign deferred tax asset | (2,323 | ) | (677 | ) | 3,000 | |||||
Decrease related to utilization and expiration of net operating loss carryforwards | 8,586 | 6,787 | 49 | |||||||
Balance at end of year | $ | (155,968 | ) | $ | (156,463 | ) | $ | (150,165 | ) |
2004 | 2003 | 2002 | |||||||||||||||||
Computed “statutory” (benefit)/provision | $ | (1,137 | ) | (34 | )% | $ | (1,996 | ) | (34 | )% | $ | 2,701 | 34 | % | |||||
Net increase (reduction) ofvaluation | |||||||||||||||||||
allowance on Mexican loss carryforward | 2,323 | 69 | 677 | 12 | (3,000 | ) | (38 | ) | |||||||||||
Nonutilization of net operating losses and | |||||||||||||||||||
effect of stateand foreign taxes | 1,605 | 48 | 2,536 | 43 | (2,619 | ) | (33 | ) | |||||||||||
$ | 2,791 | 83 | % | $ | 1,217 | 21 | % | $ | (2,918 | ) | (37 | )% |
Pension Benefits | Other Benefits | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Change in benefit obligation: | |||||||||||||
Benefit obligation at beginning of year | $ | 54,927 | $ | 47,071 | $ | 1,531 | $ | 1,376 | |||||
Service cost | 578 | 649 | 6 | 6 | |||||||||
Interest cost | 3,185 | 2,978 | 90 | 88 | |||||||||
Participant transfers in | - - - | 100 | - - - | - - - | |||||||||
Plan amendments | - - - | 1,714 | - - - | - - - | |||||||||
Actuarial (gain) loss | 254 | 5,848 | (270 | ) | 124 | ||||||||
Benefits paid | (3,491 | ) | (3,433 | ) | (34 | ) | (63 | ) | |||||
Benefit obligation at end of year | 55,453 | 54,927 | 1,323 | 1,531 | |||||||||
Change in fair value of plan assets: | |||||||||||||
Fair value of plan assets at beginning of year | 66,414 | 60,397 | - - - | - - - | |||||||||
Actual return on plan assets | 8,370 | 9,076 | - - - | - - - | |||||||||
Employer and employee contributions | 363 | 374 | 34 | 63 | |||||||||
Benefits paid | (3,491 | ) | (3,433 | ) | (34 | ) | (63 | ) | |||||
Fair value of plan assets at end of year | 71,656 | 66,414 | - - - | - - - | |||||||||
Funded status at end of year | 16,203 | 11,487 | (1,323 | ) | (1,531 | ) | |||||||
Unrecognized net actuarial gain | (7,015 | ) | (3,992 | ) | (338 | ) | (76 | ) | |||||
Unrecognized transition obligation | 3 | 7 | - - - | - - - | |||||||||
Unamortized prior-service cost | 2,972 | 3,361 | (17 | ) | 59 | ||||||||
Net amount recognized in consolidated | |||||||||||||
balance sheets | $ | 12,163 | $ | 10,863 | $ | (1,678 | ) | $ | (1,548 | ) | |||
Pension Benefits | Other Benefits | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Other noncurrent assets: | |||||||||||||
Prepaid benefit costs | $ | 14,069 | $ | 12,547 | $ | - - - | $ | - - - | |||||
Other noncurrent liabilities: | |||||||||||||
Accrued benefit liability | (4,078 | ) | (3,960 | ) | (1,678 | ) | (1,548 | ) | |||||
Intangible asset | 804 | 876 | - - - | - - - | |||||||||
Accumulated other comprehensive income (loss) | 1,368 | 1,400 | - - - | - - - | |||||||||
Net amount recognized | $ | 12,163 | $ | 10,863 | $ | (1,678 | ) | $ | (1,548 | ) | |||
Pension Benefits | Other Benefits | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Discount rate | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | |||||
Expected rate on plan assets | 8.00 | % | 8.00 | % | - - - | - - - | |||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | - - - | - - - | |||||||
Pension Benefits | Other Benefits | ||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||
Service cost | $ | 578 | $ | 649 | $ | 534 | $ | 6 | $ | 6 | $ | 9 | |||||||
Interest cost | 3,186 | 2,978 | 2,814 | 90 | 88 | 183 | |||||||||||||
Expected return on plan assets | (5,180 | ) | (4,733 | ) | (4,585 | ) | - - - | - - - | - - - | ||||||||||
Amortization of transitionasset (obligation) | 5 | 5 | 23 | - - - | - - - | - - - | |||||||||||||
Amortization of unrecognized prior | |||||||||||||||||||
service cost | 389 | 542 | 439 | 76 | 75 | 75 | |||||||||||||
Amortization of unrecognized net | |||||||||||||||||||
gain (loss) from earlier periods | 86 | (65 | ) | 15 | (8 | ) | (22 | ) | (18 | ) | |||||||||
Net periodic pension cost (income) | $ | (936 | ) | $ | (624 | ) | $ | (760 | ) | $ | 164 | $ | 147 | $ | 249 |
Hecla Plan | Lucky Friday Plan | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
Interest-bearing cash | 8 | % | 27 | % | 13 | % | 28 | % | |||||
Equity securities | 40 | % | 33 | % | 38 | % | 33 | % | |||||
Debt securities | 37 | % | 29 | % | 34 | % | 28 | % | |||||
Real estate | 0 | % | 0 | % | 0 | % | 0 | % | |||||
Absolute return | 10 | % | 0 | % | 10 | % | 0 | % | |||||
Precious metals and other natural resources | 5 | % | 11 | % | 5 | % | 11 | % | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||
Equity Portion | 30-46 | % | ||
Fixed Income Portion | 29-43 | % | ||
Real Estate Portion | 8-12 | % | ||
Absolute Return Portion | 8-12 | % | ||
Precious Metals andOther Natural Resources Portion | 5-10 | % |
Year Ending December 31, | Hecla Plan | Lucky Friday Plan | |||||
2005 | $ | 2,633 | $ | 688 | |||
2006 | 2,610 | 764 | |||||
2007 | 2,579 | 755 | |||||
2008 | 2,579 | 806 | |||||
2009 | 2,581 | 866 | |||||
Years 2010-2014 | 13,512 | 4,545 |
Year Ended December 31, | ||||||||||
2004 | 2003 | 2002 | ||||||||
Number of shares of Series B preferred stock exchanged for shares of common stock | 306,961 | 288,625 | 1,546,598 | |||||||
Number of shares of common stock issued | 2,436,098 | 2,183,719 | 10,826,186 | |||||||
Non-cash preferred stock dividend incurred in exchange (millions of dollars)(1) | $ | 10.9 | $ | 9.6 | $ | 17.6 | ||||
2004 | 2003 | 2002 | ||||||||
Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Expected stock price volatility | 70.86 | % | 77.38 | % | 78.89 | % | ||||
Risk-free interest rate | 2.59 | % | 1.90 | % | 2.09 | % | ||||
Expected life of options | 2.8 years | 3.2 years | 3.0 years | |||||||
Weighted Average | |||||||
Shares | Exercise Price | ||||||
Outstanding, December 31, 2001 | 2,391,000 | $ | 3.89 | ||||
Year ended December 31, 2002 | |||||||
Granted | 1,095,000 | $ | 3.25 | ||||
Exercised | (634,330 | ) | $ | 1.85 | |||
Expired | (50,000 | ) | $ | 9.75 | |||
Outstanding, December 31, 2002 | 2,801,670 | $ | 3.99 | ||||
Year ended December 31, 2003 | |||||||
Granted | 1,186,000 | $ | 4.95 | ||||
Exercised | (1,933,434 | ) | $ | 3.43 | |||
Expired | (1,334 | ) | $ | 3.23 | |||
Outstanding, December 31, 2003 | 2,052,902 | $ | 5.08 | ||||
Year ended December 31, 2004 | |||||||
Granted | 752,000 | $ | 5.99 | ||||
Exercised | (340,234 | ) | $ | 4.34 | |||
Expired | (52,000 | ) | $ | 9.58 | |||
Outstanding, December 31, 2004 | 2,412,668 | $ | 5.37 | ||||
2004 | 2003 | 2002 | ||||||||
Exercisable options | 2,362,668 | 2,052,902 | 2,467,714 | |||||||
Weighted average exercise price | $ | 5.35 | $ | 5.08 | $ | 4.09 |
Weighted Average | |||||||||||||
Range of | Exercise | Remaining | |||||||||||
Shares | Exercise Price | Price | Life (years) | ||||||||||
Exercisable options | 159,000 | $ | 1.13 - - $1.31 | $ | 1.13 | 1.6 | |||||||
Exercisable options | 189,168 | $ | 2.88 - - $3.23 | $ | 3.23 | 0.5 | |||||||
Exercisable options | 438,000 | $ | 4.10 - - $5.19 | $ | 4.48 | 2.6 | |||||||
Exercisable options | 1,413,500 | $ | 5.63 - - $8.00 | $ | 6.00 | 3.4 | |||||||
Exercisable options | 163,000 | $ | 8.63 - - $9.34 | $ | 8.69 | 0.9 | |||||||
Total exercisable options | 2,362,668 | $ | 1.13 - - $9.34 | $ | 5.36 | 2.8 | |||||||
Unexercisable options | 50,000 | $ | 5.99 | $ | 5.99 | 4.5 | |||||||
Total all options | 2,412,668 | $ | 1.13 - - $9.34 | $ | 5.37 | 2.8 | |||||||
Maturity Date | ||||
2005 | ||||
Lead contract (metric tons) | 4,050 | |||
Future price (per tonne) | $ | 782.40 | ||
Contract amount (in thousands) | $ | 3,169 | ||
Estimated fair value (in thousands) | $ | (904) | (a) | |
Estimated % of annual lead production | ||||
Committed to contracts | 19 | % |
(a) | The estimated fair value is determined based on information as of December 31, 2004 provided by our counterparties and represents an approximation of the amount we would have to pay the counterparties to close out the positions at December 31, 2004. |
At January 1, 2004 | $ | - - - | ||
Change in fair value | (1,208 | ) | ||
Hedge losses transferred to earnings | 310 | (a) | ||
Hedge ineffectiveness transferred to earnings | 135 | (b) | ||
At December 31, 2004 | $ | (763 | ) |
(a) | Included as sales on the consolidated statement of operations. |
(b) | Included as sales on the consolidated statement of operations. A portion of our smelter treatment charge is linked to the lead price. As the lead price increases our treatment charge also increases, thus creating the hedge to be less than 100% effective. Inception to date, our lead hedges have been approximately 82% effective. The ineffective portion of the hedge has been reclassed to sales in each reporting period. |
Year Ended December 31, | ||||||||||
Segment | 2004 | 2003 | 2002 | |||||||
United States | 40.3 | % | 35.9 | % | 31.1 | % | ||||
Venezuela | 36.6 | % | 33.7 | % | 46.6 | % | ||||
Mexico | 23.1 | % | 30.0 | % | 22.3 | % | ||||
Other | - - - | 0.4 | % | - - - |
2004 | 2003 | 2002 | ||||||||
Net sales to unaffiliated customers: | ||||||||||
United States | $ | 52,713 | $ | 41,685 | $ | 32,873 | ||||
Venezuela | 47,884 | 39,192 | 49,296 | |||||||
Mexico | 30,229 | 34,956 | 23,531 | |||||||
Other | - - - | 520 | - - - | |||||||
$ | 130,826 | $ | 116,353 | $ | 105,700 | |||||
Income (loss) from operations: | ||||||||||
United States | $ | 12,730 | $ | 4,323 | $ | (1,476 | ) | |||
Venezuela | 6,718 | 10,344 | 15,181 | |||||||
Mexico | 3,557 | 11,906 | 5,954 | |||||||
Other | (27,771 | ) | (33,627 | ) | (10,318 | ) | ||||
$ | (4,766 | ) | $ | (7,054 | ) | $ | 9,341 | |||
Capital expenditures (includingnon-cash additions): | ||||||||||
United States | $ | 8,610 | $ | 1,887 | $ | 2,856 | ||||
Venezuela | 31,848 | 13,879 | 8,564 | |||||||
Mexico | 984 | 3,863 | 1,834 | |||||||
Other | 354 | 1,156 | 1,997 | |||||||
$ | 41,796 | $ | 20,785 | $ | 15,251 | |||||
Depreciation, depletion and amortization: | ||||||||||
United States | $ | 6,454 | $ | 7,986 | $ | 8,342 | ||||
Venezuela | 11,439 | 8,538 | 11,273 | |||||||
Mexico | 3,659 | 3,597 | 2,921 | |||||||
Other | 326 | 341 | 116 | |||||||
$ | 21,878 | $ | 20,462 | $ | 22,652 | |||||
Other significant non-cash items: | ||||||||||
United States | $ | 192 | $ | 217 | $ | 714 | ||||
Venezuela | 43 | (475 | ) | 2,638 | ||||||
Mexico | 223 | 165 | 403 | |||||||
Other | 9,813 | 23,120 | 2,213 | |||||||
$ | 10,271 | $ | 23,027 | $ | 5,968 |
2004 | 2003 | 2002 | ||||||||
Identifiable assets: | ||||||||||
United States | $ | 77,692 | $ | 71,539 | $ | 68,954 | ||||
Venezuela | 80,198 | 47,538 | 40,004 | |||||||
Mexico | 23,362 | 17,837 | 13,568 | |||||||
Discontinued operations | - - - | - - - | 686 | |||||||
Other | 98,196 | 141,281 | 36,929 | |||||||
$ | 279,448 | $ | 278,195 | $ | 160,141 | |||||
2004 | 2003 | 2002 | ||||||||
United States | $ | 3,474 | $ | 13,698 | $ | 7,779 | ||||
Canada | 46,174 | 21,698 | 13,276 | |||||||
Mexico | 9,193 | 14,468 | 22,929 | |||||||
United Kingdom | 40,825 | 16,970 | 28,070 | |||||||
Japan | 17,069 | 34,500 | 24,090 | |||||||
Korea | 12,164 | 8,407 | 5,456 | |||||||
Other foreign | 1,927 | 6,612 | 4,100 | |||||||
$ | 130,826 | $ | 116,353 | $ | 105,700 | |||||
2004 | 2003 | 2002 | ||||||||
United States | $ | 59,365 | $ | 57,443 | $ | 61,281 | ||||
Venezuela | 48,773 | 28,811 | 23,000 | |||||||
Mexico | 6,377 | 9,061 | 8,084 | |||||||
$ | 114,515 | $ | 95,315 | $ | 92,365 |
2004 | 2003 | 2002 | ||||||||
Teck Cominco Ltd. | 20.2 | % | 21.1 | % | 12.6 | % | ||||
Standard Bank London | 19.4 | % | 15.2 | % | 24.8 | % | ||||
Scotia Mocatta | 15.7 | % | 1.4 | % | - - - | % | ||||
HSBC Bank USA | 9.5 | % | 9.0 | % | 6.1 | % | ||||
Korea Zinc | 8.0 | % | 5.5 | % | 4.0 | % | ||||
Mitsubishi International Corp. | 7.5 | % | 26.2 | % | 19.9 | % | ||||
Met-Mex Peñoles, S.A. de C.V. | 7.2 | % | 13.7 | % | 21.7 | % |
December 31, | |||||||||||||
2004 | 2003 | ||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||
Amounts | Value | Amounts | Value | ||||||||||
Financial assets (liabilities): | |||||||||||||
Short-term investments | $ | 28,178 | $ | 28,178 | $ | 18,003 | $ | 18,003 | |||||
Investments | $ | 19,789 | $ | 19,789 | $ | 722 | $ | 722 | |||||
Gold lease rate swap | $ | - - - | $ | - - - | $ | 169 | $ | 169 | |||||
Long-term debt | $ | - - - | $ | - - - | $ | (4,673 | ) | $ | (4,673 | ) | |||
Gold forward sales contracts | $ | - - - | $ | - - - | $ | - - - | $ | (6,300 | ) | ||||
Lead forward sales contracts | $ | (897 | ) | $ | (897 | ) | $ | - - - | $ | - - - |
2004 | 2003 | 2002 | ||||||||
Income (loss) before cumulative effect of change in | ||||||||||
accounting principle and preferred stock dividends | $ | (6,134 | ) | $ | (7,088 | ) | $ | 8,639 | ||
Add: Cumulative effect of change in accountingprinciple | - - - | 1,072 | - - - | |||||||
Less: Preferred stock dividends | (11,602 | ) | (12,154 | ) | (23,253 | ) | ||||
Basic and diluted loss applicable to commonShareholders | $ | (17,736 | ) | $ | (18,170 | ) | $ | (14,614 | ) | |
Basic and dilutive weighted average shares | 118,048 | 110,610 | 80,250 | |||||||
Basic and diluted loss per common share | $ | (0.15 | ) | $ | (0.16 | ) | $ | (0.18 | ) |
2004 | 2003 | 2002 | ||||||||
1995 Stock Incentive Plan | ||||||||||
Stock options | 2,412,668 | 2,052,902 | 2,801,670 | |||||||
2002 Key Employee Deferred Compensation Plan | ||||||||||
Stock options | 544,347 | 202,218 | 7,613 | |||||||
Restricted Stock Units | 185,500 | - - - | - - - | |||||||
Warrants | -- | - - - | 2,000,000 | |||||||
Total | |||||||||||||
Unrealized | Minimum | Accumulated | |||||||||||
Gains | Pension | Change in | Other | ||||||||||
(Losses) | Liability | Derivative | Comprehensive | ||||||||||
On Securities | Adjustment | Contracts | Income (Loss) | ||||||||||
Balance January 1, 2002 | 14 | - - - | 159 | 173 | |||||||||
2002 change | 9 | - - - | (218 | ) | (209 | ) | |||||||
Balance December 31, 2002 | 23 | - - - | (59 | ) | (36 | ) | |||||||
2003 change | 647 | (1,400 | ) | 36 | (717 | ) | |||||||
Balance December 31, 2003 | 670 | (1,400 | ) | (23 | ) | (753 | ) | ||||||
2004 change | 2,481 | 32 | (740 | ) | 1,773 | ||||||||
Balance December 31, 2004 | $ | 3,151 | $ | (1,368 | ) | $ | (763 | ) | $ | 1,020 |
Balance Sheet | 2004 | 2003 | |||||
Assets: | |||||||
Current assets | $ | 31,996 | $ | 46,715 | |||
Properties, plants and equipment, net | 122,955 | 134,383 | |||||
Securities held for reclamation fund | 26,499 | - - - | |||||
Total assets | $ | 181,450 | $ | 181,098 | |||
Liabilities and equity: | |||||||
Liabilities | $ | 29,495 | $ | 27,150 | |||
Equity | 151,955 | 153,948 | |||||
Total liabilities and equity | $ | 181,450 | $ | 181,098 |
Summary of Operations | 2004 | 2003 | 2002 | |||||||
Net revenue | $ | 123,751 | $ | 105,259 | $ | 85,190 | ||||
Operating income | $ | 29,558 | $ | 17,406 | $ | 5,274 | ||||
Net income | $ | 30,007 | $ | 15,130 | $ | 5,437 |
2002 | ||||
Sales of products | $ | 4,221 | ||
Cost of sales | 5,145 | |||
Depreciation, depletion and amortization | 116 | |||
5,261 | ||||
Gross loss | (1,040 | ) |
Loss from operations | (1,040 | ) | ||
Other expense: | ||||
Miscellaneous expense | (1,178 | ) | ||
Interest expense | (6 | ) | ||
(1,184 | ) | |||
Loss from discontinued operations beforeincome taxes | (2,224 | ) | ||
Income tax provision | - - | |||
Loss from discontinued operations | $ | (2,224 | ) | |
F-54 |
Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-K/A-1 – December 31, 2004
Index to Exhibits
3.1 | Certificate of Incorporation of the Registrant as amended to date. Filed as exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference. |
3.2 | By-Laws of the Registrant as amended to date.* |
4.1(a) | Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant. Filed as exhibit 4.1(d)(e) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. |
4.1(b) | Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as exhibit 4.5 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. |
4.2 | Rights Agreement dated as of May 10, 1996, between Hecla Mining Company and American Stock Transfer & Trust Company, which includes the form of Rights Certificate of Designation setting forth the terms of the Series A Junior Participating Preferred Stock of Hecla Mining Company as Exhibit A and the summary of Rights to Purchase Preferred Shares as Exhibit B. Filed as exhibit 4 to Registrant’s Current Report on Form 8-K dated May 10, 1996 and incorporated herein by reference. |
4.3 | Stock Purchase Agreement dated as of August 27, 2001, between Hecla Mining Company and Copper Mountain Trust. Filed as exhibit 4.3 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
4.4 | Warrant Agreement dated August 2, 2002, between Hecla Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.4 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
4.5 | Registration Rights Agreement dated August 2, 2002, between Hecla Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.5 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
10.1 | Employment agreement dated November 6, 2001, between Hecla Mining Company and Phillips S. Baker, Jr. (Registrant has substantially identical agreements with each of Messrs. Thomas F. Fudge, Jr., Michael H. Callahan, Ronald W. Clayton, Lewis E. Walde and Ms. Vicki Veltkamp. Such substantially identical agreements are not included as separate exhibits.) Filed as exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated by herein by reference. (1) |
10.2(a) | 1987 Nonstatutory Stock Option Plan of the Registrant. Filed as exhibit B to Registrant’s Proxy Statement dated March 20, 1987 and incorporated herein by reference. (1) |
10.2(b) | Hecla Mining Company 1995 Stock Incentive Plan, as amended. (1)* |
10.2(c) | Hecla Mining Company Stock Plan for Nonemployee Directors, as amended. (1)* |
10.2(d) | Hecla Mining Company Key Employee Deferred Compensation Plan. Filed as exhibit 4.3 to Registrant’s Registration Statement on Form S-8 filed on July 24, 2002 (File No. 333-96995) and incorporated herein by reference. (1) |
10.2(e) | Hecla Mining Company form of Non-Qualified Stock Option Agreement (Under the Key Employee Deferred Compensation Plan) entered into between Hecla Mining Company and participants under the Key Employee Deferred Compensation Plan. Filed as Exhibit 10.2(e) to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference. (1) |
10.3(a) | Hecla Mining Company Retirement Plan for Employees and Supplemental Retirement and Death Benefit Plan. Filed as exhibit 10.11(a) to Registrant’s Annual Report on Form 10-K/A-1 for the year ended December 31, 1985 and incorporated herein by reference. (1) |
10.3(b) | Supplemental Excess Retirement Master Plan Documents. Filed as exhibit 10.5(b) to Registrant’s Annual Report on Form 10-K/A-1 for the year ended December 31, 1994 and incorporated herein by reference. (1) |
10.3(c) | Hecla Mining Company Nonqualified Plans Master Trust Agreement. Filed as exhibit 10.5(c) to Registrant’s Annual Report on Form 10-K/A-1 for the year ended December 31, 1994 and incorporated herein by reference. (1) |
10.4 | Form of Indemnification Agreement dated December 14, 2004, between Hecla Mining Company and Arthur Brown (Registrant has substantially identical agreements with each of Messrs. David J. Christensen, John E. Clute, Ted Crumley, Charles L. McAlpine, George R. Nethercutt, Jr. (dated February 25, 2005), Jorge E. Ordonez C., Anthony P. Taylor, Phillips S. Baker, Jr., Thomas F. Fudge, Jr., Lewis E. Walde, Ian Atkinson, Ronald W. Clayton, Michael H. Callahan and Ms. Vicki Veltkamp. Such substantially identical agreements are not included as separate exhibits.) (1)* |
10.5(a) | Hecla Mining Company Performance Pay Compensation Plan. (1) * |
10.5(b) | Written description of objectives for 2004 under the Hecla Mining Company Performance Payment Plan. Filed as exhibit 10.6(b) to Registrant’s Amendment No. 1 on Form 10-Q/A for the quarter ended March 31, 2004, filed on March 16, 2005 and incorporated herein by reference. (1) |
10.5(c) | Written description of objectives for 2005 under the Hecla Mining Company Performance Payment Plan. (1) * |
10.5(d) | Written description of the Hecla Mining Company Executive and Senior Management Long-Term Performance Payment Plan. Filed as exhibit 10.7(b) to Registrant’s Amendment No. 1 on Form 10-Q/A for the quarter ended June 30, 2003, filed on March 15, 2005 and incorporated herein by reference. (1) |
10.5(e) | Written description of objectives for the 2004-2006 plan period under the Hecla Mining Company Executive and Senior Management Long-Term Performance Payment Plan, which Plan was previously filed as exhibit 10.7(b) to Registrant’s Amendment No. 1 on Form 10-Q/A for the quarter ended June 30, 2003, filed on March 15, 2005. Filed as exhibit 10.6(c) to Registrant’s Amendment No. 1 on Form 10-Q/A for the quarter ended March 31, 2004, filed on March 16, 2005 and incorporated herein by reference. (1) |
10.6(a) | Amended and Restated Golden Eagle Earn-in Agreement between Echo Bay Mines Ltd. (successor in interest to Newmont Mining Corp./Santa Fe Pacific Gold Corp.) and Hecla Mining Company dated September 6, 1996. Filed as exhibit 10.11(a) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference. |
10.6(b) | Golden Eagle Operating Agreement between Echo Bay Mines Ltd. (successor in interest to Newmont Mining Corp./Santa Fe Pacific Gold Corp.) and Hecla Mining Company dated September 6, 1996. Filed as exhibit 10.11(b) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference. |
10.6(c) | First Amendment to the Amended and Restated Golden Eagle Earn-in Agreement effective September 5, 2002, by and between Echo Bay Mines Ltd. and Hecla Mining Company. Filed as exhibit 10.6(c) to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
10.7 | Restated Mining Venture Agreement among Kennecott Greens Creek Mining Company, Hecla Mining Company and CSX Alaska Mining Inc. dated May 6, 1994. Filed as exhibit 99.A to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference. |
10.8 | Stock Purchase Agreement dated February 27, 2001, between Hecla Mining Company and IMERYS USA, Inc. Filed as exhibit 99 to Registrant’s Current Report on Form 8-K dated March 27, 2001 and incorporated herein by reference. |
10.9 | Real Estate Purchase and Sale Agreement between Hecla Mining Company and JDL Enterprises, LLC, dated October 19, 2001. Filed as exhibit 10.21 to Registrant’s Annual Report on Form 10-K/A-1 for the year ended December 31, 2001 and incorporated herein by reference. |
10.10 | Earn-in Agreement dated August 2, 2002, between Hecla Ventures Corp. and Rodeo Creek Gold Inc. Filed as exhibit 10.19 to Registrant's Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
10.11 | Lease Agreement dated September 5, 2002 between Hecla Mining Company and CVG-Minerven. Filed as exhibit 10.20 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333 – 100395) and incorporated herein by reference. |
10.12 | Agreement No. C-020 between Minera Hecla Venezolana, C.A. and Redpath Venezolana, C.A., dated October 31, 2003, for the construction of the La Camorra mine production shaft facility. Filed as exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference. |
11. | Computation of weighted average number of common shares outstanding.* |
21. | List of subsidiaries of the Registrant.* |
23.1 | Consent of PricewaterhouseCoopers LLP.* |
23.2 | Consent of BDO Seidman, LLP.* |
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
32.2 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
_________________
(1) Indicates a management contract or compensatory plan or arrangement.
* Filed herewith
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, 2005
Commission file number 1-8491
HECLA MINING COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 82-0126240 | ||||
(State or other jurisdiction of | (I.R.S. Employer | ||||
incorporation or organization) | Identification No.) | ||||
6500 N. 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, and (2) has been subject to such filing requirements for at least the past 90 days.
Yes XX . No .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes XX . No .
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 May 6, 2005 | ||||
Common stock, par value $0.25 per share | 118,397,842 |
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended March 31, 2005
I N D E X*
-2-
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In thousands, except share data)
_________________
March 31, 2005 | December 31, 2004 | |||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 15,594 | $ | 34,460 | ||||
Short-term investments and securities held for sale | 47,822 | 46,328 | ||||||
Accounts and notes receivable: | ||||||||
Trade | 7,918 | 6,911 | ||||||
Other | 14,637 | 15,025 | ||||||
Inventories | 23,945 | 20,250 | ||||||
Other current assets | 6,839 | 5,607 | ||||||
Total current assets | 116,755 | 128,581 | ||||||
Investments | 2,107 | 1,657 | ||||||
Restricted cash and investments | 19,922 | 19,789 | ||||||
Properties, plants and equipment, net | 120,285 | 114,515 | ||||||
Other non-current assets | 15,293 | 14,906 | ||||||
Total assets | $ | 274,362 | $ | 279,448 | ||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 15,047 | $ | 16,042 | ||||
Accrued payroll and related benefits | 9,017 | 9,405 | ||||||
Accrued taxes | 2,355 | 2,379 | ||||||
Current portion of accrued reclamation and closure costs | 8,721 | 9,237 | ||||||
Total current liabilities | 35,140 | 37,063 | ||||||
Accrued reclamation and closure costs | 65,792 | 65,951 | ||||||
Other non-current liabilities | 7,578 | 7,107 | ||||||
Total liabilities | 108,510 | 110,121 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Preferred stock, $0.25 par value, authorized 5,000,000 shares; | ||||||||
issued 2005 and 2004 – 157,816 shares | ||||||||
liquidation preference 2005 and 2004 - $10,238 | 39 | 39 | ||||||
Common stock, $0.25 par value, authorized 200,000,000 shares; | ||||||||
issued 2005 – 118,402,116 shares and | ||||||||
issued 2004 – 118,350,861 shares | 29,600 | 29,588 | ||||||
Capital surplus | 506,758 | 506,630 | ||||||
Accumulated deficit | (371,266 | ) | (367,832 | ) | ||||
Accumulated other comprehensive income | 839 | 1,020 | ||||||
Less treasury stock, at cost; 8,274 common shares | (118 | ) | (118 | ) | ||||
Total shareholders’ equity | 165,852 | 169,327 | ||||||
Total liabilities and shareholders’ equity | $ | 274,362 | $ | 279,448 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
-3-
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
(Dollars and shares in thousands, except per share amounts)
_________________
Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
March 31, 2005 | March 31, 2004 | |||||||
Sales of products | $ | 24,434 | $ | 36,650 | ||||
Cost of sales and other direct production costs | 15,143 | 16,848 | ||||||
Depreciation, depletion and amortization | 3,826 | 6,393 | ||||||
18,969 | 23,241 | |||||||
Gross profit | 5,465 | 13,409 | ||||||
Other operating expenses: | ||||||||
General and administrative | 2,642 | 1,779 | ||||||
Exploration | 2,792 | 2,414 | ||||||
Pre-development expense | 2,134 | 296 | ||||||
Depreciation and amortization | 146 | 75 | ||||||
Other operating expense | 692 | 1,210 | ||||||
Provision for closed operations and environmental matters | 334 | 778 | ||||||
8,740 | 6,552 | |||||||
Income (loss) from operations | (3,275 | ) | 6,857 | |||||
Other income (expense): | ||||||||
Interest income | 430 | 387 | ||||||
Interest expense | (33 | ) | (198 | ) | ||||
397 | 189 | |||||||
Income (loss) from operations, before income taxes | (2,878 | ) | 7,046 | |||||
Income tax provision | (418 | ) | (866 | ) | ||||
Net income (loss) | (3,296 | ) | 6,180 | |||||
Preferred stock dividends | (138 | ) | (11,188 | ) | ||||
Loss applicable to common shareholders | $ | (3,434 | ) | $ | (5,008 | ) | ||
Comprehensive income (loss): | ||||||||
Net income (loss) | $ | (3,296 | ) | $ | 6,180 | |||
Change in derivative contracts | 399 | 8 | ||||||
Unrealized holding gains on investments | (580 | ) | 212 | |||||
Comprehensive income (loss) | $ | (3,477 | ) | $ | 6,400 | |||
Basic and diluted loss per common share after preferred dividends | $ | (0.03 | ) | $ | (0.04 | ) | ||
Weighted average number of common | ||||||||
shares outstanding – basic and diluted | 118,381 | 117,318 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
-4-
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
_________________
Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
March 31, 2005 | March 31, 2004 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | (3,296 | ) | $ | 6,180 | |||
Non-cash elements included in net income (loss): | ||||||||
Depreciation, depletion and amortization | 3,972 | 6,468 | ||||||
(Gain) loss on disposition of properties, plants and equipment | 14 | (24 | ) | |||||
Gain on sale of royalty interests | (550 | ) | — | |||||
Provision for reclamation and closure costs | 253 | 568 | ||||||
Deferred income taxes | — | 718 | ||||||
Stock compensation | 161 | 767 | ||||||
Change in assets and liabilities: | ||||||||
Accounts and notes receivable | (619 | ) | (3,273 | ) | ||||
Inventories | (3,695 | ) | (1,156 | ) | ||||
Other current and non-current assets | (1,614 | ) | (2,465 | ) | ||||
Accounts payable and accrued expenses | (736 | ) | (1,405 | ) | ||||
Accrued payroll and related benefits | (575 | ) | (344 | ) | ||||
Accrued taxes | (24 | ) | (439 | ) | ||||
Accrued reclamation and closure costs and other non-current liabilities | (414 | ) | (686 | ) | ||||
Net cash provided by (used in) operating activities | (7,123 | ) | 4,909 | |||||
Investing activities: | ||||||||
Additions to properties, plants and equipment | (9,815 | ) | (6,796 | ) | ||||
Proceeds from disposition of properties, plants and equipment | 17 | 55 | ||||||
Increase in restricted investments | (133 | ) | (3,666 | ) | ||||
Purchases of short-term investments and other securities held for sale | (44,694 | ) | (71,577 | ) | ||||
Maturities of short-term investments and other securities held for sale | 42,721 | 63,450 | ||||||
Net cash used in investing activities | (11,904 | ) | (18,534 | ) | ||||
Financing activities: | ||||||||
Common stock issued under stock option plans | 161 | 1,312 | ||||||
Borrowings on debt | — | 2,396 | ||||||
Repayments on debt | — | (1,714 | ) | |||||
Net cash provided by financing activities | 161 | 1,994 | ||||||
Change in cash and cash equivalents: | ||||||||
Net decrease in cash and cash equivalents | (18,866 | ) | (11,631 | ) | ||||
Cash and cash equivalents at beginning of period | 34,460 | 73,662 | ||||||
Cash and cash equivalents at end of period | $ | 15,594 | $ | 62,031 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
-5-
Note 1. Basis of Preparation of Financial Statements
In the opinion of management, the accompanying unaudited consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of cash flows and notes to consolidated financial statements contain all adjustments, consisting only of normal recurring items, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (“we” or “our” or “us”). These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2004, 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Note 2. Short-term Investments, Investments and Restricted Cash
Short-term Investments and Securities Held for Sale
Investments consisted of the below at March 31, 2005 and December 31, 2004 (in thousands), and are carried at amortized cost. Due to the short-term nature of these investments, with the exception of marketable equity securities, the amortized cost approximates fair market value.
2005 | 2004 | |||||||
---|---|---|---|---|---|---|---|---|
Certificates of deposit | $ | 1,400 | $ | 6,498 | ||||
United States government and federal agency securities | 9,500 | 9,500 | ||||||
Municipal securities | 1,007 | 1,480 | ||||||
Corporate bonds | — | 1,000 | ||||||
Adjustable rate securities (1) | 13,500 | 18,150 | ||||||
Marketable equity securities (cost 2005 - $21,001 and cost 2004 - $7,807) | 22,415 | 9,700 | ||||||
$ | 47,822 | $ | 46,328 | |||||
(1) Certain reclassifications of prior year balances have been made to conform to the current year presentation. We have reclassified adjustable rate securities into short-term investments, from cash and cash equivalents, on the December 31, 2004 Consolidated Balance Sheet to conform to the March 31, 2005 Consolidated Balance Sheet presentation. Adjustable rate securities are long-term debt securities or preferred stock whose interest (dividend) rate resets frequently. These securities share many attributes with cash equivalents however, their contractual maturities are longer into the future, not within 90 days, or in the case of preferred stock, they don’t have contractual maturities at all.
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With the exception of the marketable equity securities, corporate bonds and adjustable rate securities, all of the investments held at March 31, 2005 will mature during 2005.
Non-current Investments
At March 31, 2005 and December 31, 2004, the fair value of our non-current investments was $2.1 million and $1.7 million, respectively. The cost of these investments was approximately $1.0 million and $0.4 million, respectively. In February 2005, we sold certain undeveloped mining royalty interests to International Royalty Corporation, an unrelated company. As a result of this sale, we received payment of approximately $0.6 million in the form of International Royalty Corporation common stock and is included in our non-current investments. Additionally, we have recorded a gain of approximately $0.6 million, which represented the fair value of the common stock received in excess of our carrying value of such interests.
Restricted Cash and Investments
Various laws and permits require that financial assurances be in place for certain environmental and reclamation obligations and other potential liabilities. Restricted investments primarily represent investments in money market funds and bonds of U.S. government agencies, and are restricted primarily for reclamation funding or surety bonds.
We have cash restricted in Venezuela to secure certain alleged unpaid tax liabilities, as discussed further in Note 5. At March 31, 2005 and December 31, 2004, restricted cash and investments were $19.9 million and $19.8 million, respectively.
Note 3. Income Taxes
For the three months ended March 31, 2005, we recorded a $0.4 million provision, primarily for U.S. alternative minimum tax, foreign withholding taxes payable and foreign income taxes payable. For the three months ended March 31, 2004, we recorded a $0.9 million provision for foreign income taxes, consisting primarily of deferred tax amortization and a current provision for accrued foreign withholding taxes payable. The income tax provision for the first three months of 2005 varies from the amount that would have resulted from applying the statutory income tax rate to our loss before income taxes primarily due to non-utilization of foreign tax losses, partially offset by utilization of U.S. tax loss carryforward for regular tax. The income tax provision for the first three months of 2004 varies from the amount that would have resulted from applying the statutory income tax rate to our income before income taxes primarily due to the availability and utilization of net operating losses and a tax loss for currency devaluation in Venezuela.
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Note 4. Inventories
Inventories consist of the following (in thousands):
March 31, 2005 | December 31, 2004 | |||||||
---|---|---|---|---|---|---|---|---|
Concentrates, doré, bullion, metals in | ||||||||
transit and other products | $ | 5,087 | $ | 5,338 | ||||
Stockpiled ore at San Sebastian mine | 4,721 | 2,409 | ||||||
Materials and supplies | 14,137 | 12,503 | ||||||
$ | 23,945 | $ | 20,250 | |||||
At March 31, 2005, we had forward sales contracts for 2,025 metric tons of lead, at an average price of $766.53 per metric ton, equal to a total contract value of $1.6 million. These forward contracts expose us to certain losses, generally the amount by which the contract price exceeds the spot price of a commodity in the event of nonperformance by the counterparties to the agreement.
In October 2004, the National Miners Union at the Velardeña mill in Mexico, initiated a strike in an attempt to unionize the employees at the San Sebastian mine. Production was affected during the fourth quarter of 2004 and continues to be affected as of the date of this report. There can be no assurance as to the outcome or length of the strike. Costs related to our mining operations are included in our stockpile inventory at San Sebastian. All costs related to our idle Velardeña mill are being expensed as incurred until such time as the strike is resolved and normal production activities are resumed. In April 2005 and as of the date of this filing, non-employee union members have illegally blocked access to the mine, stopping production of ore from the Don Sergio vein. The state of Durango has filed criminal charges against several of the union leaders. Although we currently believe the strike will not materially affect our longer-term expected production, there can be no assurance that the strike will not affect our longer-term production.
Note 5. Commitments and Contingencies
Bunker Hill Superfund Site
In 1994, we, as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), entered into a consent decree with the Environmental Protection Agency (“EPA”) and the State of Idaho concerning environmental remediation obligations at the Bunker Hill Superfund site located in the Kellogg, Idaho, area. The 1994 Consent Decree (the “1994 Decree”) settled our response-cost responsibility under CERCLA at the Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and Refining Company, which was also a party to the 1994 Decree, filed for Chapter 11 bankruptcy and in January 2001, the Federal District Court approved a new Consent Decree between Sunshine, the U.S. Government and the Coeur d’Alene Indian Tribe which settled
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Sunshine’s environmental liabilities in the Coeur d’Alene Basin lawsuits described below, and released Sunshine from further obligations under the 1994 Decree.
In response to a request by us and ASARCO Incorporated, the United States Federal District Court in Idaho, having jurisdiction over the 1994 Decree, issued an Order in September 2001 that the 1994 Decree should be modified in light of a significant change in factual circumstances not reasonably anticipated by the mining companies at the time they signed the 1994 Decree. In its Order, the Court reserved the final ruling on the appropriate modification to the 1994 Decree until after the issuance by the EPA of a Record of Decision (“ROD”) on the Basin-wide Remedial Investigation/Feasibility Study.
The EPA issued the ROD on the Basin in September 2002, proposing a $359 million Basin clean-up plan to be implemented over 30 years. The ROD also establishes a review process at the end of the 30-year period to determine if further remediation would be appropriate. Based on the 2001 Order issued by the Court, in April 2003, we requested the Court release Hecla and ASARCO from future work under the 1994 Decree within the Bunker Hill site. In November 2003, the Idaho Federal District Court issued its order on ASARCO’s and our request for final relief on the motion to modify the 1994 Decree. The Court held that we and ASARCO were entitled to a reduction of $7.0 million from the remaining work or costs under the 1994 Decree. Pursuant to the Court’s order, the parties to the 1994 Decree have negotiated an agreement for crediting this reduction against the government’s past cost claims and future work and payments under the 1994 Decree. In January 2004, both the United States and the State of Idaho filed notice of their appeal of the Federal District Court’s order modifying the 1994 Consent Decree and the appeal is currently pending before the U.S. Ninth Circuit Court of Appeals.
On February 2, 2003, ASARCO entered into a Consent Decree with the United States relating to a transfer of certain assets to its parent corporation, Grupo Mexico, S.A. de C.V. The Consent Decree also addresses ASARCO’s environmental liabilities on a number of sites in the United States, including the Bunker Hill site. The provisions of the Consent Decree could limit ASARCO’s annual obligation at the Bunker Hill site through 2005.
As of March 31, 2005, we have estimated and accrued a liability for remedial activity costs at the Bunker Hill site of $4.5 million, which are anticipated to be made over the next three to four years. Although we believe the accrual is adequate based upon our current estimates of aggregate costs, it is reasonably possible that our estimate may change in the future due to the assumptions and estimates inherent in the accrual.
Coeur d’Alene River Basin Environmental Claims
Coeur d’Alene Indian Tribe Claims
In July 1991, the Coeur d’Alene Indian Tribe brought a lawsuit, under CERCLA, in Idaho Federal District Court against us, ASARCO and a number of other mining companies asserting claims for damages to natural resources downstream from the Bunker Hill site over which the Tribe alleges some ownership or control. The Tribe’s natural resource damage
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litigation has been consolidated with the United States’ litigation described below. Because of various bankruptcies and settlements of other defendants, we are the only remaining defendant in the Tribe’s Natural Resource Damages case.
U.S. Government Claims
In March 1996, the United States filed a lawsuit in Idaho Federal District Court against certain mining companies that conducted historic mining operations in the Silver Valley of northern Idaho, including us. The lawsuit asserts claims under CERCLA and the Clean Water Act and seeks recovery for alleged damages to or loss of natural resources located in the Coeur d’Alene River Basin in northern Idaho for which the United States asserts it is the trustee under CERCLA. The lawsuit claims that the defendants’ historic mining activity resulted in releases of hazardous substances and damaged natural resources within the Basin. The suit also seeks declaratory relief that we and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Basin outside the Bunker Hill site. We have asserted a number of defenses to the United States’ claims.
As discussed above, in May 1998, the EPA announced that it had commenced a Remedial Investigation/Feasibility Study under CERCLA for the entire Basin, including Lake Coeur d’Alene, in support of its response cost claims asserted in its March 1996 lawsuit. In October 2001, the EPA issued its proposed clean-up plan for the Basin. The EPA issued the ROD on the Basin in September 2002, proposing a $359 million Basin clean-up plan to be implemented over 30 years. The ROD also establishes a review process at the end of the 30-year period to determine if further remediation would be appropriate.
During 2000 and into 2001, we were involved in settlement negotiations with representatives of the U.S. Government and the Coeur d’Alene Indian Tribe. We also participated with certain of the other defendants in the litigation in a State of Idaho-led settlement effort. In August 2001, we entered into a now terminated Agreement in Principle with the United States and the State of Idaho to settle the governments’ claims for natural resource damages and clean-up costs related to the historic mining practices in the Coeur d’Alene Basin in northern Idaho. In August 2002, because the parties were making no progress toward a final settlement under the terms of the Agreement in Principle, the United States, the State of Idaho and we agreed to discontinue utilizing the Agreement in Principle as a settlement vehicle. However, we may participate in further settlement negotiations with the United States, the State of Idaho and the Coeur d’Alene Indian Tribe in the future.
The first phase of the trial commenced on the consolidated Coeur d’Alene Indian Tribe’s and the United States’ claims in January 2001, and was concluded in July 2001. The first phase of the trial addressed the extent of liability, if any, of the defendants and the allocation of liability among the defendants and others, including the U.S. Government. In September 2003, the Court issued its Phase I ruling, holding that we have some liability for Coeur d’Alene Basin environmental conditions. The Court refused to hold the defendants jointly and severally liable for historic tailings releases and instead allocated a 31% share of liability to us for impacts resulting from these releases. The portion of damages, past costs and clean-up costs to which this 31% applies, other cost allocations applicable to us and the Court’s determination of an
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appropriate clean-up plan will be addressed in the Phase II trial. The Court also left for the Phase II trial issues on the deference, if any, to be afforded the Government’s clean-up plan. By order dated March 31, 2005, the Court has scheduled the second phase of the trial to commence on January 17, 2006.
The Court also found that while certain Basin natural resources had been injured, “there has been an exaggerated overstatement” by the plaintiffs of Basin environmental conditions and the mining impact. The Court also significantly limited the scope of the trustee plaintiffs’ resource trusteeship and will require proof in the Phase II trial of the trustees’ percentage of trusteeship in co-managed resources. The U.S. Government and the Coeur d’Alene Tribe are re-evaluating their claims for natural resource damages for the Phase II trial. Although we believe, because of the actions of the Court described above, we have limited liability for natural resource damages, such claims may be in the range of $2.0 billion to $3.4 billion. Because of a number of factors relating to the quality and uncertainty of the U.S. Government’s and Tribe’s natural resources damage claims, we are currently unable to estimate any liability or range of liability for these claims.
In expert reports exchanged with the defendants in August and September 2004, the U.S. Government claimed to have incurred approximately $87 million for past environmental study, remediation and legal costs associated with the Coeur d’Alene Basin for which it is alleging it is entitled to reimbursement in the Phase II trial. A portion of these costs is also included in the work to be done under the ROD. With respect to the U.S. Government’s past cost claims, we have determined a potential range of liability to be $5.6 million to $13.6 million, with no amount in the range being more likely than any other amount.
The Phase II trial has been scheduled to commence January 17, 2006. Two of the defendant mining companies, Coeur d’Alene Mines Corporation and Sunshine Mining and Refining Company, settled their liabilities under the litigation during the first quarter of 2001. We and ASARCO are the only defendants remaining in the United States’ litigation.
Although the U.S. Government has previously issued its ROD proposing a clean-up plan totaling approximately $359 million and the U.S. Government’s past cost claim is $87 million, based upon the Court’s prior orders, including its September 2003 order and other factors and issues to be addressed by the Court in the Phase II trial, we currently estimate the range of our potential liability for both past costs and remediation (but not natural resource damages as discussed above) in the Basin to be $23.6 million to $72.0 million, with no amount in the range being more likely than any other number at this time. Based upon generally accepted accounting principles, we have accrued the minimum liability within this range, which at March 31, 2005, was $23.6 million. It is reasonably possible that our ability to estimate what, if any, additional liability we may have relating to the Coeur d’Alene Basin may change in the future depending on a number of factors, including information obtained or developed by us prior to the Phase II trial, any interim court determinations and the outcome of the Phase II trial.
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Insurance Coverage Litigation
In 1991, we initiated litigation in the Idaho District Court, County of Kootenai, against a number of insurance companies that provided comprehensive general liability insurance coverage to us and our predecessors. We believe the insurance companies have a duty to defend and indemnify us under their policies of insurance for all liabilities and claims asserted against us by the EPA and the Tribe under CERCLA related to the Bunker Hill site and the Coeur d’Alene Basin in northern Idaho. In 1992, the Idaho State District Court ruled that the primary insurance companies had a duty to defend us in the Tribe’s lawsuit. During 1995 and 1996, we entered into settlement agreements with a number of the insurance carriers named in the litigation. We have received a total of approximately $7.2 million under the terms of the settlement agreements. Thirty percent of these settlements were paid to the EPA to reimburse the U.S. Government for past costs under the 1994 Decree. Litigation is still pending against one insurer with trial suspended until the underlying environmental claims against us are resolved or settled. The remaining insurer in the litigation, along with a second insurer not named in the litigation, is providing us with a partial defense in all Basin environmental litigation. As of March 31, 2005, we have not recorded a receivable or reduced our accrual for reclamation and closure costs to reflect the receipt of any potential insurance proceeds.
Independence Lead Mines Litigation
In March 2002, Independence Lead Mines Company (“Independence”), the holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the Lucky Friday unit, notified us of certain alleged defaults by us under the 1968 lease agreement between the unit owners (Independence and us under the terms of the 1968 DIA Unitization Agreement) as lessors and defaults by us as lessee and operator of the properties. We are a net 81.48% interest holder under these Agreements. Independence alleged that we violated the “prudent operator obligations” implied under the lease by undertaking the Gold Hunter project and violated certain other provisions of the Agreement with respect to milling equipment and calculating net profits and losses. Under the lease agreement, we have the exclusive right to manage, control and operate the DIA properties, and our decisions with respect to the character of work are final. In June 2002, Independence filed a lawsuit in Idaho State District Court seeking termination of the lease agreement and requesting unspecified damages. Trial of the case occurred in late March 2004. In July 2004, the Court issued a decision that found in our favor on all issues and subsequently awarded us approximately $0.1 million in attorney fees and certain costs, which Independence has paid. In August 2004, Independence filed its Notice of Appeal that is currently pending before the Idaho Supreme Court. We believe that we have complied in all material respects with all of our obligations under the 1968 lease agreement, and intend to continue defending our right to operate the property under the lease agreement.
Nevada Litigation – Hollister Development Project
In Nevada, Hecla and our wholly owned subsidiary, Hecla Ventures Corporation, filed a lawsuit in Elko County in April 2005, against our co-participants, Great Basin Gold Ltd. and Rodeo Creek Gold Inc., to resolve contractual disagreements involving our Earn-In Agreement
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(“Agreement”) dated August 2, 2002, for the Hollister Development Project located in northern Nevada. Under the agreement, we can earn a fifty percent (50%) participating interest by completing the first stage of a two-stage exploration and development project with total estimated expenditures of $21.8 million and either completing stage two or funding the second stage by making a payment of $21.8 million less expenditures incurred during stage one. The lawsuit seeks a declaration of our rights that: 1) the operative program and budget is the 2004-05 Program and Budget rather than the initial program and budget prepared as part of the agreement; 2) the term of the agreement should be extended for at least six months because we were unable to access an area of the site owned by a third party that delayed commencement of ground activities for several months; and 3) all costs incurred and to be incurred under the 2004-05 Program and Budget reduce dollar-for-dollar the $21.8 million required to vest our participating interest in the project.
Although there can be no assurance as to the course of and outcome of this proceeding, we believe the lawsuit will not adversely affect progress on the project and an adverse ruling will not have a material adverse effect on our financial condition.
Mexico Litigation
In Mexico, our wholly owned subsidiary, Minera Hecla, S.A. de C.V. (“Minera Hecla”) is involved in litigation in state and federal courts located within the State of Durango, Mexico, concerning the Velardeña mill. In October 2003, representatives from Minera William, S.A. de C.V. (an affiliate of the prior owner of the Velardeña mill and subsidiary of ECU Silver Mining, a Canadian company) presented to Minera Hecla court documents from a state court in Durango, Mexico, that purported to award custody of the mill to Minera William to satisfy an alleged unpaid debt by the prior owner. Minera Hecla was not a party to and did not have any notice of the legal proceeding in Durango. In October 2003, Minera Hecla obtained a temporary restraining order from a federal court in Durango to preserve our possession of the mill. In February 2004, Minera Hecla obtained a permanent restraining order that prohibited further interference with our operation and possession of the mill. Minera William appealed that decision and on March 8, 2005, the Federal Court of Appeals in the City and State of Durango upheld the lower court decision in favor of the Company. We believe that Minera William has exhausted its appeals and the matter has concluded in our favor.
The court proceeding discussed above has not affected Minera Hecla’s San Sebastian mine, located approximately 65 miles from the Velardeña mill. Although, we believe the matter successfully concluded, the above-mentioned dispute could result in future disruption of operations at the Velardeña mill.
Venezuela Litigation
In February 2004, the Venezuelan National Guard impounded a shipment of approximately 5,000 ounces of gold doré produced from the La Camorra unit, which is owned and operated by our wholly owned subsidiary, Minera Hecla Venezolana, C.A. (“MHV”). The impoundment was allegedly made due to irregularities in documentation that accompanied the shipment. That shipment was stored at the Central Bank of Venezuela. In March 2004, we filed
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with the Superior Tax Court in Bolivar City, State of Bolivar, an injunction action against the National Guard to release the impounded gold doré. In April 2004, that Court granted our request for an injunction, but conditioned release of the gold pending resolution of an unrelated matter (described in the following paragraph) involving a tax claim and embargo by the Venezuelan tax authority (“SENIAT”) that was proceeding in the Superior Tax Court in Caracas. In June 2004, the Superior Tax Court in Caracas ordered return of the impounded gold to Hecla. Although we encountered difficulties, delays, and costs in enforcing such order, the impounded gold was returned to us in July 2004 and was shipped to our refiner for further processing and sale by us. On March 29, 2005, the Supreme Court of Venezuela reversed the above-mentioned injunction in favor of MHV on grounds that the proper legal procedure would have been to oppose the embargo action by SENIAT rather than commence a separate injunction proceeding. We believe the decision by the Supreme Court of Venezuela should not have any adverse consequences to our Venezuela operations because, as mentioned below, MHV made a cash deposit with the court to prevent future enforcement of the embargo. All subsequent shipments of gold doré have been exported without intervention by Venezuelan government authorities, but there can be no assurance that such impoundments may not occur in the future or, that, if such were to occur, they would be resolved in a similar manner or time frame, or upon acceptable conditions or costs.
MHV is also involved in litigation in Venezuela with SENIAT concerning alleged unpaid tax liabilities that predate our purchase of the La Camorra unit from Monarch Resources (“Monarch”) in 1999. Pursuant to our Purchase Agreement, Monarch has assumed defense of and responsibility for a pending tax case in the Superior Tax Court in Caracas. In April 2004, SENIAT filed with the Third Superior Tax Court in Bolivar City, State of Bolivar an embargo action against all of MHV’s assets in Venezuela to secure the alleged unpaid tax liabilities. In order to prevent the embargo, in April 2004, MHV made a cash deposit with the Court for the dollar equivalent of approximately $4.3 million, at exchange rates in effect at that time. In June 2004, the Superior Tax Court in Caracas ordered suspension and revocation of the embargo action filed by the SENIAT. Although we believe the cash deposit will continue to prevent any further action by SENIAT with respect to the embargo, there can be no assurances as to the outcome of this proceeding. If the tax court in Caracas or an appellate court were to subsequently award SENIAT its entire requested embargo, it could disrupt our operations in Venezuela and have a material adverse effect on our financial condition.
In February 2005, we were notified by the SENIAT that it had completed its audit of our Venezuelan tax returns for the years ended December 31, 2003 and 2002. In the notice, the SENIAT has alleged that certain expenses are not deductible for income tax purposes and that calculations of tax deductions based upon inflationary adjustments were overstated, and has issued an assessment that is equal to taxes payable of $3.8 million. We have reviewed SENIAT’s findings and have submitted an appeal. Any resolution could be significantly delayed, and involve further legal proceedings, additional related costs and further uncertainty. We have not accrued any amounts associated with the tax audits as of March 31, 2005. There can be no assurance that we will be successful in defending against the tax assessment, that there will not be additional assessments in the future or that SENIAT or other governmental agencies or officials may not take other actions against us, whether or not justified, that could disrupt our operations in Venezuela and have a material adverse effect on our financial condition.
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Other
In October 2004, the National Miners Union at the Velardeña mill in Mexico initiated a strike in an attempt to unionize the employees at the San Sebastian mine. Production was affected during the fourth quarter of 2004, and continues to be affected as of the date of this report. There can be no assurance as to the outcome or length of the strike. In April 2005 and as of the date of this filing, non-employee union members have illegally blocked access to the mine, stopping production of ore from the Don Sergio vein. The State of Durango has filed criminal charges against several of the union leaders. Although we currently believe the strike will not materially affect our longer-term expected production, although there can be no assurance that the strike will not affect our longer-term production.
The Central Bank of Venezuela maintains regulations concerning the export of gold from Venezuela. Under current regulations, 15% of our gold production from Venezuela is required to be sold in Venezuela. Prior to our acquisition of the La Camorra mine, the previous owners had sold substantially all of the gold production to the Central Bank of Venezuela and built up a significant credit to cover the 15% requirement, which we assumed upon our acquisition. Since we began operating in Venezuela in 1999, all our production of gold has been exported and no sales have been made in the Venezuelan market. We currently expect that our credit for national sales will be exhausted in the middle of 2005, and we may be required to sell 15% of our future gold production to either the Central Bank of Venezuela or to other customers within Venezuela. Markets within Venezuela are limited, and historically the Central Bank of Venezuela has been the primary customer of gold. There can be no assurance that the Central Bank of Venezuela will purchase gold from us, and we may be required to sell gold into a limited market, which could result in lower sales and cash flows from gold as a result of discounts, or we may have to inventory a portion of our gold production until such time as we find a suitable purchaser for our gold. These matters could have a material adverse effect on our financial results.
We are subject to other legal proceedings and claims not disclosed above which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these other matters, it is the opinion of our management that the outcome of these other proceedings will not have a material adverse effect on our financial condition.
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Note 6. Loss per Common Share
The following table presents a reconciliation of the numerators and denominators used in the basic and diluted loss per common share computations. Also shown is the effect that has been given to cumulative preferred dividends in arriving at the losses applicable to common shareholders for the three months ended March 31, 2005 and 2004, in computing basic and diluted loss per common share (dollars and shares in thousands, except per-share amounts).
Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
March 31, | ||||||||
2005 | 2004 | |||||||
Income (loss) from operations before preferred stock dividends | $ | (3,296 | ) | $ | 6,180 | |||
Less: Preferred stock dividends | (138 | ) | (11,188 | ) | ||||
Basic loss applicable to common shareholders | $ | (3,434 | ) | $ | (5,008 | ) | ||
Basic and diluted weighted average number of common shares | 118,381 | 117,318 | ||||||
Basic and diluted loss per common share | $ | (0.03 | ) | $ | (0.04 | ) | ||
These calculations of diluted loss per share for the three months ended March 31, 2005 and 2004 exclude the effects of convertible preferred stock ($7.9 million in 2005 and 2004), restricted stock units, as well as common stock issuable upon the exercise of various stock options, as their conversion and exercise would be antidilutive, as follows:
Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
March 31, | ||||||||
2005 | 2004 | |||||||
1995 Stock Incentive Plan | ||||||||
Stock Options | 2,348,668 | 213,500 | ||||||
2002 Key employee deferred compensation plan | ||||||||
Stock options | 517,550 | 159,862 | ||||||
Stock units | 12,705 | 4,944 | ||||||
Restricted stock units | 182,500 | — |
The convertible preferred stock above had a liquidation preference of $7.9 million, plus dividends in arrears of approximately $2.3 million, at March 31, 2005 and December 31, 2004, respectively. On May 6, 2005, our board of directors opted to pay the outstanding Series B Cumulative Convertible Preferred stock dividends in arrears on July 1, 2005, for an approximate total of $2.3 million.
Note 7. Business Segments
For GAAP purposes and in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information,” we are organized and managed as three segments which represent the geographical areas in which we operate: Venezuela (the La Camorra unit and various exploration projects), Mexico (the San Sebastian unit and various exploration projects) and the United States (the Greens Creek unit, the Lucky Friday unit and various exploration projects). General corporate activities not associated with operating units, as well as idle properties, are presented as Other. Interest expense, interest income and income taxes are considered a general corporate expense and are not allocated to the segments.
The following tables present information about reportable segments for the three months ended March 31, 2005 and 2004 (in thousands):
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Three Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
March 31, | ||||||||
2005 | 2004 | |||||||
Net sales to unaffiliated customers: | ||||||||
United States | $ | 14,588 | $ | 14,725 | ||||
Venezuela | 9,690 | 11,755 | ||||||
Mexico | 156 | 10,170 | ||||||
$ | 24,434 | $ | 36,650 | |||||
Income (loss) from operations: | ||||||||
United States | $ | 3,624 | $ | 3,966 | ||||
Venezuela | 365 | 2,926 | ||||||
Mexico | (2,262 | ) | 4,232 | |||||
Other | (5,002 | ) | (4,267 | ) | ||||
$ | (3,275 | ) | $ | 6,857 | ||||
The following table presents identifiable assets by reportable segment as of March 31, 2005 and December 31, 2004 (in thousands):
March 31, 2005 | December 31, 2004 | |||||||
---|---|---|---|---|---|---|---|---|
Identifiable assets: | ||||||||
United States | $ | 78,243 | $ | 77,692 | ||||
Venezuela | 88,952 | 80,198 | ||||||
Mexico | 18,927 | 23,362 | ||||||
Other | 88,240 | 98,196 | ||||||
$ | 274,362 | $ | 279,448 | |||||
Note 8. Employee Benefit Plans
We sponsor defined benefit pension plans covering substantially all U.S. employees. Net periodic pension cost (income) for the plans consisted of the following for the three months ended March 31, 2005 and 2004 (in thousands):
Pension Benefits | Other Benefits | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Service cost | $ | 176 | $ | 123 | $ | 2 | $ | 2 | ||||||
Interest cost | 803 | 707 | 19 | 28 | ||||||||||
Expected return on plan assets | (1,399 | ) | (1,249 | ) | — | — | ||||||||
Amortization of prior service cost | 97 | 83 | 19 | 23 | ||||||||||
Amortization of net gain | (20 | ) | (5 | ) | (5 | ) | (3 | ) | ||||||
Amortization of transition obligation | 1 | — | — | — | ||||||||||
Net periodic benefit cost (income) | $ | (342 | ) | $ | (341 | ) | $ | 35 | $ | 50 | ||||
Note 9. Stock-Based Plans
At March 31, 2005 and 2004, executives, key employees and directors had been granted options to purchase our common shares or were credited with common shares under stock-based compensation plans. We measure compensation cost for stock option plans using the intrinsic
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value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” We also provide the required disclosures of SFAS No. 123. Effective January 1, 2006, we will adopt the revisions to SFAS No. 123, which will require us to recognize compensation expense for employee services rendered in exchange for an award of equity instruments, based on the grant-date fair value of the award over the period during which the employee is required to provide service in exchange for the award. Had compensation expense for our stock-based plans been determined for awards during the three months ended March 31, 2005 and 2004 consistent with the provisions of SFAS No. 123, our losses and per share losses applicable to common shareholders would have been increased to the pro-forma amounts indicated below (in thousands, except per share amounts):
Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||
Loss applicable to common shareholders | ||||||||
As reported | $ | (3,434 | ) | $ | (5,008 | ) | ||
Stock-based employee compensation expense | ||||||||
included in reported loss | 161 | 767 | ||||||
Total stock-based employee compensation | ||||||||
expense determined under fair value | ||||||||
based methods for all awards | (209 | ) | (881 | ) | ||||
Pro-forma loss applicable to common | ||||||||
shareholders | $ | (3,482 | ) | $ | (5,122 | ) | ||
Loss applicable to common shareholders | ||||||||
per share: | ||||||||
As reported | $ | (0.03 | ) | $ | (0.04 | ) | ||
Pro forma | $ | (0.03 | ) | $ | (0.04 | ) |
Note 10. New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29.” The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.�� The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends
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APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” This Statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires the measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render service. We will adopt SFAS No. 123(R) on January 1, 2006, requiring compensation cost to be recognized as expense for the portion of outstanding unvested awards, based on the grant-date fair value of those awards calculated using an option pricing model. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We are currently evaluating the impact this new pronouncement will have on our consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations – An Interpretation of SFAS No. 143.” FIN No. 47 provides clarification of the term conditional asset retirement obligation as used in paragraph A23 of SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset, and states that an entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 becomes effective on January 1, 2006, and we are evaluating the impact, if any, this may have on our consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained 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. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “feel,” “plan,” “estimate” 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 Item 1 – Business – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2004. 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 is a precious metals company originally incorporated in 1891 (in this report, “we” or “our” refers to Hecla Mining Company and/or our affiliates and subsidiaries). We are engaged in the exploration, development, mining and processing of silver, gold, lead and zinc. Our business is to discover, acquire, develop, produce and market mineral resources. In doing so, we intend to:
• | Manage all our business activities in a safe, environmentally responsible and cost-effective manner; |
• | Give preference to projects where we will be the manager of the operation; |
• | Provide a work environment that promotes personal excellence and growth for all our employees; and |
• | Conduct our business with integrity and honesty. |
Our focus in 2005 is to continue progress on major capital projects at current operating properties, exploration and development of new and existing targets, and low-cost production. We believe these activities should help build our resource base and help maintain our low costs in the long term. Our strategy consists of the following:
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• | Maintaining our production and cost profile; |
• | Significantly increasing our proven and probable reserves via investment in exploration and acquisitions; |
• | Positioning the company to double our silver and gold production; |
• | Maintaining our financial strength; and |
• | Focusing on silver and gold assets and production. |
We are organized and managed into three segments, which represent the geographical areas in which we operate: Venezuela (the La Camorra unit and various exploration projects), Mexico (the San Sebastian unit and various exploration projects) and the United States (the Greens Creek unit, the Lucky Friday unit and various exploration projects). The maps at the right indicate the locations of our operating units and our exploration projects: the Hollister Development Block, the Block B concessions, which includes our Mina Isidora development project, and the Noche Buena feasibility project.
We produce both metal concentrates, which we sell to custom smelters on contract, and unrefined gold and silver bullion bars (doré), which is further refined before sale to metals traders. Our revenue is derived from the sale of silver, gold, lead and zinc and, as a result, our earnings are directly related to the prices of these metals. Silver, gold, lead and zinc prices fluctuate widely and are affected by numerous factors beyond our control.
Results of Operations
For the first quarter of 2005, we recorded a net loss of $3.3 million, compared to net income of $6.2 million during the first quarter of 2004. In support of our objective to grow and expand production, exploration and pre-development expenditures increased by $2.2 million compared to the first quarter of 2004. The strike at our Velardeña mill in Mexico has decreased the San Sebastian unit’s gross profit by $6.4 million, while decreased gold ore grades and rising operating costs combined to decrease gross profit from our other units by a total of $1.6 million. General and administrative expenses increased by $0.9 million due to increased corporate expenditures, including legal fees and the addition of personnel.
The first quarter of 2005 has seen several favorable effects. For the first quarter of 2005 compared to the same period in 2004, the average price of silver increased 4% and our average
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realized price of gold increased 13%. Lead prices rose 16% and zinc prices increased by 23%, both of which are important by-products at our Greens Creek and Lucky Friday units. Expenses for interest and idle properties and income tax provisions have declined this year when compared to the first quarter of 2004. Our balance sheet continues to be strong, with $16 million in cash, and $48 million in investments, and we continue to be free of outstanding bank debt.
Factors contributing to the quarter-on-quarter variances are discussed below in more detail under each operating property, corporate matters and financial condition and liquidity.
The following table displays our actual silver and gold production (in thousand ounces) by operation for the quarters ended March 31, 2005 and 2004, and projected silver and gold production for the year ending December 31, 2005.
Projected | First Quarters Ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2005 | 2004 | |||||||||
Silver ounce production: | |||||||||||
San Sebastian unit (1) | 600 | — | 857 | ||||||||
Greens Creek unit (2) | 3,000 | 897 | 745 | ||||||||
Lucky Friday unit | 2,800 | 521 | 483 | ||||||||
Total silver ounces | 6,400 | 1,418 | 2,085 | ||||||||
Projected | First Quarters Ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2005 | 2004 | |||||||||
Gold ounce production: | |||||||||||
La Camorra unit | 143 | 22 | 38 | ||||||||
San Sebastian unit (1) | 22 | — | 11 | ||||||||
Greens Creek unit (2) | 25 | 6 | 7 | ||||||||
Total gold ounces | 190 | 28 | 56 | ||||||||
(1) | In October 2004, the National Miners Union at the Velardeña mill initiated a strike in an attempt to unionize employees at the San Sebastian mine. The strike has continued as of the date of this report and as a result, there was no ore processed or metal production during the first quarter of 2005. Projected production in 2005 from the San Sebastian unit may continue to be affected, as discussed in the Mexico segment below. |
(2) | Reflects our 29.73% portion. |
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Total cash and total production costs, and average metals prices were as follows:
First Quarters Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||
Average costs per ounce of silver produced: | ||||||||
Total cash costs per ounce ($/oz.) (1,3,4) | 2.60 | 1.43 | ||||||
Total production costs per ounce ($/oz.) (1,3) | 4.12 | 2.93 | ||||||
Average costs per ounce of gold produced: | ||||||||
Total cash costs per ounce ($/oz.) (2,3,4) | 294 | 141 | ||||||
Total production costs per ounce ($/oz.) (2,3) | 358 | 233 | ||||||
Average Metals Prices: | ||||||||
Silver-Handy & Harman ($/oz.) | 7.00 | 6.71 | ||||||
Gold-Realized ($/oz.) | 429 | 379 | ||||||
Gold-London Final ($/oz.) | 427 | 408 | ||||||
Lead-LME Cash ($/pound) | 0.44 | 0.38 | ||||||
Zinc-LME Cash ($/pound) | 0.60 | 0.49 |
(1) | The higher costs per silver ounce during the first quarter of 2005 compared to 2004 are due in part to absence of production from our San Sebastian unit. Our costs per ounce amounts are calculated pursuant to standards developed by mining companies in conjunction with the Gold Institute, a non-profit trade group no longer in existence. |
(2) | The increased costs per gold ounce during the first quarter of 2005 compared to 2004 are due to a 42% decrease in gold ounces produced at the La Camorra unit, resulting from a 47% decrease in the gold ore grade (see the Venezuelan segment below). |
(3) | Costs per ounce of gold are based on the gold produced from the La Camorra unit, our sole gold operating property. Gold produced from San Sebastian and Greens Creek is treated as a by-product credit in calculating silver costs per ounce. Ore containing gold that we purchase from third parties in Venezuela is treated as a by-product credit in calculating gold costs per ounce. |
(4) | Cash costs per ounce of silver or gold represent non-GAAP measurements that management uses to monitor and evaluate the performance of its mining operations. We believe cash costs per ounce of silver or gold provide an indicator of cash flow generation at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other operating mining properties. Cost of sales and other direct production costs, which excludes depreciation, depletion and amortization, is the most comparable financial measure calculated in accordance with GAAP to total cash costs. Total cash costs per ounce provides investors and management with a consistent measure of cash flows generated by operations, and is frequently used by publicly-traded precious metals mining companies. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found below under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs (GAAP). |
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The Mexico Segment
The San Sebastian unit, located in the State of Durango, Mexico, reported sales of $0.2 million in the first quarter of 2005, compared to $10.2 million in same period for 2004, and a loss from operations of $2.0 million in the 2005 period, compared to income from operations of $5.6 million in 2004. These decreases are primarily due to a strike at the Velardeña mill, where we process our ore from the San Sebastian mine, that prevented production during the entire first quarter of 2005. The San Sebastian unit reported cost of sales and other production costs of $0.5 million during the first quarter of 2005, compared to $3.3 million during the same period in 2004. Included in the (loss) income from operations during the first quarters of 2005 and 2004, respectively, were exploration expenditures of $1.2 million during both comparable periods.
The National Miners Union at the Velardeña mill initiated a strike in October 2004 in an attempt to unionize employees at the San Sebastian mine. The mine employees have informed us, the union and the Ministry of Labor that they do not want to be organized. Although we are meeting regularly with government and union officials to resolve the issue, there can be no assurance as to the outcome or length of the strike. As a result of the strike, there was no ore processed or metal production during the first quarter of 2005, compared to almost 40,000 tons milled containing 857,000 ounces of silver and 11,000 ounces of gold during the first quarter of 2004. The San Sebastian unit had average grades of approximately 25 ounces of silver and 0.32 ounce of gold per ton during the first quarter of 2004.
Through the first quarter of 2005, the mine continued to operate at a normal rate, stockpiling ore in preparation for future processing. On April 5, 2005 and continuing as of the date of this report, non-employee union members have illegally blocked access to the mine, stopping the production of ore from the Don Sergio vein. The State of Durango has filed criminal charges against several of the union leaders. During the first quarter of 2005, approximately 24,000 tons of ore-grade material was added to the stockpile, containing an estimated 290,000 ounces of silver and 6,000 ounces of gold.
We completed mining on the Francine vein at the end of the first quarter of 2005. We are currently mining the end of the known resources on the Don Sergio vein at the San Sebastian mine, and we anticipate that the productive capacity of this vein will be exhausted near the middle of 2005, assuming a successful resolution of the current strike at the mill. Production will cease at this mine until new areas are identified and developed. The San Sebastian unit is forecast to produce approximately 0.6 million ounces of silver and 22,000 ounces of gold, respectively, for the year ending December 31, 2005, assuming the strike is resolved.
The lack of metal production due to the strike resulted in an inability to calculate a meaningful total cash cost per ounce for the San Sebastian unit during the first quarter of 2005, compared to a negative $0.44 cash cost per ounce for the same period in 2004. Because gold is considered a by-product of our silver production, the negative cash cost per ounce is the result of a gold by-product credit that was approximately $5.47 per silver ounce for the first quarter of 2004. For the first quarter of 2005, there was no by-product credit as there was no gold production. A reconciliation of this non-GAAP measure to cost of sales and other direct
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production costs, the most comparable GAAP measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs.
The United States Segment
Greens Creek
The Greens Creek unit, a 29.73%-owned joint-venture arrangement with Kennecott Greens Creek Mining Company located on Admiralty Island, near Juneau, Alaska, reported sales of $10.1 million for our account during both the first quarter of 2005 and 2004. Income from operations increased to $3.2 million in the first quarter of 2005, from $3.0 million in the 2004 period, primarily the result of increased metals prices and a 20% increase in silver production due to higher silver ore grades, offset by the timing of shipments resulting in lower comparative sales (when comparing the increases in silver production and metals prices), and increased costs of production including higher fuel prices ($0.7 million), and exploration expenditures ($0.2 million). Cost of sales and other direct production costs as a percentage of sales from products decreased to 46.0% in the first quarter of 2005 from 53.5% in the 2004 period.
Greens Creek produced 896,871 ounces of silver during the first quarter of 2005 as compared to 744,967 silver ounces produced during the same 2004 period, a 20% increase despite an 8% decrease in the volume of ore milled (approximately 55,000 tons in the 2005 period compared to 60,000 tons in the 2004 period). The increased silver production is the result of silver ore grades that were approximately 28% higher for the first quarter of 2005 as compared to the 2004 period. Greens Creek produced approximately 6,200 ounces of gold, 1,800 tons of lead and 5,100 tons of zinc during the first quarter of 2005, compared to 6,700 ounces of gold, 1,700 tons of lead and 5,400 tons of zinc during the first quarter of 2004.
Silver and gold ore grades during the first quarter of 2005 were approximately 21 ounces per ton of silver and 0.16 ounce of gold per ton, compared to approximately 17 ounces per ton of silver and 0.17 ounce of gold per ton during the first quarter of 2004.
The total cash costs per silver ounce increased by approximately 7% to $1.05 per ounce during the first quarter of 2005 from $0.98 during the 2004 period. The increase is the result of increased production costs, including increased fuel prices, offset by increased silver production. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs. For the year ending December 31, 2005, production is forecast to total approximately 3.0 million silver ounces, 24,000 ounces of gold and 7,000 and 25,000 tons of lead and zinc, respectively.
Lucky Friday
The Lucky Friday unit, located in northern Idaho and a producing mine for Hecla since 1958, reported sales of approximately $4.4 million during the first quarter of 2005, compared to $4.7 million during the first quarter of 2004, and income from operations of $0.4 million during the first quarter of 2005, compared with $1.0 million during the same period in 2004. The decrease in
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income from operations is primarily the result of higher costs attributable to mining at a greater depth and increased personnel costs, the deferral of sales to product inventory in March due to a two-week maintenance closure at the smelter, offset by higher average metals prices and increased production due to a 9% increase in tons milled (43,000 tons in 2005 versus 39,000 tons in 2004). For the first quarter of 2005, Lucky Friday produced approximately 521,000 ounces of silver and 3,000 tons of lead, compared to 483,000 ounces of silver and 2,800 tons of lead a year ago.
Cost of sales and other direct production costs as a percentage of sales from products increased to 87.9% during the first quarter of 2005, from 79.1% during the first quarter of 2004. Costs will remain higher until the new access is completed on the 5900 level of the Gold Hunter deposit, a property we have been mining at the Lucky Friday unit for the past several years, under a long term lease agreement negotiated in 1968. Development of the 5900 level continued during the first quarter of 2005, with the completion of a 4,946 foot drift and 460 feet of lateral advancement. In the second half of 2005, full production on the new level is expected.
The total cash costs per silver ounce during the first quarter of 2005 decreased to $5.26, compared to $5.44 during the 2004 period, primarily due to a strong by-product credit from increased lead and zinc prices, and increased silver production partially offset by increased production costs. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs. For the year ending December 31, 2005, production is forecast to total approximately 2.8 million silver ounces and 15,000 tons of lead.
The Venezuela Segment
We currently operate the La Camorra unit, located in the eastern Venezuelan State of Bolivar. At the present time, La Camorra is our sole designated gold operation. The La Camorra unit consists of the La Camorra mine, a custom milling business, and exploration and development activities on the Block B concessions located approximately 70 miles north-northwest of the La Camorra mine. During 2004, we commenced development of an additional operating gold property, Mina Isidora, on the Block B concessions.
Sales of product during the first quarter of 2005 were $9.7 million, a decrease of $2.1 million, or 18%, compared to sales of product of $11.8 million during the 2004 comparable period. During the first quarter of 2005, the La Camorra unit produced approximately 22,000 ounces of gold compared to 38,000 ounces during the first quarter of 2004, primarily due to a 47% negative variance in gold ore grade, which was 0.45 ounce of gold per ton in 2005 compared to an average grade of 0.84 ounce of gold per ton during the first quarter of 2004. Ore grades are expected to improve over the remainder of 2005 to near proven and probable ore-grade levels, as higher-grade areas of the mine are developed. Tons milled in 2005 increased 12% over the 2004 period, from approximately 45,000 tons in 2004 to 50,000 tons in 2005. Total gold production for the La Camorra unit, including custom milling and anticipated production from Mina Isidora, is projected to reach approximately 143,000 ounces for the year ending December 31, 2005.
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The negative production variance is offset by an 17% increase in the realized price of gold, which increased to $429 per ounce during the first quarter of 2005 compared to $365 per ounce in 2004. Our realized gold price during 2004 was less than the average London Final prices for that quarter ($408 per ounce) due to forward gold sales contracts at $288.25 per ounce for a portion of our production. We delivered on all outstanding forward gold sales contracts by the end of 2004.
For the quarter ended March 31, 2005, the La Camorra unit reported income from operations of $0.4 million, compared to income from operations of $2.9 million from the same period in 2004, primarily due to the decrease in sales as discussed above, a 35% increase in operating costs primarily due to the higher cost of mining at greater depth at the La Camorra mine, as well as a foreign exchange loss in March 2005 due to an increase in the government-fixed exchange rate of the bolivar to the U.S. dollar at 2,150 to $1 (previously set at 1,920 to $1). In order to mine more efficiently at the greater depths of the La Camorra mine, we are currently constructing a production shaft that is anticipated to be in service in the second quarter of 2005, which is anticipated to decrease operating costs.
Due to the exchange-rate controls in place, the La Camorra unit recognized foreign exchange gains, which reduced by $1.7 million during the first quarter of 2005 and $2.2 million during the same period in 2004, respectively, due to the use of multiple exchange rates in valuing U.S. dollar denominated transactions. As mentioned above, the Venezuelan government has fixed the exchange rate of the bolivar to the U.S. dollar; however, markets outside of Venezuela have reflected a devaluation of the Venezuelan currency from such fixed rates ranging from 25% to 60%.
Cost of sales and other direct production costs as a percentage of sales from products increased to 62.5% during the first quarter of 2005, from 38.2% during the same period in 2004, with a total cash cost of $294 per ounce, compared to a total cash cost of $141 per ounce during the first quarter of 2004. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs.
Because of the exchange controls in place and their impact on local suppliers, some supplies, equipment parts and other items we previously purchased in Venezuela have been ordered from outside the country. Increased lead times in receiving orders from outside Venezuela have continued to require a further increase in supply inventory at the La Camorra mine as of March 31, 2005 ($9.9 million), compared to December 31, 2004 ($9.0 million), and prepayments to vendors, which have increased to $4.5 million at March 31, 2005, from $2.7 million since December 31, 2004.
In February 2005, Venezuela’s Basic Industries Minister announced that Venezuela will review all foreign investments in non-oil basic industries, including gold projects, to maximize technological and developmental benefits and align investments with the current administration’s social agenda. The Minister indicated Venezuela is seeking transfers of new technology, technical training and assistance, job growth, greater national content, and creation of local downstream industries and that the transformation would require a fundamental change in
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economic relations with major multinational companies. We have several contracts, a concession and one lease which could be subject to review. To the best of our knowledge, all of our properties are in compliance with the regulations and requirements of the agreements. Additionally, we believe we have gone beyond the mandated requirements in community and social development and believe we are generally perceived as having an overall positive impact on the region.
Also in February 2005, the Venezuelan government announced new regulations concerning the export of goods and services from Venezuela, which will require, effective April 1, 2005, all goods and services to be invoiced in the currency of the country of destination or in U.S. dollars. We are currently evaluating the impact of these new regulations; however, we may no longer be able to export our production in bolivares, which could result in an increase in our costs. In addition, the new regulations may impact our cash flows, our profitability of operations, and our production in Venezuela. There can be no assurance that further developments or interpretations of these regulations are limited to the impact we have described herein.
Our wholly owned subsidiary, Minera Hecla Venezolana, C.A. (“MHV”), which owns and operates our La Camorra unit, is involved in litigation in Venezuela with the Venezuelan tax authority (“SENIAT”) concerning alleged unpaid tax liabilities that predate our purchase of La Camorra from Monarch Resources (“Monarch”) in 1999. Pursuant to our Purchase Agreement, Monarch has assumed defense of and responsibility for a pending tax case in the Superior Tax Court in Caracas. In April 2004, SENIAT filed with the Superior Tax Court in Bolivar City, State of Bolivar, an embargo action against all of MHV’s assets in Venezuela to secure the alleged unpaid tax liabilities. In order to prevent the embargo, in April 2004, MHV made a cash deposit with the Court of approximately $4.3 million. In June 2004, the Superior Tax Court in Caracas ordered suspension and revocation of the embargo action filed by the SENIAT. Although we believe the cash deposit will continue to prevent any further action by SENIAT with respect to the embargo, there can be no assurance as to the outcome of this proceeding. If the Tax Court in Caracas or an appellate court were to subsequently award SENIAT its entire requested embargo, it could disrupt our Venezuela operations and have a material adverse effect on our financial condition.
In February 2005, we were notified by the SENIAT that it had completed its audit of our Venezuelan tax returns for the years ended December 31, 2003 and 2002. In the notice, the SENIAT has alleged that certain expenses are not deductible for income tax purposes and that calculations of tax deductions based upon inflationary adjustments were overstated, and has issued an assessment that is equal to taxes payable of $3.8 million. We have reviewed SENIAT’s findings and have submitted an appeal. Any resolution could be significantly delayed, and include further legal proceedings, additional related costs and further uncertainty. We have not accrued any amounts associated with the tax audits as of March 31, 2005. There can be no assurance that we will be successful in defending ourselves against the tax assessment, that there will not be additional assessments in the future or that SENIAT or other governmental agencies or officials may not take other actions against us, whether or not justified, that could disrupt our operations in Venezuela and have a material adverse effect on our financial condition.
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The Central Bank of Venezuela maintains regulations concerning the export of gold from Venezuela. Under current regulations, 15% of our gold production from Venezuela is required to be sold in Venezuela. Prior to our acquisition of the La Camorra mine, the previous owners had sold substantially all of the gold production to the Central Bank of Venezuela and built up a significant credit to cover the 15% requirement, which we assumed upon our acquisition. Since we began operating in Venezuela in 1999, all our production of gold has been exported and no sales have been made in the Venezuelan market. We currently expect that our credit for national sales will be exhausted in the middle of 2005, and we may be required to sell 15% of our future gold production to either the Central Bank of Venezuela or to other customers within Venezuela. Markets within Venezuela are limited, and historically the Central Bank of Venezuela has been the primary customer of gold. There can be no assurance that the Central Bank of Venezuela will purchase gold from us, and we may be required to sell gold into a limited market, which could result in lower sales and cash flows from gold as a result of discounts, or we may have to inventory a portion of our gold production until such time we find a suitable purchaser for our gold. These matters could have a material adverse effect on our financial results.
In addition, our operations may also be affected by the presence of small and/or illegal miners who attempt to operate on the fringes of major mining operations. Although we, in conjunction with local authorities and/or the Venezuelan National Guard, employ strategies to control the presence and/or impact of such miners, including the commencement of a custom milling program in 2004 for small mining cooperatives working in the area of Mina Isidora, there can be no assurance that such miners will not adversely affect our operations or that the local authorities and/or the Venezuelan National Guard will continue to assist our efforts to control their impact.
Although we believe we will be able to manage and operate the La Camorra unit and related exploration projects successfully, due to the continued uncertainty relating to political, regulatory, legal enforcement, security and economic matters, exportation and exchange controls, and the effect of all of these on our operations including, among other things, changes in policy or demands of governmental agencies or their officials, litigation, labor stoppages and the impact on our supplies of oil, gas and other supplies, there can be no assurance we will be able to operate without interruptions to our operations. Management is actively monitoring exchange controls in Venezuela, although there can be no assurance that the exchange controls will not further affect our operations in Venezuela in the future.
Corporate Matters
Dividends for preferred stock were considerably lower during the first quarter of 2005 ($0.1 million) when compared to the same period in 2004 ($11.2 million). During the first quarter of 2005, dividends of approximately $0.1 million were declared and subsequently paid on April 1, 2005. Included in the first quarter 2004 preferred stock dividends were non-cash dividend charges of approximately $10.9 million related to exchanges of preferred stock for common stock. For more information, see Note 10 – Shareholders’ Equity in our annual report filed on Form 10-K for the year ended December 31, 2004. On May 6, 2005, our Board of Directors opted to pay the outstanding Series B Cumulative Convertible Preferred Stock dividends in arrears, for an approximate total of $2.3 million.
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Pre-development expense increased $1.8 million during the first quarter of 2005 compared to the first quarter of 2004, due to increased activity at the Hollister Development Block in Nevada, for which final permits have been issued and surface and underground construction has commenced. Exploration expense increased $0.4 million during the first quarter of 2005 compared to the same period in 2004, primarily due to increased exploration expenditures associated with the Noche Buena feasibility project in northern Mexico ($0.3 million), as well as the Greens Creek unit ($0.2 million).
General and administrative expenses increased $0.9 million during the first quarter of 2005 compared to 2004, primarily due to increased corporate expenditures in 2005, including accounting, audit and legal fees and the addition of personnel.
Provision for income taxes was lower by $0.4 million during the first quarter of 2005 compared to the first quarter of 2004.
Other operating expense, net of other operating income, decreased $0.5 million during the first three months of 2005, from $1.2 million in 2004 to $0.7 million in the 2005 period, primarily due to decreased accruals of $0.8 million for variable plan accounting on certain stock options outstanding due to the decreases in our common stock price during the first three months of 2005 compared to the 2004 period, as well as a gain of $0.6 million recorded for the sale of royalty interests, partially offset by an increased foreign exchange loss ($0.8 million), due to an increase in the Venezuelan government-fixed exchange rate of the bolivar to the U.S. dollar at 2,150 to $1 (previously set at 1,920 to $1) in March 2005.
The provision for closed operations and environmental matters decreased $0.4 million during the first quarter of 2005, principally due to lower legal and other expenditures related to Idaho’s Coeur d’Alene Basin ($0.2 million), and a lower provision for future reclamation and other closure costs during 2005 compared to the 2004 period ($0.2 million).
Interest expense decreased $0.2 million during the first quarter of 2005 compared to the same period in 2004, due to no outstanding bank debt during the first quarter of 2005.
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs (GAAP)
The following tables present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs (GAAP) for our gold (the Venezuela segment only) and silver operations (the Mexico and United States segments), a reconciliation for each individual silver operating property, as well as a summary reconciliation of total cash costs that is reported in our Consolidated Statements of Operations and Comprehensive Income (Loss) for the quarters ended March 31, 2005 and 2004 (in thousands, except costs per ounce). We believe cash costs per ounce of silver or gold provide an indicator of cash flow generation at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other operating mining properties. Cost of sales and other direct production costs, which excludes depreciation, depletion, and amortization, is the most comparable financial measure calculated in accordance with GAAP to total cash costs. Total cash cost per ounce
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provides investors and management with a consistent measure of cash flows generated by operations, and is frequently used by publicly-traded precious metals mining companies. “Total cash cost per ounce” is a measure developed by gold companies in conjunction with the Gold Institute in an effort to provide a comparable standard, however, there can be no assurance that our reporting of this non-GAAP measure is similar to that reported by other mining companies.
Venezuela Segment (1) | ||||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, | ||||||||
2005 | 2004 | |||||||
Total cash costs (2) | $ | 6,181 | $ | 5,235 | ||||
Divided by ounces produced | 21 | 37 | ||||||
Total cash cost per ounce produced | $ | 294 | $ | 141 | ||||
Reconciliation to GAAP: | ||||||||
Total cash costs | $ | 6,181 | $ | 5,235 | ||||
Treatment & freight costs | (412 | ) | (459 | ) | ||||
By-product credits | 306 | 65 | ||||||
Change in product inventory | (48 | ) | (402 | ) | ||||
Reclamation and other costs | 31 | 46 | ||||||
Cost of sales and other direct | ||||||||
production costs (GAAP) | $ | 6,058 | $ | 4,485 | ||||
U.S. | Mexico | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mexico & U.S. Segments Combined | Lucky Friday Unit | Greens Creek Unit | San Sebastian Unit (3, 4) | |||||||||||
Three months ended March 31, 2005 | ||||||||||||||
Total cash costs (2) | $ | 3,682 | $ | 2,743 | $ | 939 | $ | — | ||||||
Divided by ounces produced | 1,418 | 521 | 897 | — | ||||||||||
Total cash cost per ounce produced | $ | 2.60 | $ | 5.26 | $ | 1.05 | $ | — | ||||||
Reconciliation to GAAP: | ||||||||||||||
Total cash costs | $ | 3,682 | $ | 2,743 | $ | 939 | $ | — | ||||||
Reclamation and other costs | 54 | 13 | 41 | — | ||||||||||
Treatment & freight costs | (4,851 | ) | (1,409 | ) | (3,442 | ) | — | |||||||
By-product credits | 10,078 | 2,883 | 7,195 | — | ||||||||||
Idle facility cost | 511 | — | — | 511 | ||||||||||
Change in product inventory | (389 | ) | (328 | ) | (61 | ) | — | |||||||
Cost of sales and other direct | ||||||||||||||
production costs (GAAP) | $ | 9,085 | $ | 3,902 | $ | 4,672 | $ | 511 | ||||||
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Three months ended March 31, 2004 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total cash costs (2) | $ | 2,982 | $ | 2,629 | $ | 729 | $ | (376 | ) | |||||
Divided by ounces produced | 2,085 | 483 | 745 | 857 | ||||||||||
Total cash cost per ounce produced | $ | 1.43 | $ | 5.44 | $ | 0.98 | $ | (0.44 | ) | |||||
Reconciliation to GAAP: | ||||||||||||||
Total cash costs | $ | 2,982 | $ | 2,629 | $ | 729 | $ | (376 | ) | |||||
Reclamation and other costs | 175 | 11 | 89 | 75 | ||||||||||
Treatment & freight costs | (4,695 | ) | (1,164 | ) | (3,069 | ) | (462 | ) | ||||||
By-product credits | 13,508 | 2,112 | 6,711 | 4,685 | ||||||||||
Change in product inventory | 393 | 89 | 932 | (628 | ) | |||||||||
Cost of sales and other direct | ||||||||||||||
production costs (GAAP) | $ | 12,363 | $ | 3,677 | $ | 5,392 | $ | 3,294 | ||||||
Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||
Reconciliation to GAAP, All Locations: | ||||||||
Total cash costs (2) | $ | 9,863 | $ | 8,217 | ||||
Treatment & freight costs | (5,263 | ) | (5,154 | ) | ||||
By-product credits | 10,384 | 13,573 | ||||||
Change in product inventory | (437 | ) | (9 | ) | ||||
Idle facility cost | 511 | — | ||||||
Reclamation and other costs | 85 | 221 | ||||||
Cost of sales and other direct | ||||||||
production costs (GAAP) | $ | 15,143 | $ | 16,848 | ||||
(1) | Costs per ounce of gold are based on the gold produced by the La Camorra mine only. During the first quarter of 2005 and 2004, a total of 767 ounces and 164 ounces of gold, respectively, were produced from third-party mining operations located near the La Camorra mine. The revenues from these gold ounces were treated as a by-product credit and included in the calculation of gold costs per ounce. Included in total cash costs for the first quarters of 2005 and 2004 were the costs to purchase the ore of approximately $0.5 million and $0.3 million, respectively. |
(2) | Includes 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 and marketing expense, on-site general and administrative costs, royalties and mining production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit. |
(3) | Due to the strike at the Velardeña mill in Mexico, costs totaling $511,000 have been excluded from the determination of silver costs per ounce during the first quarter of 2005, as they are not representative of costs associated with first quarter silver ounces produced. |
(4) | During 2004, gold was accounted for as a by-product at the San Sebastian unit whereby revenues from gold were deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy had been changed to treat gold production as a co-product, the following costs per ounce would have been reported: |
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Three months ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||
Total cash costs (excluding by-product credits) | $ | — | $ | 4,309 | ||||
Revenues | ||||||||
Silver | — | 55.2 | % | |||||
Gold | — | 44.8 | % | |||||
Ounces produced | ||||||||
Silver | — | 857 | ||||||
Gold | — | 11 | ||||||
Total cash cost per ounce produced | ||||||||
Silver | $ | — | $ | 2.77 | ||||
Gold | $ | — | $ | 168 |
Financial Condition and Liquidity
At March 31, 2005, we had cash and cash equivalents of $15.6 million and $47.8 million in short-term investments. Our cash requirements have been funded primarily by our existing cash balances and short-term investments held at the beginning of the quarter. Our cash needs over the next nine months will be primarily related to capital expenditures, exploration activities and reclamation expenditures, and will be funded through a combination of current cash, maturities or sales of investments, future cash flows from operations and/or future borrowings or debt or equity security issuances. Although we believe existing cash and cash equivalents are adequate, we cannot project the cash impact of possible future investment opportunities or acquisitions, and our operating properties may require more cash than forecasted.
Operating Activities
Cash flow from operating activities decreased by $12.0 million in the first quarter of 2005 compared to the same period of 2004, due primarily to a decrease in net income of $9.5 million related to a strike in Mexico and our commitment to exploration, feasibility, and pre-development costs. Working capital changes resulted in positive cash flows totaling $2.1 million for the first quarter of 2005 compared to the same period in 2004, in particular:
• | Trade accounts receivable increased by a lesser amount ($3.0 million) in the first quarter of 2005 than in 2004. The difference is attributable to the timing of shipments and collections for the Greens Creek unit, from which large volumes of concentrates are periodically shipped in bulk oceangoing vessels. |
• | Accounts payable obligations required a lesser amount of cash ($0.7 million) in the first quarter of 2005 than in 2004, due primarily to an $0.8 million interest payment in the first quarter of 2004. |
• | Prepaid expenses increased less ($0.9 million) in the first quarter of 2005 than in 2004, which was attributable to lower level of deposits required of vendors for materials and services related to capital projects in Venezuela. |
The foregoing sources of cash from working capital changes were offset by the following negative effects:
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• | Materials inventories increased by a greater amount ($0.6 million) in the first quarter of 2005 than in 2004. The increase was driven by the escalation of operational activity at Mina Isidora in Venezuela, as well as increases at La Camorra mine due to the long lead time in ordering supplies outside the country, offset partly by decreased materials inventories at San Sebastian resulting from the strike at the Velardeña mill. |
• | Product inventories increased by a greater amount ($2.0 million) in the first quarter of 2005 than in 2004. The increase in 2005 was due primarily to the building of an ore stockpile in Mexico attributable to the strike, partly offset by decreased product inventories at March 31, 2005 related to the timing of gold shipments from Venezuela. |
Non-cash elements included depreciation, depletion and amortization expense (lower by $2.5 million), no provision in 2005 for deferred income taxes (lower by $0.7 million), a $0.6 million non-cash gain recorded for the sale of royalty interests, a reduced adjustment for compensation expense primarily recognized for variable plan accounting on certain stock options compared with the first quarter of 2004 (lower by $0.6 million) and a lower provision recorded for future reclamation and closure costs (lower by $0.3 million).
Investing Activities
Investing activities required $11.9 million in cash during the first quarter of 2005 compared to $18.5 million in 2004. We purchased $31.5 million in held-to-maturity securities primarily for adjustable rate securities, offset by maturities of similar instruments, as well as bonds and other interest-bearing investments, totaling $42.7 million. Another $13.2 million in cash was used to purchase publicly traded securities. In addition, $9.8 million was used for additions to properties, plants, and equipment, of which the most significant components were the shaft project at the La Camorra mine and development of the Mina Isidora mine in Venezuela, and the Lucky Friday Gold Hunter 5900 level development project.
For 2005, we estimate our capital expenditures will be in the range of $40.0 to $47.0 million, which represents sustaining capital at our existing operations and expansion capital for shaft construction at the La Camorra mine, equipment and development at Mina Isidora and development at the Lucky Friday unit. There can be no assurance that our estimated capital expenditures for 2005 will be in the range we have projected.
Financing Activities
Financing activities provided approximately $0.2 million in cash from common stock issued upon the exercise of 51,255 employee stock options, compared to $2.0 million provided in the first quarter of 2004 from the exercise of employee stock options ($1.3 million) and the net borrowings of debt ($0.7 million).
Contractual Obligations and Contingent Liabilities and Commitments
The table below presents our fixed, noncancelable contractual obligations and commitments primarily related to our earn-in agreement obligations, outstanding purchase orders, and certain capital expenditures and lease arrangements as of March 31, 2005 (in thousands):
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Payments Due By Period | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less than 1 year | 1-3 years | 4-5 years | After 5 years | Total | |||||||||||||
Purchase obligations | $ | 8,622 | — | — | — | $ | 8,622 | ||||||||||
Contractual obligations (1) | 1,480 | — | — | — | 1,480 | ||||||||||||
Earn-in agreement (2) | 2,121 | — | — | — | 2,121 | ||||||||||||
Operating lease commitments (3) | 701 | 627 | 11 | — | 1,339 | ||||||||||||
Total contractual cash obligations | $ | 12,924 | $ | 627 | $ | 11 | $ | — | $ | 13,562 | |||||||
(1) | As of March 31, 2005, we were committed to approximately $1.3 million for Venezuelan employee transportation to the La Camorra mine, and $0.2 million for various capital projects in Venezuela. |
(2) | In August 2002, we entered into an earn-in agreement with Rodeo Creek Gold Inc., a wholly owned subsidiary of Great Basin Gold Ltd. (“Great Basin”), concerning exploration, development and production on Great Basin’s Hollister Development Block gold property. The agreement provides us with an option to earn a 50% working interest in the Hollister Development Block in return for funding a two-stage, advanced exploration and development program leading to commercial production. As of March 31, 2005, we were contractually committed to approximately $2.1 million, which represents the remaining portion of the first stage of the agreement. The $2.1 million has not been recorded in our Consolidated Financial Statements although project-to-date we have incurred expenditures of $8.2 million, which has been recorded on our Consolidated Financial Statements as pre-development expenditures. |
(3) | We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements. |
We maintain reserves for costs associated with mine closure, land reclamation and other environmental matters. At March 31, 2005, our reserves for these matters totaled $74.5 million, for which no contractual or commitment obligations exist. Future expenditures related to closure, reclamation and environmental expenditures are difficult to estimate, although we anticipate we will make expenditures relating to these obligations over the next thirty years. During 2005, expenditures for environmental remediation and reclamation are estimated to be in the range of $8.0 million to $10.0 million. For additional information relating to our environmental obligations, see Note 5 to our Notes to Consolidated Financial Statements.
Other
In May 2005, we signed a letter agreement to acquire the Guariche gold project in Venezuela, which would more than double our land position in that country. To obtain the property, we will acquire the shares of the subsidiary corporations of Triumph Gold Corporation (“Triumph”), which collectively control the concessions. The transaction has been approved by the board of directors of each company, and is subject to approval by the shareholders of Triumph. We have proposed to issue to Triumph 1.5 million units of stock, each unit consisting of one share of common stock and one warrant, entitling the holder to purchase one additional common share for a period of four years. The warrant exercise price shall be $4.856, which represents the average closing price of our common stock for the 10 days preceding the date of the letter agreement. In addition to the stock and warrants, we have agreed to a cash payment to Triumph of $75,000, and are giving Triumph the ability to earn an interest into the rights we hold in two other Venezuelan concessions by conducting exploration on the properties. The letter agreement provides us the
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right to buy back into the properties and operate them, as well as providing us with a right to buy into Triumph’s Las Flores property.
Holders of our Series B preferred stock are entitled to receive cumulative cash dividends at the annual rate of $3.50 per share, payable quarterly, when and if declared by the board of directors. As of January 31, 2002, we had not declared and paid the equivalent of six quarterly dividends, entitling holders of the preferred stock to elect two directors at our annual shareholders’ meeting. On May 10, 2002, holders of the preferred stock, voting as a class, elected two additional directors, both of whom continue to serve on the board. In February 2005, we declared a dividend payable on April 1, 2005 to preferred shareholders of record totaling approximately $0.1 million. On May 6, 2005, our Board of Directors opted to pay the outstanding dividends in arrears payable on July 1, 2005, for an approximate total of $2.3 million.
We are subject to legal proceedings and claims that have not been finally adjudicated. The ultimate disposition of these matters and various other pending legal actions and claims is not presently determinable. For information on legal proceedings and claims, see Note 5 to our Notes to Consolidated Financial Statements.
For information on hedged positions and derivative instruments, see Item 3 – “Quantitative and Qualitative Disclosures About Market Risk.”
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make a wide variety of estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. Our accounting policies are described in Note 1 of the Consolidated Financial Statements in our annual report filed on Form 10-K for the year ended December 31, 2004. We have identified our most critical accounting policies below that are important to the portrayal of our current financial condition and results of operations. Management has discussed the development and selection of these critical accounting policies with the audit committee of our board of directors and the audit committee has reviewed the disclosures presented below.
Revenue Recognition
Sales of all metals products sold directly to smelters (including by-products) are recorded as revenues when title and risk of loss transfer to the smelter at forward prices for the estimated month of settlement for the Greens Creek and Lucky Friday units. Due to the time elapsed from the transfer to the smelter and the final settlement with the smelter, we must estimate the price at which our metals will be sold in reporting our profitability and cash flow. Recorded values are adjusted monthly until final settlement at month-end metals prices and final metal content. If a
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significant variance was observed in estimated metals prices or metal content compared to the final actual metals prices or content, our monthly results of operations could be affected. Sales of metals in products tolled, rather than sold to smelters, are recorded at contractual amounts when title and risk of loss transfer to the buyer.
Sales of concentrates and precipitates (including by-products) from the Greens Creek, Lucky Friday and San Sebastian units are sold directly to smelters and recorded as revenues, with recorded amounts adjusted to month-end metals prices until final settlement.
Changes in the market price of metals significantly affect our revenues, profitability and cash flow. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control, such as political and economic conditions; demand; forward selling by producers; expectations for inflation; central bank sales; custom smelter activities; the relative exchange rate of the U.S. dollar; purchases and lending; investor sentiment; and global mine production levels. The aggregate effect of these factors is impossible to predict. Because our revenue is derived from the sale of silver, gold, lead and zinc, our earnings are directly related to the prices of these metals. If the market prices for these metals fall below our total production costs, we will experience losses on such sales.
Proven and Probable Ore Reserves
At least annually, management reviews the reserves used to estimate the quantities and grades of ore at our mines which management believes can be recovered and sold economically. Management’s calculations of proven and probable ore reserves are based on in-house engineering and geological estimates using current operating costs and metals prices. Periodically, but less often than annually, management obtains external audits of reserves.
Reserve estimates will change as existing reserves are depleted through production and as production costs and/or metals prices change. A significant drop in metals prices reduces reserves by making some portion of such ore uneconomic to develop and produce. Changes in reserves may also reflect that actual grades of ore processed may be different from stated reserve grades because of variation in grades in areas mined, mining dilution and other factors. Estimated reserves, particularly for properties that have not yet commenced production, may require revision based on actual production experience.
Declines in the market prices of metals, increased production or capital costs, reduction in the grade or tonnage of the deposit or an increase in the dilution of the ore or reduced recovery rates may render ore reserves uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques is sufficient to offset such effects. If our realized price for the metals we produce, including hedging benefits, were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, net losses, reduced cash flow, restatements or reductions in reserves and asset write-downs in the applicable accounting periods. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized.
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Depreciation and Depletion
The mining industry is extremely capital intensive. We capitalize property, plant and equipment and depreciate these items consistent with industry standards. The cost of property, plant and equipment is charged to depreciation expense based on the estimated useful lives of the assets using straight-line and unit-of-production methods. Depletion is computed using the unit-of-production method. As discussed above, our estimates of proven and probable ore reserves may change, possibly in the near term, resulting in changes to depreciation, depletion and amortization rates in future reporting periods.
Impairment of Long-Lived Assets
Management reviews the net carrying value of all facilities, including idle facilities, on a periodic basis. We estimate the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. These estimates of undiscounted future cash flows are dependent upon the future metals price estimates over the estimated remaining mine life. If undiscounted cash flows are less than the carrying value of a property, an impairment loss is recognized based upon the estimated expected future cash flows from the property discounted at an interest rate commensurate with the risk involved.
Management’s estimates of metals prices, recoverable proven and probable ore reserves, and operating, capital and reclamation costs are subject to risks and uncertainties of change affecting the recoverability of our investment in various projects. Although management believes it has made a reasonable estimate of these factors based on current conditions and information, it is reasonably possible that changes could occur in the near term which could adversely affect management’s estimate of net cash flows expected to be generated from our operating properties and the need for asset impairment write-downs. All estimates and assumptions are inherently subjective to some extent and may be impacted by bias, error, or changing conventions in the methodology of their determination or in changing industry conditions.
Environmental Matters
Our operations are subject to extensive federal, state and local environmental laws and regulations. The major environmental laws to which we are subject include, among others, the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law). CERCLA can impose joint and several liability for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The risk of incurring environmental liability is inherent in the mining industry. We own or operate property, or have previously owned and operated property, used for industrial purposes. Use of these properties may subject us to potential material liabilities relating to the investigation and cleanup of contaminants and claims alleging personal injury or property damage as the result of exposures to, or release of, hazardous substances.
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At our operating properties, we accrue costs associated with environmental remediation obligations in accordance with Statement of Financial Accounting Standards (SFAS) No. 143 “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires us to record a liability for the present value of our estimated environmental remediation costs and the related asset created with it in the period in which the liability is incurred. The liability will be accreted and the asset will be depreciated over the life of the related asset. Adjustments for changes resulting from the passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation will be made.
At our non-operating properties, we accrue costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. Accruals for estimated losses from environmental remediation obligations have historically been recognized no later than completion of the remedial feasibility study for such facility and are charged to provision for closed operations and environmental matters.
We periodically review our accrued liabilities for costs of remediation as evidence becomes available indicating that our remediation liabilities have potentially changed. Such costs are based on management’s then current estimate of amounts expected to be incurred when the remediation work is performed within current laws and regulations. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
Future closure, reclamation and environment-related expenditures are difficult to estimate in many circumstances due to the early stages of investigation; uncertainties associated with defining the nature and extent of environmental contamination; the uncertainties relating to specific reclamation and remediation methods and costs; application and changing of environmental laws; regulations and interpretations by regulatory authorities; and the possible participation of other potentially responsible parties. Reserves for closure costs, reclamation and environmental matters totaled $74.5 million at March 31, 2005, and we anticipate that the majority of these expenditures relating to these reserves will be made over the next 30 years. This amount was derived from a range of reasonable estimates in accordance with SFAS No. 5 “Accounting for Contingencies,” SFAS No. 143 and AICPA Statement of Position 96-1 “Environmental Remediation Liabilities.” It is reasonably possible that the ultimate cost of remediation could change in the future and that changes to these estimates could have a material effect on future operating results as new information becomes known. For environmental remediation sites known as of March 31, 2005, if the highest estimate from the range (based upon information presently available) were recorded, the total estimated liability would be increased by approximately $48.4 million. For additional information, see Note 5 of Notes to Consolidated Financial Statements.
Foreign Exchange in Venezuela
As of March 3, 2005, the Venezuelan government has fixed the exchange rate of their currency to the U.S. dollar at 2,150 bolivares to $1 (previously 1,920 to $1 during 2004 and the first two months of 2005), which are the exchange rates we utilized to translate the financial statements of our Venezuelan subsidiary included in our consolidated financial statements.
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Rules and regulations regarding the implementation of exchange controls in Venezuela have been published and are periodically revised and/or updated.
Due to the exchange controls in place, the La Camorra unit recognized foreign exchange gains, which reduced our cost of sales by $1.7 million in the first quarter of 2005 and $2.2 million in the same 2004 period, due to the use of multiple exchange rates in valuing U.S. dollar denominated transactions. As discussed above, the Venezuelan government has fixed the exchange rate of the bolivar to the U.S. dollar; however, markets outside of Venezuela have reflected a devaluation of the Venezuelan currency from such fixed rates ranging from 25% to 60%.
By-product Credits at the San Sebastian Unit in Mexico
Cash costs per ounce of silver at the San Sebastian unit include significant by-product credits from gold production and the strong gold prices. Our costs per ounce amounts are calculated pursuant to standards developed by mining companies in conjunction with the Gold Institute, a non-profit trade group no longer in existence. The lack of metal production due to the strike at the Velardeña mill, as discussed above, resulted in no meaningful total cash cost per ounce during the first quarter of 2005, compared to a negative $0.44 per silver ounce during the first quarter of 2004. For the first quarter in 2004, gold by-product credits were approximately $5.47 per silver ounce. By-product credits at the San Sebastian unit are deducted from operating costs in the calculation of cash costs per ounce. If our accounting policy were changed to treat gold production as a co-product, the following total cash costs per ounce would be reported:
Three months ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||
Silver | $ | — | $ | 2.77 | ||||
Gold | $ | — | $ | 168 |
Cash costs per ounce of silver or gold represent measurements that management uses to monitor and evaluate the performance of our mining operations that are not in accordance with GAAP. We believe cash costs per ounce of silver or gold produced provide an indicator of cash flow generation at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales and Other Direct Production Costs.
Value-added Taxes
Value-added taxes (“VAT”) are assessed in Venezuela on purchases of materials and services. VAT is recorded as an account receivable on our consolidated balance sheet, with a balance of $7.8 million (net of a reserve for anticipated discounts totaling $1.9 million) at March 31, 2005, and $7.4 million at December 31, 2004 (net of a reserve for anticipated discounts of $1.9 million).
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As an exporter from Venezuela, we are eligible for refunds from the government for payment of VAT, and we prepare a monthly filing to obtain this refund. Refunds are given by the government in the form of tax certificates, which are marketable in Venezuela. We received our most recent certificate from the Venezuelan government in April 2005, for the periods of November 2002 through May 2004. While we believe that we will receive certificates for all outstanding VAT from the Venezuelan government, issuance of certificates is slow and the likelihood of recovery at our recorded value may diminish over time. We have established a reserve of 20% of face value at March 21, 2005 and December 31, 2004, respectively. In April 2005, we received and sold $3.1 million of VAT refunds to an outside third-party for a net discount of 15%.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29.” The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” This Statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires the measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render service. We will adopt SFAS No. 123(R) on January 1, 2006, requiring compensation cost to be recognized as expense for the portion of outstanding unvested awards, based on the grant-date fair value of those awards calculated using an option pricing model. This requirement will reduce net operating cash flows and increase net financing cash flows in periods
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after adoption. We are currently evaluating the impact this new pronouncement will have on our consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations – an Interpretation of SFAS No. 143.” FIN No. 147 provides clarification of the term conditional asset retirement obligation as used in paragraph A23 of SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset, and states that an entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 becomes effective on January 1, 2006, and we are evaluating the impact, if any, this may have on our consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our risk-management activities includes forward-looking statements that involve risk and uncertainties, as well as summarizes the financial instruments and derivative instruments held by us at March 31, 2005, which are sensitive to changes in interest rates and commodity prices and are not held for trading purposes. Actual results could differ materially from those projected in the forward-looking statements. We believe there has been no material change in our market risk since the end of our last fiscal year. In the normal course of business, we also face risks that are either nonfinancial or nonquantifiable (see Part I, Item 1 – Risk Factors in our Form 10-K for the year ended December 31, 2004).
Interest-Rate Risk Management
At March 31, 2005, certain of our short-term investments were subject to changes in market interest rates and were sensitive to those changes. We currently have no derivative instruments to offset the risk of interest rate changes. We may choose to use derivative instruments in the future, such as interest rate swaps, to manage the risk associated with interest rate changes.
The following table presents principal cash flows (in thousands) for short-term investments sensitive to changes in market interest rates at March 31, 2005, by maturity date and the related average interest rate. The variable rates are estimated based on implied forward rates in the yield curve at the reporting date.
Expected Maturity Date | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fair | |||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Total | Value | |||||||||||||||||
Short-term investments | $ | 25,407 | — | — | — | — | $ | 25,407 | $ | 25,407 | |||||||||||||
Average interest rate | 2.51 | % |
Commodity-Price Risk Management
At times, we 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 which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production. We use these instruments to reduce risk by offsetting market exposures. We are exposed to certain losses, generally the amount by which the contract price exceeds the spot price of a commodity, in the event of nonperformance by the counterparties to these agreements. The instruments held by us are not leveraged and are held for purposes other than trading. All contracts outstanding at March 31, 2005, are required to be accounted for as derivatives under SFAS No. 133.
The following table provides information about our forward sales contracts at March 31, 2005. The table presents the notional amount in tonnes, the average forward sales price and the total-dollar contract amount expected by the maturity dates, which occur during 2005.
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Expected Maturity Date 2005 | |||||
---|---|---|---|---|---|
Forward contracts: | |||||
Lead tonnes | 2,025 | ||||
Future price (per tonne) | $ | 766.53 | |||
Contract amount (in thousands) | $ | 1,552 | |||
Estimated fair value | $ | (431 | ) | ||
Estimated % of annual production | |||||
committed to contract | 9 | % |
At March 31, 2005, a decrease of $0.01 per pound in the price of lead would decrease our exposure to losses in 2005 by approximately $38,000.
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Item 4. Controls and Procedures
(a) Disclosure and controls 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. Based on that evaluation, our CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2005, in ensuring them in a timely manner that material information required to be disclosed in this report has been properly recorded, processed, summarized and reported.
(b) Changes to internal control over financial reporting: In our December 31, 2004 Annual Report on Form 10-K, management, in consultation with the Audit Committee, concluded that internal controls over financial reporting in place at December 31, 2004, were ineffective due to three material weaknesses. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Two of the material weaknesses concerned the employee strike at our Velardeña mill (the “mill”) in Mexico. First, management was not able to complete testing of all internal controls at the mill, as access to the mill was restricted, as provided by Mexican law and practice, by the employees on strike. Second, operations personnel, in order to preserve the equipment, prepared for the strike by emptying work-in-process inventory into the tailings impoundment at the mill, and the emptying of the work-in-process inventory was not properly communicated to accounting personnel. The third material weakness related to the lack of appropriate levels of monitoring and oversight of the accounts payable process in Mexico. The status of these three material weaknesses at March 31, 2005, was as follows:
• | During the first quarter of 2005, the strike at the mill continued. Accordingly, we believe the material weakness we reported in our Form 10-K for the year ended December 31, 2004, had no effect on our internal controls over financial reporting for the first quarter ended March 31, 2005. We continue to believe the strike will ultimately be resolved and operations at the mill will resume. At that time, we believe we will be able to complete our testing of internal controls and affirmatively report on the effectiveness of internal controls at the mill. |
• | The second material weakness regarding communication of the emptying of the work-in-process inventory into the tailings impoundment at the mill has been remediated through discussion and education of personnel involved in the mill operating and financial reporting process. Management believes this to be an isolated incident due to the circumstances surrounding the strike and has taken steps to prevent a recurrence in the future. |
• | Regarding the third material weakness, management has designed and implemented new control procedures to remediate the lack of appropriate levels of monitoring and oversight of the accounts payable process in Mexico. Steps taken during the first quarter of 2005 to eliminate this material weakness included providing additional training to the accounting staff in Mexico concerning proper recording of accounts payable transactions and the reconciliation and review of |
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accounts payable and related accounts payable transactions and balances. Management performed additional oversight and review procedures throughout the first quarter and on March 31, 2005, to ensure that accounts payable balances in Mexico were properly stated. Management believes these controls have been, and will continue to be, effective in remediating this material weakness. |
(c) Limitation on the effectiveness of controls: 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.
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Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
For information concerning legal proceedings, refer to Note 5 to our Notes to Consolidated Financial Statements, which is incorporated by reference into this Item 1.
Item 3. Defaults Upon Senior Securities
In December 2004 and February 2005, we declared a dividend payable to preferred shareholders of record, totaling approximately $0.1 million each occurrence. These dividends were paid on January 3, 2005 and April 1, 2005, respectively. On May 6, 2005 our Board of Directors opted to pay the outstanding Series B Cumulative Convertible Preferred stock dividends in arrears on July 1, 2005, for an approximate total of $2.3 million.
Item 6. Exhibits
See the exhibit index to this Form 10-Q for the list of exhibits.
Items 2, 4 and 5 of Part II are not applicable and are omitted from this report.
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Hecla Mining Company and Subsidiaries
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.
HECLA MINING COMPANY | ||
(Registrant) | ||
Date: May 10, 2005 | By | /s/ Phillips S. Baker, Jr. |
Phillips S. Baker, Jr., President, Chief Executive Officer and Director | ||
Date: May 10, 2005 | By | /s/ Lewis E. Walde |
Lewis E. Walde, Vice President and Chief Financial Officer |
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Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-Q – March 31, 2005
Index to Exhibits
3.1 | Certificate of Incorporation of the Registrant as amended to date. Filed as exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference. |
3.2 | By-Laws of the Registrant as amended to date. Filed as exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2004 and incorporated herein by reference. |
4.1(a) | Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant. Filed as exhibit 4.1(d)(e) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. |
4.1(b) | Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as exhibit 4.5 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. |
4.2 | Rights Agreement dated as of May 10, 1996, between Hecla Mining Company and American Stock Transfer & Trust Company, which includes the form of Rights Certificate of Designation setting forth the terms of the Series A Junior Participating Preferred Stock of Hecla Mining Company as Exhibit A and the summary of Rights to Purchase Preferred Shares as Exhibit B. Filed as exhibit 4 to Registrant’s Current Report on Form 8-K dated May 10, 1996 and incorporated herein by reference. |
4.3 | Stock Purchase Agreement dated as of August 27, 2001, between Hecla Mining Company and Copper Mountain Trust. Filed as exhibit 4.3 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
4.4 | Warrant Agreement dated August 2, 2002, between Hecla Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.4 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
4.5 | Registration Rights Agreement dated August 2, 2002, between Hecla Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.5 to Registrant’s Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395) and incorporated herein by reference. |
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10.1 | Indemnification Agreement dated February 25, 2005, between Hecla Mining Company and George R. Nethercutt, Jr. Filed as exhibit 10.4 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2004. (1) |
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
32.2 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
_________________
(1) | Indicates a management contract or compensatory plan or arrangement. | |
* Filed herewith |
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