The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our outstanding purchase orders and certain capital expenditures and lease arrangements as of September 30, 2008 (in thousands):
On April 16, 2008, we completed the acquisition of the remaining 70.3% of the Greens Creek mine. Accordingly, our obligations relating to open purchase orders, capital projects, transportation and other non-capital cost commitments, and all other items relating to Greens Creek reflect our 100% ownership, versus 29.7% historically. For more information on the acquisition, seeNote 14 ofNotes to Condensed Consolidated Financial Statements (Unaudited).
On June 19, 2008, we announced that we had entered into an agreement to sell 100% of our wholly owned subsidiaries holding our business and operations in Venezuela, and the transaction closed on July 8, 2008. SeeNote 5 ofNotes to the Condensed Consolidated Financial Statements (Unaudited) for further discussion of the sale. As a result, our obligations relating to the discontinued La Camorra unit for open purchase orders, transportation and other non-capital commitments, and future royalty obligations were eliminated upon completion of the sale.
Within the area mined by Lucky Friday, we control the Gold Hunter property under a long-term operating agreement with Independence Lead Mines Company (“Independence”) expiring in February 2018 and renewable thereafter, that entitles us, as operator, to an 81.48% interest in the net profits from operations from the Gold Hunter property. Under the current agreement, we would be obligated to pay a net profits interest of 18.52% to Independence after we have recouped our costs to explore and develop the property. Recoupment depends on, among other factors, metals prices and the extent of capital invested in Lucky Friday. In February 2008, we announced an agreement to purchase substantially all of the assets of Independence, which would result in our ownership of 100% of the property, thus eliminating our obligation to outside third parties (SeeNote 14 ofNotes to the Condensed Consolidated Financial Statements (Unaudited)).
We maintain reserves for costs associated with mine closure, land reclamation and other environmental matters. At September 30, 2008, our reserves for these matters totaled $119.1 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 30 years. For additional information relating to our environmental obligations, seeNote 6of Notes to the Condensed Consolidated Financial Statements (Unaudited).
Off-Balance Sheet Arrangements
At September 30, 2008, we had no existing off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Estimates
Our significant accounting policies are described inNote 1ofNotes to Consolidated Financial Statementsin our annual report filed on Form 10-K for the year ended December 31, 2007. As described inNote 1, we are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.
We believe that our most critical accounting estimates are related to future metals prices, obligations for environmental, reclamation, and closure matters, mineral reserves, and accounting for business combinations, as they require us to make assumptions that were highly uncertain at the time the accounting estimates were made, and changes in them are reasonably likely to occur from period to period. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosures presented below. In addition, there are other items within our financial statements that require estimation, but are not deemed to be critical. However, changes in estimates used in these and other items could have a material impact on our financial statements.
-39-
Future Metals Prices
Metals prices are key components in estimates that determine the valuation of some of our significant assets and liabilities, including properties, plants and equipment, deferred tax assets, and certain accounts receivable. As shown below underPart II,Item 1A. Risk Factors, metals prices have been historically volatile. While average prices for silver and gold have performed favorably for five consecutive years, there has been a reduction in the average prices of zinc and lead in the first nine months of 2008, compared to 2007. We have recorded impairments to our asset carrying value because of low prices in the past, and we can offer no assurance that prices will remain at their current levels or higher.
Processes supporting valuation of our assets and liabilities that are most significantly affected by prices include analyses of asset carrying values, depreciation, and deferred income taxes. On at least an annual basis – and more frequently if circumstances warrant – we examine the carrying values of our assets, our depreciation rates, and the valuation allowances on our deferred tax assets. In our analyses of carrying values and deferred taxes, we apply several pricing views to our forecasting model, including current prices, forward-curve prices, and historical prices (seeMineral Reserves, below, regarding prices used for reserve estimates). Using applicable accounting guidance and our view of metals markets, we use the most likely outcome to determine whether the values of our assets are fairly stated, and to determine the level of valuation allowances on our deferred tax assets. In addition, estimates of future metals prices are used in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (seeBusiness Combinations below).
Obligations for Environmental, Reclamation and Closure Matters
The most significant liability on our balance sheet is for accrued reclamation and closure costs. We have conducted considerable remediation work at sites in the United States for which remediation requirements have not been fully determined, nor have they been agreed between us and various regulatory agencies with oversight over the properties. We have estimated our liabilities with counsel and in accordance with appropriate accounting guidance. On at least an annual basis – and more frequently if warranted – management reviews our liabilities with our Audit Committee. However, the range of liability proposed by the plaintiffs in environmental proceedings considerably exceeds the liabilities we have recognized. If substantial damages were awarded or remediation costs incurred in excess of our accruals, our financial results or condition could be materially adversely affected.
Mineral Reserves
Critical estimates are inherent in the process of determining our reserves. Our reserves are affected largely by our assessment of future metals prices, as well as by engineering and geological estimates of ore grade, accessibility and production cost. Metals prices are estimated at long-term averages, as described inItem 2. — Property Descriptionsin our annual report filed on Form 10-K for the period ended December 31, 2007. Our assessment of reserves occurs at least annually, and periodically utilizes external audits.
Reserves are a key component in valuation of our properties, plants and equipment. Reserve estimates are used in determining appropriate rates of units-of-production depreciation, with net book value of many assets depreciated over remaining estimated reserves. Reserves are also a key component in forecasts, with which we compare future cash flows to current asset values to ensure that carrying values are reported appropriately. Reserves also play a role in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (seeBusiness Combinations below).
-40-
Reserves represent a culmination of many estimates, and are not guarantees that we will recover the indicated quantities of metals.
Business Combinations
In accordance with SFAS 141, “Business Combinations,” we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at acquisition date. We would recognize the excess of an acquired business’s cost over the fair value of acquired assets, less liabilities, as goodwill. The valuation of assets acquired and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to long-lived assets, including estimates of future metals prices and mineral reserves, as discussed above. In some cases, we use third-party appraisers to determine the fair values and lives of property and other identifiable assets.
| |
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 held by us at September 30, 2008, 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. In the normal course of business, we also face risks that are either non-financial or non-quantifiable (seePart II, Item 1A. Risk Factors).
Short-term Investments
From time to time we hold various types of short-term investments that are subject to changes in market interest rates and are sensitive to those changes. We did not carry any such short-term investments as of September 30, 2008.
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 had no commodity-related derivative positions at September 30, 2008.
Interest-Rate Risk Management
At September 30, 2008, we had $198.8 million in debt associated with the acquisition of the remaining 70.3% of the Greens Creek mine. The debt consists of $121.7 million related to a three-year amortizing term facility and a $77.1 million bridge facility balance. On October 16, 2008, the Company paid $37.1 million of the bridge loan and the balance of $40 million was extended to February 16, 2009 subject to the requirement that a revised operating plan be submitted to the bank syndicate by November 14, 2008. If the bank syndicate notifies us that the revised operating plan is unsatisfactory by December 10, 2008, the remaining outstanding balance on the bridge loan must be repaid on December 19, 2008. For additional information regarding our credit facility, seeNote 11of Notes to the Condensed Consolidated Financial Statements (Unaudited).
-41-
The term loan requires us to hedge the floating rate interest rate exposure and on May 5, 2008, we entered into a interest rate swap agreement that has the economic effect of modifying the LIBOR-based variable interest obligations associated with the $121.7 million term facility maturing on March 31, 2011 so that the interest payable on the note effectively became fixed at a rate of 5.005% until maturity on March 31, 2011. The terms of the interest rate swap agreement and the notes that the swap agreement pertains to match, including the notional amounts, interest rate reset dates, and maturity dates. The fair value of the swap totaled an unrealized gain of $267,000 at September 30, 2008. We are accounting for this swap as a hedge pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The unrealized gain is included in accumulated other comprehensive income and the corresponding fair value receivable is included in other current assets in our condensed consolidated balance sheet.
| |
Item 4. | Controls and Procedures |
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as required by Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2008, 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. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On January 1, 2008, we implemented a new business system at our corporate office to facilitate automation of our accounting processes. We believe the new system will enhance existing controls over financial reporting by decreasing manual controls inherent in our prior system.
On April 16, 2008, our subsidiaries acquired the remaining 70.3% interest in the Greens Creek Joint Venture, of which we previously held 29.7%. Prior to ownership by our various subsidiaries of 100% of the joint venture, we excluded Greens Creek from our assessment of internal control over financial reporting, as we did not have the ability to dictate or modify the controls at Greens Creek. We have commenced the process of assessing the effectiveness of our internal control over financial reporting at Greens Creek, using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). We have not yet determined whether we will be able to include Greens Creek in our assessment of internal controls as of December 31, 2008.
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.
-42-
Part II - Other Information
Hecla Mining Company and Subsidiaries
For information concerning legal proceedings, refer toNote 6 ofNotes to the Condensed Consolidated Financial Statements (Unaudited), which is incorporated by reference into this Item 1.
Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended December 31, 2007 sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. Except as set forth in the next following paragraph, those risk factors continue to be relevant to an understanding of our business, financial condition and operating results. Certain of those risk factors have been updated in this Form 10-Q to provide updated information, as set forth below.
Subsequent to the filing of our Form 10-K for the year ended December 31, 2007 and Form 10-Q for the period ended March 31, 2008, we sold our business and operations in Venezuela. As a result of that sale, we are no longer directly subject to any risks from conducting business in Venezuela as previously disclosed in our Form 10-K for the year ended December 31, 2007 and our Form 10-Q for the period ended March 31, 2008.
FINANCIAL RISKS
The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict.
The continued credit crisis and related turmoil in the global financial system has had and may continue to have an impact on our business and financial position. The recent high costs of fuel and other consumables have negatively impacted production costs at our operations. In addition, the financial crisis may limit our ability to raise capital through credit and equity markets, both of which we have utilized recently to finance the acquisition of the 70.3% interest in the Greens Creek mine and meet the related debt obligations. As discussed further below, the prices of the metals that we produce are affected by a number of factors, and it is unknown how these factors will be impacted by a continuation of the financial crisis.
A substantial or extended decline in metals prices would have a material adverse effect on us.
The majority of 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, including:
| |
• | speculative activities; |
| |
• | relative exchange rates of the U.S. dollar; |
| |
• | global and regional demand and production; |
| |
• | recession or reduced economic activity; and |
| |
• | other political and economic conditions. |
-43-
These factors are largely beyond our control and are difficult to predict. If the market prices for these metals fall below our production or development costs for a sustained period of time, we will experience losses and may have to discontinue exploration, development or operations, or incur asset write-downs at one or more of our properties.
On April 16, 2008, we completed the acquisition of the companies owning 70.3% of the Greens Creek mine (seeNote 14 ofNotes to Condensed Consolidated Financial Statements (Unaudited)for further discussion of the acquisition). The acquisition was partially funded by a $380 million debt facility, which included a $140 million three-year term facility and a $240 million bridge facility, which was scheduled to mature in October 2008. We utilized $220 million from the bridge facility at the time of closing the Greens Creek transaction, and used the remaining $20 million balance available for general corporate purposes in September 2008 (seeNote 11 ofNotes to Condensed Consolidated Financial Statements (Unaudited)for more information on the debt facility). At September 30, 2008, the outstanding balance associated with the debt facility was $198.8 million, including $77.1 million related to the bridge facility. On October 16, 2008, the Company paid $37.1 million of the bridge loan and the remaining balance of $40 million was extended to February 16, 2009 subject to the requirement that a revised operating plan be submitted to the bank syndicate by November 14, 2008. If the bank syndicate notifies us that the revised operating plan is unsatisfactory by December 10, 2008, the remaining outstanding balance on the bridge loan must be repaid on December 19, 2008. If the market prices for the metals we produce decline or we fail to control our production or development costs for a sustained period of time, our ability to service our debt obligations associated with this transaction may be adversely affected.
The following table sets forth the average daily closing prices of the following metals for the year ended December 31, 1995, 2001 and each year thereafter through 2007, and for the nine months ended September 30, 2008.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | | 1995 | |
| | | | | | | | | | | | | | | | | | | |
Silver(1) (per oz.) | | $ | 16.63 | | $ | 13.39 | | $ | 11.57 | | $ | 7.31 | | $ | 6.66 | | $ | 4.88 | | $ | 4.60 | | $ | 4.37 | | $ | 5.20 | |
Gold(2) (per oz.) | | $ | 897.43 | | $ | 696.66 | | $ | 604.34 | | $ | 444.45 | | $ | 409.21 | | $ | 363.51 | | $ | 309.97 | | $ | 272.00 | | $ | 384.16 | |
Lead(3) (per lb.) | | $ | 1.08 | | $ | 1.17 | | $ | 0.58 | | $ | 0.44 | | $ | 0.40 | | $ | 0.23 | | $ | 0.21 | | $ | 0.22 | | $ | 0.29 | |
Zinc(4) (per lb.) | | $ | 0.95 | | $ | 1.47 | | $ | 1.49 | | $ | 0.63 | | $ | 0.48 | | $ | 0.38 | | $ | 0.35 | | $ | 0.40 | | $ | 0.47 | |
| |
|
(1) | London Fix |
(2) | London Final |
(3) | London Metals Exchange — Cash |
(4) | London Metals Exchange — Special High Grade — Cash |
On November 3, 2008, the closing prices for silver, gold, lead and zinc were $10.05 per ounce, $729.50 per ounce, $0.67 per pound and $0.49 per pound, respectively.
A decline in metals prices may cause us to record write-downs, which could negatively impact our results of operations.
Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of long-Lived Assets(“SFAS 144”) establishes accounting standards for impairment of the value of long-lived assets such as mining properties. SFAS 144 requires a company to review the recoverability of the cost of its assets by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment, measured by comparing an asset’s carrying value to its fair value, must be recognized when the carrying value of the asset exceeds these cash flows, and recognizing impairment write-downs could negatively impact our results of operations. Metal price estimates are a key component used in the analysis of the carrying values of our assets. If the prices of silver, gold, zinc and lead decline or we fail to control production costs or realize the mineable ore reserves at our mining properties, we may be required to recognize asset write-downs.
-44-
Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income
We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. Metal price estimates are a key component used in the determination of our ability to realize the expected future benefit of our deferred tax assets. To the extent that future cash flows and taxable income differ significantly from estimates as a result of a decline in metals prices or other factors, our ability to realize the deferred tax assets could be impacted. Additionally, future changes in tax law could limit our ability to obtain the future tax benefits represented by our deferred tax assets. As of September 30, 2008, our current and non-current deferred tax asset balances were $36.5 million and $10.6 million, respectively. SeeNote 3 ofNotes to Condensed Consolidated Financial Statements for further discussion of our deferred tax assets.
Failure to comply with debt covenants could adversely affect our financial results or condition.
In September 2005, we entered into a $30.0 million revolving credit agreement that includes various covenants and other limitations related to our indebtedness and investments that require us to maintain customary measures of financial performance. The revolving credit agreement was replaced on April 16, 2008 by a restated and amended credit agreement in connection with our acquisition of the companies owning 70.3% of the Greens Creek mine, as discussed below.
Our acquisition of the companies owning 70.3% of the Greens Creek mine (seeNote 14 ofNotes to the Condensed Consolidated Financial Statements for further discussion) was partially funded by a $380 million debt facility, which includes a $140 million three-year term facility and a $240 million bridge facility, which matured in October 2008. We utilized $220 million from the bridge facility at the time of closing the Greens Creek transaction, and the remaining $20 million available balance in September 2008. The total outstanding balance on the debt facility at September 30, 2008 was $198.8 million, including $77.1 million related to the bridge facility. On October 16, 2008, the Company paid an additional $37.1 million of the bridge loan balance and the remaining balance of $40 million was extended to February 16, 2009 subject to the requirement that a revised operating plan be submitted to the bank syndicate by November 14, 2008. If the bank syndicate notifies us that the revised operating plan is unsatisfactory by December 10, 2008, the remaining outstanding balance on the bridge loan must be repaid on December 19, 2008. The debt facility includes various covenants and other limitations related to our indebtedness and investments that require us to maintain customary measures of financial performance. We believe we will be able to comply with such requirements in the future, although failure to do so could adversely affect our results or financial condition and may limit our ability to obtain financing. SeeNote 11 ofNotes to Condensed Consolidated Financial Statements (Unaudited)for more information on the debt facility.
-45-
The terms of our senior credit facility restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions and that, in turn, could impair our ability to meet our obligations.
Our senior credit facility contains various restrictive covenants that limit management’s discretion in operating our business. In particular, these covenants limit our ability to, among other things:
| | |
| • | incur additional debt; |
| |
| • | make certain investments or pay dividends or distributions on our capital stock or purchase or redeem or retire capital stock; |
| |
| • | sell assets, including capital stock of our restricted subsidiaries; |
| |
| • | restrict dividends or other payments by restricted subsidiaries; |
| |
| • | create liens; |
| |
| • | enter into transactions with affiliates; and |
| |
| • | merge or consolidate with another company. |
Our senior credit facility also requires us to maintain specified financial ratios and satisfy certain financial tests. Our ability to maintain or meet such financial ratios and tests may be affected by events beyond our control, including changes in general economic and business conditions, and we cannot assure you that we will maintain or meet such ratios and tests or that the lenders under our senior credit facility will waive any failure to meet such ratios or tests.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand, to pursue our business strategies, and otherwise to conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot assure you that we will be able to comply with them. A breach of these covenants could result in a default under our senior credit facility. If there were an event of default under our senior credit facility, the affected creditors could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay indebtedness under the senior credit facility when it becomes due, the lenders under the senior credit facility could proceed against the assets which we have pledged to them as security.
The inability to meet the payment obligations of our term or bridge debt facilities when due could adversely affect our financial results or condition.
The total outstanding balance of the debt facility at September 30, 2008 was $198.8 million, comprised of $121.7 million for the term facility and $77.1 million related to the bridge facility. Scheduled debt repayments on the term facility at September 30, 2008 are $18.3 million for the remainder of 2008, $48.3 million in 2009, $43.8 million in 2010 and $11.3 million in 2011. On October 16, 2008, the Company paid an additional $37.1 million of the bridge loan balance, and the remaining balance of $40 million was extended to February 16, 2009, subject to the requirement that a revised operating plan be submitted to the bank syndicate by November 14, 2008. If the bank syndicate notifies us that the revised operating plan is not satisfactory by December 10, 2008, the remaining outstanding balance on the bridge loan must be repaid on December 19, 2008. SeeNote 11 ofNotes to the Condensed Consolidated Financial Statements for further discussion of our credit facility. We may defer some capital investment activities until we secure additional capital, if necessary, to maintain liquidity. We also may pursue additional acquisition opportunities, which would require additional equity issuances or financing. There can be no assurances that such financing will be available to us. Failure to meet the payment obligations of our credit facilities could cause us to be in default. If there were an event of default under our senior credit facility, the affected creditors could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay indebtedness under the senior credit facility when it becomes due, the lenders under the senior credit facility could proceed against the assets which we have pledged to them as security.
-46-
A continued reduction in the average price of our common stock may affect our ability in the future to pay the quarterly dividends on our 6.5% Mandatory Convertible Preferred Stock in our common stock.
Dividends on our mandatory convertible preferred stock are payable on a cumulative basis when, as, and if declared by our board of directors at an annual rate of 6.5% per share on the liquidation preference of $100 per share. We intend to pay quarterly dividends of $3.3 million in cash, common stock, or a combination thereof, on January 1, April 1, July 1, and October 1 of each year to, and including, January 1, 2011. On October 16, 2008, we reached an agreement with our bank syndicate to extend the remaining $40 million balance of our bridge debt facility balance, originally scheduled to mature on October 16, 2008, until February 16, 2009, subject to certain requirements (seeNote 11 ofNotes to the Condensed Consolidated Financial Statements for more information on our credit facilities). One such requirement is that we must pay any dividends on our mandatory convertible preferred stock in common stock until the earlier of the date on which the bridge facility is repaid in full and February 16, 2009, to the extent that payment of such dividends in common stock is permitted thereby and under applicable law. The number of shares of common stock which may be delivered in connection with a regular dividend payment is capped. Because there has recently been a decline in the average price of our common stock, the cap may apply if recent prices of our common stock exist during upcoming calculation periods. The price of our common stock is impacted by numerous factors and has historically been volatile, and there can be no assurance that our ability to pay the quarterly dividends on our mandatory convertible preferred stock will not be impacted by future declines in the average price of our common stock.
OPERATION, DEVELOPMENT, EXPLORATION AND ACQUISITION RISKS
Our foreign operations are subject to additional inherent risks.
We recently sold our mining operations and assets in Venezuela, but still currently conduct exploration projects in Mexico. We anticipate that we will continue to conduct significant operations in Mexico and possibly other international locations in the future. Because we conduct operations internationally, we are subject to political and economic risks such as:
| | |
| • | 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; |
| | |
| • | expropriation or nationalization of assets with inadequate compensation; |
| | |
| • | currency fluctuations and repatriation restrictions; |
| | |
| • | invalidation of governmental orders, permits or agreements; |
| | |
| • | renegotiation or nullification of existing concessions, licenses, permits and contracts; |
| | |
| • | recurring tax audits and delays in processing tax credits or refunds; |
| | |
| • | corruption, demands for improper payments, expropriation, and uncertain legal enforcement and physical security; |
| | |
| • | disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations; |
-47-
| | |
| | |
| • | fuel or other commodity shortages; |
| | |
| • | illegal mining; |
| | |
| • | laws or policies of foreign countries and the United States affecting trade, investment and taxation; |
| | |
| • | civil disturbances, war and terrorist actions; and |
| | |
| • | seizures of assets. |
Consequently, our exploration, development and production activities outside of the United States may be substantially affected by factors beyond our control, any of which could materially adversely affect our financial condition or results of operations.
We may be subject to a number of unanticipated risks related to inadequate infrastructure.
Mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important determinants, which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect our mining operations.
We may be subject to a number of risks and uncertainties if our announced acquisition agreement fails to close.
In February 2008, we announced an agreement to purchase substantially all of the assets of Independence Lead Mines Company (“Independence”). For more information, seeNote 14 ofNotes to Condensed Consolidated Financial Statements (Unaudited). Failure to complete this transaction could negatively impact our stock performance and future operations. For example:
| | |
| • | The price of our common stock may decline to the extent that the current market price reflects an assumption that the transactions will be completed. |
| | |
| • | We must pay expenses related to the transaction, including substantial legal and accounting fees, even if the transaction is not completed. This could affect the results of our operations for the period during which the fees are incurred. |
| | |
| • | We would continue to own our current interest, rather than the entire future interest in the Gold Hunter property at the Lucky Friday mine. |
We may not realize the cost savings and other benefits we currently anticipate due to challenges associated with integrating the operations, personnel and other aspects of the companies owning 70.3% of the Greens Creek mine.
Our acquisition of the companies owning 70.3% of the Greens Creek mine reflects our expectation that the transaction will result in increased metals production, earnings and cash flow. These anticipated results will depend in part on whether we can successfully integrate the acquired companies’ operations in an efficient and effective manner. This will present significant challenges to management, including integration of systems and personnel, unanticipated liabilities and increases in costs, and the potential loss of key personnel. There can be no assurance that there will be operational or other synergies realized, or that the integration of the companies’ operations, management and cultures will be timely or effectively accomplished. In addition, the integration of the companies may subject us to liabilities existing at the acquired companies, some of which may be unknown. While we have conducted due diligence on the operations of, and have participated in the Greens Creek Joint Venture with the acquired companies, there can be no guarantee that we are aware of any and all liabilities of the acquired companies. These liabilities, and any additional risks and uncertainties related to the acquisition not currently known to us or that we may currently deem immaterial, could negatively impact our business, financial condition and results of operations.
-48-
LEGAL, MARKET AND REGULATORY RISKS
The issuance of additional shares of our preferred stock or common stock in the future could adversely affect holders of common stock.
The market price of our common stock is likely to be influenced by our preferred stock. For example, the market price of our common stock could become more volatile and could be depressed by:
| |
• | investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon conversion or as dividends of the mandatory convertible preferred stock; and |
| |
• | our failure to pay dividends on our currently outstanding Series B Preferred Stock or mandatory convertible preferred stock, which would prevent us from paying dividends to holders of our common stock. |
In addition, our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of our stockholders. This includes the power to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over common stock with respect to dividends or upon the liquidation, dissolution or winding up of the business and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.
See the exhibit index to this Form 10-Q for the list of exhibits.
Items 2, 3, 4 and 5 of Part II are not applicable and are omitted from this report.
-49-
Hecla Mining Company and Subsidiaries
SIGNATURES
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: November 4, 2008 | | /s/ Phillips S. Baker, Jr. | |
| | | |
| | Phillips S. Baker, Jr., President and | |
| | Chief Executive Officer | |
|
Date: November 4, 2008 | | /s/ James A. Sabala | |
| | | |
| | James A. Sabala, Vice President and | |
| | Chief Financial Officer | |
-50-
Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-Q – September 30, 2008
Index to Exhibits
| | | |
| 2.1 | | Asset Purchase Agreement among Hecla Mining Company, Hecla Merger Company and Independence Lead Mines Company dated February 12, 2008. Filed as exhibit 2.2 to Registrant’s Quarterly Report on Form 10-Q filed on May 12, 2008 (File No. 1-8491), and incorporated herein by reference. * |
| | | |
| 2.2 | | Stock Purchase Agreement dated as of June 19, 2008, by and among Rusoro Mining Ltd., Rusoro MH Acquisition Ltd., and Hecla Limited. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on June 25, 2008 (File No. 1-8491), and incorporated herein by reference.* |
| | | |
| 2.3 | | Letter agreement by and among Hecla Limited, Rusoro MH Acquisition Ltd., and Rusoro Mining Ltd. dated June 27, 2008. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K (File No. 1-8491) filed on July 3, 2008, and incorporated herein by reference. |
| | | |
| 2.4 | | Agreement to Amend the Asset Purchase Agreement by and among Independence Lead Mines Company, Hecla Mining Company and Hecla Merger Company dated August 12, 2008. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on August 13, 2008 (File No. 1-8491), and incorporated herein by reference. |
| | | |
| 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 March 31, 2007 (File No. 1-8491), and incorporated herein by reference. |
| | | |
| 3.2 | | Bylaws of the Registrant as amended to date. Filed as 3.1 to Registrant’s Current Report on Form 8-K filed on December 6, 2007 (File No. 1-8491), and incorporated herein by reference. |
| | | |
| 4.1(a) | | Form of Certificate of Designations for 6.5% Mandatory Convertible Preferred Stock of the Registrant. Filed as exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on December 14, 2007 (File No. 1-8491), and incorporated herein by reference. |
| | | |
| 4.1(b) | | Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant. Filed as exhibit 4.1(a) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-8491), and incorporated herein by reference. |
| | | |
| 4.1(c) | | Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as exhibit 4.1(b) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-8491), and incorporated herein by reference. |
-51-
| | | |
| | | |
| 10.1 | | Amended and Restated Bank Credit Agreement dated April 16, 2008, by and among Hecla Mining Company, various Lenders, The Bank of Nova Scotia, as the Administrative Agent for the Lenders, and Scotia Capital as Sole Lead Arranger and Sole Bookrunner. Filed as exhibit 10.1 to Registrant’s Current Report on Form 8-K (File No. 1-8491) filed on April 22, 2008, and incorporated herein by reference.* |
| | | |
| 10.2 | | First Amendment to Amended and Restated Credit Agreement dated October 16, 2008, by and among Hecla Mining Company, The Bank of Nova Scotia, as the Administrative Agent for the Lenders, and various Lenders. Filed as exhibit 10.2 to Registrant’s Current Report on Form 8-K (File No. 1-8491) filed on October 16, 2008, and incorporated herein by reference. * |
| | | |
| 10.3 | | Asset Purchase Agreement among Hecla Mining Company, Hecla Merger Company and Independence Lead Mines Company dated February 12, 2008. Filed as exhibit 2.2 to Registrant’s Quarterly Report on Form 10-Q filed on May 12, 2008 (File No. 1-84901), and incorporated herein by reference. * |
| | | |
| 10.4 | | Agreement to Amend the Asset Purchase Agreement by and among Independence Lead Mines Company, Hecla Mining Company and Hecla Merger Company dated August 12, 2008. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on August 13, 2008 (File No., 1-8491), and incorporated herein by reference. |
| | | |
| 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. ** |
| |
|
|
* | The agreements filed or incorporated by reference contain a brief list identifying the contents of all omitted schedules, which schedules Hecla Mining Company agrees to furnish supplementally to the Securities and Exchange Commission upon its request. |
| |
** | Filed herewith. |
-52-
