decrease to noncurrent liabilities of $1.3 million, with a corresponding adjustment to other comprehensive income. The adoption did not affect our results of operations.
FIN 48, “Accounting for Uncertainty in Income Taxes,” requires that uncertain tax positions are evaluated in a two-step process, whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority would be recognized.
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. Estimates for reclamation and other closure costs are prepared in accordance with SFAS No. 5 “Accounting for Contingencies,” or Statement of Position 96-1 “Environmental Remediation Liabilities.” 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. Costs of future expenditures for environmental remediation are not discounted to their present value unless subject to a contractually obligated fixed payment schedule. Such costs are based on management’s current estimate of amounts to be incurred when the remediation work is performed, within current laws and regulations.
Future closure, reclamation and environmental-related expenditures are difficult to estimate, in many circumstances, due to the early stage nature of investigations, and uncertainties associated with defining the nature and extent of environmental contamination and the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology. We periodically review accrued liabilities for such reclamation and remediation costs as evidence becomes available indicating that our liabilities have potentially changed. Changes in estimates at our non-operating properties are reflected in current period net income (loss).
Sales to smelters are recorded net of charges by the smelters for treatment, refining, smelting losses, and other charges negotiated by us with the smelters. Charges are estimated by us upon shipment of concentrates based on contractual terms, and actual charges do not vary materially from our estimates. Costs charged by smelters include fixed treatment and refining costs per ton of concentrate, and also include price escalators which allow the smelters to participate in the increase of lead and zinc prices above a negotiated baseline.
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Changes in metals prices between shipment and final settlement will result in changes to revenues previously recorded upon shipment. Our concentrate sales are based on a provisional sales price containing an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement.
At December 31, 2008, metals contained in concentrates and exposed to future price changes totaled 902,248 ounces of silver, 3,730 ounces of gold, 17,283 tons of zinc, and 5,609 tons of lead.
Sales from our Greens Creek and Lucky Friday units include significant value from by-product metals mined along with net values of each unit’s primary metal.
Sales of metals in products tolled by refiners and sold directly by us, rather than sold to smelters, are recorded at contractual amounts when title and risk of loss transfer to the buyer. We sell finished metals after refining, as well as doré produced at our locations. Third-party smelting and refinery costs are recorded as a reduction of revenue.
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.
P. Foreign Currency — The functional currency for our operations located in the U.S., Mexico and Canada, as of December 31, 2008, was the U.S. dollar. Accordingly, for the San Sebastian unit in Mexico and our Canadian office, we have translated our monetary assets and liabilities at the period-end exchange rate, and non-monetary assets and liabilities at historical rates, with income and expenses translated at the average exchange rate for the current period. All translation gains and losses have been included in the current period net income (loss).
Effective January 1, 2007, we implemented a change in the functional currency for our discontinued Venezuelan operations from the U.S. dollar to the Bolívar, the local currency in Venezuela. We believe that significant changes in the economic facts and circumstances affecting our discontinued Venezuelan operations indicated that a change in the functional currency was appropriate, under the provisions of FASB Statement No. 52, “Foreign Currency Translation” (SFAS 52). In accordance with SFAS 52, the balance sheet for our discontinued Venezuelan operations has been recalculated, as of January 1, 2007, so that all assets and liabilities are translated at the current exchange rate of 2,150 Bolívar to $1, the fixed, official exchange rate in effect at that time. As a result, the dollar value of non-monetary assets, previously translated at historical exchange rates, has been significantly reduced. The offsetting translation adjustment was recorded to equity as a component of accumulated other comprehensive income, and reclassified to loss on sale of discontinued operations upon the sale of our Venezuelan operations.
For the years ended December 31, 2008, 2007 and 2006, we recognized total net foreign exchange losses of $13.2 million, $12.1 million and $5.0 million, respectively.Of these, $13.3 million, $12.0 million and $4.9 million, respectively, of the net foreign exchange losses for the three years are related to our discontinued Venezuelan operations, and are included inGain (loss) from discontinued operations, net of tax with the remaining balance included inNet foreign exchange gain (loss), on ourConsolidated Statements of Operations and Comprehensive Income (Loss).
Exchange control regulations enacted in Venezuela in 2005 limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. At December 31, 2007, we held the U.S. dollar equivalent of approximately $30.0 million denominated in the Venezuelan Bolívar at the rate of 2,150 Bolivares to $1.00. Additionally, we were required to convert into Venezuelan currency the proceeds of Venezuelan export sales made over the past 180 days, approximately $8.1 million, during the six months following December 31, 2007. Exchanging our cash held in local currency into U.S. dollars could be done through specific governmental programs, or through the use of negotiable instruments at conversion rates that were higher than the official rate (parallel rate) on which we incurred foreign currency losses. During 2008 and 2007, we exchanged the U.S. dollar equivalent of approximately $38.7 and $37.0 million, respectively, valued at the official exchange rate of 2,150 Bolivares to $1.00, for $25.4 and $19.8 million at open market exchange rates, in compliance with applicable regulations, incurring a foreign exchange loss for the difference. Changes to the Venezuelan Criminal Exchange Law enacted in December 2007 prohibit the publication of Bolívar exchange rates other than the official rate.
On July 8, 2008, we completed the sale of our discontinued Venezuelan operations to Rusoro Mining Company (“Rusoro”) (seeNote 13 for further discussion). During the second quarter of 2008, we repatriated substantially all of our remaining Bolivares-denominated cash. Pursuant to the sale agreement, Rusoro paid us $0.9 million for the U.S. dollar equivalent of the residual Bolivares-denominated cash balances held in Venezuela at the close of the sale, converted at official rates.
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Q. Risk Management Contracts — We use derivative financial instruments as part of an overall risk-management strategy that is used as a means of hedging exposure to base metals prices and interest rates. We do not hold or issue derivative financial instruments for speculative trading purposes.
Derivative contracts qualifying as normal purchases and sales are accounted as such, under the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” Gains and losses arising from a change in the fair value of a contract before the contract’s delivery date are not recorded, and the contract price is recognized in sales of products following settlement of the contract by physical delivery of production to the counterparty at contract maturity.
We measure derivative contracts as assets or liabilities based on their fair value. Gains or losses resulting from changes in the fair value of derivatives in each period are recorded either in current earnings or other comprehensive income (“OCI”), depending on the use of the derivative, whether it qualifies for hedge accounting and whether that hedge is effective. Amounts deferred in OCI are reclassified to sales of products (for metals price-related contracts) or interest expense (for interest rate-related contracts) when the hedged transaction has occurred. Ineffective portions of any change in fair value of a derivative are recorded in current period other operating income (expense).
On May 5, 2008, we entered into an interest rate swap agreement that had the economic effect of modifying the LIBOR-based variable interest obligations associated with our term facility. As a result, the interest payable related to $103.3 million of the $121.7 million term facility balance at December 31, 2008 is fixed at a rate of 9.38% until maturity on March 31, 2011, in accordance with the amortization schedule of the amended and restated credit agreement dated April 16, 2008. As a result of an amendment to the facility in December 2008 to defer the $18.3 million principal payment originally due on December 31, 2008 to February 13, 2009, the terms of the interest rate swap agreement and the note that the swap agreement pertains to did not match at December 31, 2008 with regards to the maturity date of the $18.3 million payment, with the hedge being slightly ineffective as a result. The fair value of the swap at December 31, 2008 was a liability of $2.5 million. We have recorded an accumulated unrealized loss of $2.0 million at December 31, 2008, and realized a $0.5 million hedging loss in 2008 related to the ineffective portion of the swap. The unrealized loss is included in accumulated other comprehensive income in our consolidated balance sheet and the realized loss is included in interest expense in our consolidated statement of operations, with the fair value payable included in other non-current liabilities in our consolidated balance sheet. For additional information regarding our credit facilities, seeNote 7andNote 21.
On February 3, 2009, we reached an agreement to amend the terms of our credit facilities to defer all principal payments due on our term facility in 2009, totaling $66.7 million, to 2010 and 2011 (SeeNote 21 for more information). As a result of the amendment, the original hedging relationship was de-designated, and a new hedging relationship was designated. A retrospective hedge effectiveness test was performed on the original hedging relationship at the date of de-designation, and the original hedging relationship was determined to be ineffective. Consequently, the change in fair value of the swap of $0.2 million between December 31, 2008 and February 3, 2009 was recorded as a gain on the income statement. The amount of unrealized loss included in accumulated other comprehensive income relating to the original hedge will be recognized in the income statement when the hedged interest payments occur.
We had no commodity-related derivative positions at December 31, 2008.
R. Stock Based Compensation — In accordance with SFAS No. 123(R), the fair value of the equity instruments granted to employees during 2008 were estimated on the date of grant using the Black-Scholes pricing model, utilizing the same methodologies and assumptions as we have historically used. As of December 31, 2008, the majority of the instruments outstanding were fully vested, and we recognized stock-based compensation expense under SFAS No. 123(R) of approximately $4.1 million during 2008, which was recorded to general and administrative expenses, exploration and cost of sales and other direct production costs. For the years ended December 31, 2007 and 2006, we recognized $3.4 million and $2.5 million, respectively, in compensation expense as required by SFAS No. 123(R).
For additional information on our employee stock option and unit compensation, seeNotes 9 and10 ofNotes to Consolidated Financial Statements.
S. Pre-Development Expense — Costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, are expensed due to the lack of proven and probable reserves, which would indicate future recovery of these expenses.
T. Legal Costs –Legal costs incurred in connection with a potential loss contingency are recorded to expense as incurred.
U. Basic and Diluted Income (Loss) Per Common Share — We calculate basic earnings per share on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using weighted average number of common shares outstanding during the period plus the effect of potential dilutive common shares during the period using the treasury stock method.
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Potential dilutive common shares include outstanding stock options, restricted stock awards, stock units, warrants and convertible preferred stock for periods in which we have reported net income. For periods in which we reported net losses, potential dilutive common shares are excluded, as their conversion and exercise would be anti-dilutive. SeeNote 15 ofNotes to Consolidated Financial Statements for additional information.
V. Comprehensive Income (Loss) — In addition to net income (loss), comprehensive income (loss) includes all changes in equity during a period, such as adjustments to minimum pension liabilities, adjustments to recognize the overfunded or underfunded status of our defined benefit pension plans pursuant to SFAS No. 158, the effective portion of changes in fair value of derivative instruments, foreign currency translation adjustments and cumulative unrecognized changes in the fair value of available for sale investments, net of tax, if applicable.
W. New Accounting Pronouncements — In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have a material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161),” to enhance the current disclosure framework in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended.” SFAS No. 161 amends and expands the disclosures required by SFAS No. 133 so that they provide an enhanced understanding of (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (3) how derivative instruments affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for both interim and annual reporting periods beginning after November 15, 2008. We are currently evaluating the potential impact of this statement on our consolidated financial statements and at this time we do not anticipate a material effect.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of No. ARB 51,” which is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling ownership interest in a subsidiary and for the deconsolidation of a subsidiary. We are currently evaluating the potential impact of this statement on our consolidated financial statements and at this time we do not anticipate a material effect.
In December 2007, the FASB revised SFAS No. 141 “Business Combinations.” The revised standard is effective for transactions where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.SFAS No. 141(R) will change the accounting for the assets acquired and liabilities assumed in a business combination.
| | |
| • | Acquisition costs will be generally expensed as incurred; |
| | |
| • | Noncontrolling interests (formally known as “minority interests”) will be valued at fair value at the acquisition date; |
| | |
| • | Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; |
| | |
| • | In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date |
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| • | Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and |
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| • | Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. |
The adoption of SFAS No. 141(R) does not currently have a material effect on our Consolidated Financial Statements. However, any future business acquisitions occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 will be accounted for in accordance with this statement.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which became effective for fiscal years beginning after November 15, 2007, and for interim periods within those years, for certain financial assets and
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liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, FASB Staff Position (FSP) No. FAS 157-2 was issued, which delayed by a year the effective date of SFAS No. 157 for certain nonfinancial assets and liabilities. We adopted SFAS No. 157 for financial assets and liabilities in the first quarter of 2008, and the adoption did not have a material impact on our consolidated financial statements. See Note 14 of Notes to the Consolidated Financial Statements for more information. We are currently evaluating the potential impact of the adoption of SFAS No. 157 as it relates to nonfinancial assets and liabilities on our consolidated financial statements.
Note 2. Short-term Investments and Securities Held for Sale, Investments, and Restricted Cash
Cash
Exchange control regulations in Venezuela limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. Our cash balances denominated in Bolívares that were maintained in Venezuela totaled a U.S. dollar equivalent, at official exchange rates, of approximately $30.0 million at December 31, 2007. On June 19, 2008, we entered into an agreement to sell our wholly owned subsidiaries holding our business and operations in Venezuela to Rusoro, with the transaction closing on July 8, 2008 (seeNote 13 for further discussion of the transaction).
Prior to the sale of our Venezuelan operations, exchanging our cash held in local currency into U.S. dollars was done through specific governmental programs, or through the use of negotiable instruments at conversion rates that were less favorable than the official rate (parallel rate) on which we incurred foreign currency losses. During 2008, prior to the sale of our Venezuelan operations, we exchanged the U.S. dollar equivalent of approximately $38.7 million at the official exchange rate of 2,150 Bolívares to $1.00 for approximately $25.4 million at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses for the difference. All of these losses were incurred on repatriations of cash from Venezuela. During 2007, we exchanged the U.S. dollar equivalent of approximately $37.0 million, valued at the official exchange rate of 2,150 Bolívares to $1.00, for approximately $19.8 million at open market exchange rates, in compliance with applicable regulations, incurring foreign exchange losses for the difference. Approximately $13.8 million of the conversion losses for 2007 were incurred on the repatriation of cash from Venezuela, while additional losses of approximately $3.4 million in 2007 were related to conversions of Bolívares for the payment of expatriate payroll and other U.S. dollar-denominated goods and services.
Our cash is maintained in various financial institutions, and the balances are insured up to the Federal Deposit Insurance Corporation limits of $250,000 per institution. Some of our cash balances at December 31, 2008 exceeded the federally insured limits. We have not experienced losses on cash balances exceeding the federally insured limits.
Short-term Investments and Securities Held for Sale
Short-term investments consisted of the following at December 31, 2008 and 2007 (in thousands):
| | | | | | | |
| | 2008 | | 2007 | |
Adjustable rate securities | | $ | — | | $ | 4,000 | |
Marketable equity securities (Cost: 2007 - $18,903) | | | — | | | 21,759 | |
| | $ | — | | $ | 25,759 | |
Adjustable rate securities are carried at amortized cost. However, due to the short-term nature of these investments, the amortized cost approximates fair market value. Marketable equity securities are also carried at fair market value, as they are classified as “available-for-sale” securities under the provisions of SFAS No. 115. The $21.8 million marketable equity securities balance at December 31, 2007 represents 8.2 million shares of Great Basin Gold, Inc. stock, including 7.9 million shares transferred to us upon the sale of the Hollister Development Block gold exploration project interest to Great Basin Gold in April 2007. We sold 8.2 million shares of Great Basin Gold stock during the second quarter of 2008 for total proceeds of $27.0 million and recognized a gain on sale of investment of $8.1 million. In January 2006, we sold our equity shares of Alamos Gold Inc., generating a $36.4 million pre-tax gain and netting $57.4 million of cash proceeds.
Non-current Investments
At December 31, 2008 and 2007, the fair value of our non-current investments was $3.1 million and $8.4 million, respectively. The basis of these investments, representing equity securities, was approximately $5.2 million and $1.1 million, respectively, at December 31, 2008 and 2007. $1.9 million of the $3.1 million non-current investments balance at December 31, 2008 represents 3.6 million shares of Rusoro stock transferred to us upon the sale of El Callao and Drake Bering (seeNote 13 for information on the sale of our discontinued Venezuelan operations). At December 31, 2008, we have recorded a $2.6 million unrealized loss on the Rusoro shares, which have been in a continuous unrealized loss position since August 2008. We considered the following information in concluding that the impairment on the Rusoro shares is temporary:
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| • | We believe that we have the intent and ability to hold the investment until its cost basis is recovered, and that it is not probable that we will sell the investment at a loss. |
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| • | Rusoro recently completed the acquisition of a new operating mine and continues to have access to liquidity. We believe that their assets continue to remain sound. |
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| • | Analysts have recently given Rusoro stock a “buy” rating with a target share price greater than our cost, and analyst net asset value calculations have recently exceeded our cost. |
However, the exchange on which Rusoro stock is traded experienced a significant overall loss in value in 2008, there has been a general reduction in investor confidence in junior mining companies in recent months, and Rusoro shares are thinly traded. If our investment in Rusoro stock continues to have a fair value less than its original cost, we will monitor these factors in determining whether it is still appropriate to record an unrealized loss for the impairment in the future.
At December 31, 2008, total unrealized gains of $1.0 million for investments held having a net gain position and total unrealized losses of $3.1 million for investments held having a net loss position were included in accumulated other comprehensive income.
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 certificate of deposit. These investments are restricted primarily for reclamation funding or surety bonds and were $15.2 million at December 31, 2008, and $17.2 million at December 31, 2007, which includes $7.6 million and $8.9 million, respectively, restricted for reclamation funding for the Greens Creek Joint Venture. In April 2008, we completed the acquisition of the companies holding 70.3% of the Greens Creek Joint Venture, resulting in our 100% ownership of Greens Creek through our various subsidiaries (seeNote 19 for further discussion). In August 2008, we obtained release of the restricted cash balance of $30.4 million, replacing it with a letter of credit backed by the restricted cash balance of $7.6 million. Accordingly, the $7.6 million December 31, 2008 balance represents 100% of the Greens Creek restricted balance, while the $8.9 million balance at December 31, 2007 represents our 29.7% share of the $29.9 million total Greens Creek restricted balance held prior to our acquisition of the remaining 70.3% interest.
Our loan covenants required that we maintain an unencumbered cash balance of at least $10 million at December 31, 2008. There was no legal restriction on the funds, therefore, we did not classify them as restricted cash.
Note 3: Inventories
Inventories consist of the following (in thousands):
| | | | | | | |
| | December 31, | |
| | 2008 | | 2007 | |
Concentrates, doré, bullion, metals in transit and in-process inventories | | $ | 12,874 | | $ | 5,465 | |
Materials and supplies | | | 8,457 | | | 10,046 | |
| | $ | 21,331 | | $ | 15,511 | |
The product inventory acquired in connection with the purchase of the companies owning 70.3% of the Greens Creek mine, as discussed further inNote 19, was all sold during the second quarter of 2008.
Note 4: Properties, Plants, Equipment and Mineral Interests, Royalty Obligations and Lease Commitments
Properties, Plants and Equipment and Mineral Interests
Our major components of properties, plants, equipment, and mineral interests are (in thousands):
| | | | | | | |
| | December 31, | |
| | 2008 | | 2007 | |
Mining properties, including asset retirement obligations | | $ | 262,104 | | $ | 14,405 | |
Development costs | | | 88,026 | | | 147,320 | |
Plants and equipment | | | 308,482 | | | 218,791 | |
Land | | | 9,270 | | | 1,007 | |
Mineral interests | | | 369,125 | | | 4,940 | |
Construction in progress | | | 43,941 | | | 23,703 | |
| | | 1,080,948 | | | 410,166 | |
Less accumulated depreciation, depletion and amortization | | | 228,835 | | | 277,858 | |
Net carrying value | | $ | 852,113 | | $ | 132,308 | |
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During 2008, we incurred total capital expenditures of approximately $68.7 million that included $44.1 million at the Lucky Friday unit and $24 million at the Greens Creek unit. In addition, on April 16, 2008, we completed the acquisition of the remaining 70.3% interest in the Greens Creek Joint Venture for $758.5 million. A total of $689.7 million of the purchase price was allocated to the net carrying value of property, plants, equipment and mineral interests at the Greens Creek unit, including $5.0 million for the asset retirement obligation, $266.7 million for development costs, $67.2 million for plants and equipment, $7.2 million for land, and $343.6 million for mineral interests. We also acquired substantially all of the assets of Independence Lead Mines (“Independence”) on November 6, 2008 for 6.9 million shares of our common stock. The Independence purchase price of approximately $14.6 million was allocated to mineral interests at the Lucky Friday unit. In addition, we issued approximately 1.6 million shares of our Common Stock in 2008 to acquire the right to earn into a 70% interest in the San Juan Silver Joint Venture with Emerald Mining & Leasing, LLC and Golden 8 Mining, LLC, which holds an approximately 25-square-mile consolidated land package in the Creede Mining District of Colorado, resulting in an $11.4 million increase to mineral interests. SeeNote 19 for further discussion of the acquisitions of 70.3% of Greens Creek, Independence, and San Juan Silver earn-in rights.
On July 8, 2008, we completed the sale of the companies holding 100% of the ownership interest of our discontinued Venezuelan operations, resulting in the disposal of properties, plants, equipment and mineral interests having net carrying value of approximately $32.3 million at the time of sale. SeeNote 13 for more information on the sale.
Leases
We enter into operating leases during the normal course of business. During the years ended December 31, 2008, 2007 and 2006, we incurred expenses of $2.0 million, $1.8 million and $1.2 million, respectively, for these leases. At December 31, 2008, future obligations under our non-cancelable leases were as follows (in thousands):
| | | | |
Year ending December 31, | | | | |
2009 | | $ | 2,511 | |
2010 | | | 853 | |
2011 | | | 853 | |
2012 | | | 220 | |
2013 | | | 9 | |
Total | | $ | 4,446 | |
Note 5: Environmental and Reclamation Activities
The liabilities accrued for our reclamation and closure costs at December 31, 2008 and 2007, were as follows (in thousands):
| | | | | | | |
| | 2008 | | 2007 | |
Operating properties: | | | | | | | |
Greens Creek | | $ | 29,964 | | $ | 5,150 | |
Lucky Friday | | | 879 | | | 807 | |
Nonoperating properties: | | | | | | | |
San Sebastian | | | 1,161 | | | 1,148 | |
Grouse Creek | | | 14,326 | | | 19,061 | |
Coeur d’Alene Basin | | | 65,600 | | | 65,600 | |
Bunker Hill | | | 3,155 | | | 3,459 | |
Republic | | | 3,800 | | | 3,800 | |
All other sites | | | 2,462 | | | 2,640 | |
Discontinued operations – La Camorra | | | — | | | 4,474 | |
Total | | | 121,347 | | | 106,139 | |
Reclamation and closure costs, current | | | (2,227 | ) | | (9,686 | ) |
Reclamation and closure costs, long-term | | $ | 119,120 | | $ | 96,453 | |
The activity in our accrued reclamation and closure cost liability for the years ended December 31, 2008, 2007 and 2006, was as follows (in thousands):
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| | | | |
Balance at January 1, 2006 | | $ | 69,242 | |
Accruals for estimated costs | | | 643 | |
Revision of estimated cash flows due to changes in reclamation plans | | | 528 | |
Payment of reclamation obligations | | | (4,509 | ) |
Balance at December 31, 2006 | | | 65,904 | |
Accruals for estimated costs | | | 45,623 | |
Revision of estimated cash flows due to changes in reclamation plans | | | 1,293 | |
Payment of reclamation obligations | | | (6,681 | ) |
Balance at December 31, 2007 | | | 106,139 | |
Accruals for estimated costs | | | 811 | |
Liability addition due to the purchase price allocation for the acquisition of 70.3% of Greens Creek | | | 12,145 | |
Revision of estimated cash flows due to changes in reclamation plans | | | 13,114 | |
Liability reduction due to the sale of discontinued operations | | | (4,474 | ) |
Payment of reclamation obligations | | | (6,388 | ) |
Balance at December 31, 2008 | | $ | 121,347 | |
Below is a reconciliation as of December 31, 2008 and 2007 (in thousands), of our asset retirement obligations, which are included in our total accrued reclamation and closure costs of $121.3 million and $106.1 million, respectively, reflected above. The sum of our estimated reclamation and abandonment costs was discounted using a credit adjusted, risk-free interest rate of 7% from the time we incurred the obligation to the time we expect to pay the retirement obligation.
| | | | | | | |
| | 2008 | | 2007 | |
Balance January 1 | | $ | 11,579 | | $ | 9,921 | |
Changes in obligations due to acquisition of 70.3% of Greens Creek | | | 12,145 | | | — | |
Changes in obligations due to changes in reclamation plans | | | 13,114 | | | 1,363 | |
Accretion expense | | | 475 | | | 354 | |
Changes in obligations due to sale of discontinued operations | | | (4,474 | ) | | — | |
Payment of reclamation obligations | | | (835 | ) | | (59 | ) |
Balance at December 31 | | $ | 32,004 | | $ | 11,579 | |
For additional information as it pertains to the acquisition of the remaining 70.3% interest in Greens Creek, seeNote 19. SeeNote 13 for further discussion of the sale of our discontinued Venezuelan operations.
Note 6: Income Taxes
Major components of our income tax provision (benefit) for the years ended December 31, 2008, 2007 and 2006, relating to continuing operations are as follows (in thousands):
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Continuing operations: | | | | | | | | | | |
Current: | | | | | | | | | | |
Federal | | $ | 3 | | $ | 811 | | $ | 1,371 | |
State | | | (170 | ) | | 88 | | | 89 | |
Foreign | | | 370 | | | 504 | | | 442 | |
Total current income tax provision | | | 203 | | | 1,403 | | | 1,902 | |
Deferred: | | | | | | | | | | |
Federal | | | 3,604 | | | (9,906 | ) | | (11,594 | ) |
Foreign | | | — | | | — | | | — | |
Total deferred income tax (benefit) provision | | | 3,604 | | | (9,906 | ) | | (11,594 | ) |
Total income tax (benefit) provision from continuing operations | | | 3,807 | | | (8,503 | ) | | (9,692 | ) |
| | | | | | | | | | |
Discontinued operations: | | | | | | | | | | |
Tax provision for loss on sale of discontinued operations | | | 2,944 | | | — | | | — | |
Tax provision (benefit) for loss from discontinued operations | | | — | | | (627 | ) | | 2,391 | |
| | | | | | | | | | |
Total income tax (benefit) provision | | $ | 6,751 | | $ | (9,130 | ) | $ | (7,301 | ) |
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Domestic and foreign components of income (loss) from operations before income taxes for the years ended December 31, 2008, 2007 and 2006, are as follows (in thousands):
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Domestic | | $ | (23,823 | ) | $ | 72,104 | | $ | 61,510 | |
Foreign | | | (9,543 | ) | | (12,450 | ) | | (6,414 | ) |
Discontinued operations | | | (26,446 | ) | | (15,587 | ) | | 6,725 | |
Total | | $ | (59,812 | ) | $ | 44,067 | | $ | 61,821 | |
The annual tax provision (benefit) is different from the amount that would be provided by applying the statutory federal income tax rate to our pretax income (loss). The reasons for the difference are (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | 2008 | | | | | 2007 | | | | | 2006 | | | | |
Computed “statutory” (benefit) provision | | $ | (20,934 | ) | | (35 | )% | $ | 15,423 | | | 35 | % | $ | 21,637 | | | 35 | % |
Percentage depletion | | | (2,594 | ) | | (4 | ) | | (10,416 | ) | | (24 | ) | | (9,126 | ) | | (15 | ) |
Net increase (utilization) of U.S. and foreign tax loss carryforwards | | | 23,528 | | | 39 | | | (3,534 | ) | | (8 | ) | | (23,159 | ) | | (37 | ) |
Change in valuation allowance other than utilization | | | 3,604 | | | 6 | | | (10,481 | ) | | (24 | ) | | (1,219 | ) | | (2 | ) |
Discontinued operations | | | 2,944 | | | 5 | | | — | | | — | | | — | | | — | |
Effect of U.S. AMT, state, foreign taxes and other | | | 203 | | | — | | | (122 | ) | | — | | | 4,566 | | | 7 | |
| | $ | 6,751 | | | 11 | % | $ | (9,130 | ) | | (21 | )% | $ | (7,301 | ) | | (12 | )% |
Pursuant to guidelines contained in SFAS No. 109, Accounting for Income Taxes, we evaluated the positive and negative evidence available to determine whether a valuation allowance is required on our net deferred tax assets for the period ended December 31, 2008. At December 31, 2008 and 2007, the balance of our valuation allowance used to offset our net deferred tax assets was $139 million and $115 million, respectively.
For the period ended December 31, 2008 three significant factors made an impact on our net deferred tax position. The Company acquired control of the Greens Creek Joint Venture in April and added net a deferred tax asset of $23 million related to the purchase price allocation and purchase accounting. In July, the Company sold its Venezuelan business and the deferred tax assets related the Venezuelan business were eliminated, resulting in a net deferred tax reduction of $3.2 million. Lastly, the economic conditions of recent months and the evidence available at year-end reduced the amount of deferred tax assets that the Company can expect to use in the future to $38.6 million which required a net increase to the valuation allowance of $3.6 million for the year. The year 2007 benefited from favorable metal prices resulting in higher taxable income and we utilized significant tax net operating loss carryforwards. We increased our net deferred tax assets by $10.5 million, to a total of $22.3 million at December 31, 2007, to reflect the total net deferred tax asset that we expect to utilize over a 2-year period based on income from operations. Due to our return to profitability in 2007 and 2006, we felt that 24 months was an appropriate period to measure based on all available evidence at that time.
The deferred tax asset will be amortized against taxable income in the U.S. in future periods. We will review available evidence in future periods to determine whether more or less of our deferred tax asset should be realized. Adjustment to the valuation allowance will be made in the period for which the determination is made.
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The components of the net deferred tax asset were as follows (in thousands):
| | | | | | | |
| | December 31, | |
| | 2008 | | 2007 | |
Deferred tax assets: | | | | | | | |
Accrued reclamation costs | | $ | 44,281 | | $ | 40,709 | |
Deferred exploration | | | 8,523 | | | 4,564 | |
Investment valuation differences | | | — | | | 43 | |
Postretirement benefits other than pensions | | | 1,761 | | | 2,880 | |
Deferred compensation | | | 2,253 | | | 3,158 | |
Foreign net operating losses | | | 8,058 | | | 21,300 | |
Federal net operating losses | | | 85,200 | | | 64,589 | |
State net operating losses | | | 10,578 | | | 4,927 | |
Capital loss carryforward | | | 767 | | | — | |
Tax credit carryforwards | | | 2,809 | | | 3,075 | |
Stock compensation | | | 1,926 | | | 1,618 | |
Other comprehensive income | | | 10,009 | | | — | |
Miscellaneous | | | 2,162 | | | 9,080 | |
Total deferred tax assets | | | 178,327 | | | 155,943 | |
Valuation allowance | | | (138,848 | ) | | (115,413 | ) |
Total deferred tax assets | | | 39,479 | | | 40,530 | |
Deferred tax liabilities: | | | | | | | |
Unrealized gain on marketable securities | | | — | | | (4,074 | ) |
Pension costs | | | — | | | (12,231 | ) |
Properties, plants and equipment | | | (927 | ) | | (1,917 | ) |
Total deferred tax liabilities | | | (927 | ) | | (18,222 | ) |
Net deferred tax asset | | $ | 38,552 | | $ | 22,308 | |
We plan to permanently reinvest earnings from foreign subsidiaries. For the years 2008, 2007 and 2006 we had no unremitted foreign earnings. Foreign net operating losses carried forward are shown above as a deferred tax asset.
We recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized principally due to the expiration of net operating losses and tax credit carryforwards. The changes in the valuation allowance for the years ended December 31, 2008, 2007 and 2006, are as follows (in thousands):
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Balance at beginning of year | | $ | (115,413 | ) | $ | (133,363 | ) | $ | (160,396 | ) |
Increase related to non-utilization of net operating loss carryforwards and non-recognition of deferred tax assets due to uncertainty of recovery | | | (39,679 | ) | | (38,325 | ) | | (19,569 | ) |
Decrease related to net recognition of deferred tax assets | | | 16,244 | | | 10,486 | | | 11,822 | |
Decrease related to recognition of deferred tax liability on unrealized gain | | | — | | | 5,192 | | | — | |
Decrease related to utilization and expiration of deferred tax assets | | | — | | | 25,967 | | | 34,780 | |
Decrease due to utilization on gain on sale of subsidiary | | | — | | | 14,630 | | | — | |
Balance at end of year | | $ | (138,848 | ) | $ | (115,413 | ) | $ | (133,363 | ) |
As of December 31, 2008, for U.S. income tax purposes, we have net operating loss carryforwards of $243.4 million and $140.6 million, respectively, for regular and alternative minimum tax purposes. These operating loss carryforwards expire over the next 15 to 20 years, the majority of which expire between 2011 and 2024. In addition, we have foreign tax operating loss carryforwards of approximately $25 million, which expire between 2009 and 2017. Our U.S. tax loss carryforwards may also be limited upon a change in control. We have approximately $1 million in alternative minimum tax credit carryforwards which do not expire and are eligible to reduce future regular U.S. tax liabilities.
Uncertain Tax Positions
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state and foreign jurisdictions. We are no longer subject to income tax examinations by U.S. federal and state tax authorities for years prior to 2005, or examinations by foreign tax authorities for years prior to 2002. We currently have no tax years under examination.
Based on our assessment of FIN 48, “Accounting for Uncertainty in Income Taxes,” we concluded that consistent with 2007, FIN 48 had no significant impact on our results of operations or financial position as of December 31, 2008. We do not have an accrual for uncertain tax positions as of December 31, 2008. As a result, tabular reconciliation of beginning and ending balances would not be meaningful. If interest and penalties were to be assessed, we would charge interest to interest expense, and penalties to other operating expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
Note 7: Long-term Debt and Credit Agreement
In September 2005, we entered into a $30.0 million revolving credit agreement for an initial two-year term, with the right to extend the facility for two additional one-year periods, on terms acceptable to us and the lenders. In both September 2006 and September 2007, we amended and extended the agreement one additional year. Amounts borrowed under the credit agreement were to be available for general corporate purposes. Our then 29.7 % interest in the Greens Creek Joint Venture, which is held by Hecla Alaska LLC, our indirect wholly owned subsidiary, was pledged as collateral under the credit agreement. The interest rate on the agreement was either 2.25% above the London InterBank Offered Rate (“LIBOR”) or an
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alternate base rate plus 1.25%. We made quarterly commitment fee payments equal to 0.75% per annum on the sum of the average unused portion of the credit agreement. There were no outstanding borrowings at December 31, 2007.
On April 16, 2008, the credit agreement was amended and restated in connection with our acquisition of the companies owning 70.3% of the joint venture operating the Greens Creek mine (seeNote 19 for further discussion of the Greens Creek acquisition). The amended and restated agreement involved a $380 million facility, consisting of a $140 million three-year term facility maturing on March 31, 2011, which was fully drawn upon closing of the Greens Creek transaction, and a $240 million bridge facility, which originally 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. We applied $162.9 million in proceeds from the public offering of 34.4 million shares of our common stock against the bridge loan principal balance during the third quarter of 2008 (seeNote 10 for more information). On October 16, 2008, the Company repaid an additional $37.1 million of the bridge facility balance, and reached an agreement with its bank syndicate to extend the remaining $40 million outstanding bridge facility balance until February 16, 2009, subject to certain reporting requirements and amendments to the bridge loan and term loan interest rates. The amendment required the Company to provide an updated long-range operating plan for the bank syndicate to review, and the plan was accepted by the banking group in December 2008. An additional amendment to the credit facilities in December 2008 changed the repayment date of the $40 million bridge facility balance to February 13, 2009. All of the $40 million outstanding bridge facility balance was classified as current at December 31, 2008. On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (seeNote 21 of Notes to Consolidated Financial Statements for more information).
The first term facility principal payment of $18.3 was paid on September 30, 2008. In December 2008, we reached an agreement with the bank syndicate to move the $18.3 million principal payment originally scheduled for December 31, 2008 to February 13, 2009. On February 3, 2009, we again amended the terms of the credit agreement to defer all term facility principal payments due in 2009, totaling $66.7 million, to 2010 and 2011. As discussed above, we reduced our term loan by approximately $8 million in February, 2009. As a result, $8 million of the $121.7 million term facility balance outstanding at December 31, 2008 was classified as current, with the $113.7 million classified as non-current. According to the amended agreement, equal quarterly principal payments totaling $60.0 million are to be made in 2010, with a final payment of $53.7 million due on March 31, 2011. SeeNote 21 ofNotes to Consolidated Financial Statements for further discussion of the amendment. We and all of our material U.S. subsidiaries guarantee the amended and restated credit agreement.
The December 2008 amendment to the agreement to defer the $18.3 million principal payment discussed above also resulted in a change to the interest rate on the term facility from an applicable margin of 2.25% and 3.00% over LIBOR to an applicable margin of 6% over LIBOR, or an alternative base rate plus an applicable margin of 5.00%. However, we have entered into an interest rate swap agreement to manage the effects of interest rate volatility on the term facility (seeNote 11). $103.3 million of the $121.7 million term facility balance outstanding at December 31, 2008 was subject to the interest rate swap and had an interest rate of 9.38% at December 31, 2008. The $18.3 million deferred principal balance had an interest rate of 6.5% at December 31, 2008. The interest rate applicable margins did not change as a result of the February 3, 2009 amendment to the agreement. During 2008, we made interest payments totaling $5.4 million for the term facility, including net amounts paid for interest rate swap spreads.
The bridge facility has an interest rate of either LIBOR plus 6.00% or an alternative base rate plus 5.00%. At December 31, 2008, our interest rate on the bridge facility was 6.5%. During 2008, we made interest payments totaling $6.3 million for the bridge facility. We have also paid a commitment fee equal to 0.50% per annum on the unused portion of the bridge facility.
The amended and restated credit agreement includes various covenants and other limitations related to our indebtedness and investments, as well as other information and reporting requirements. We were not in compliance with certain covenants and other requirements related to the amended and restated credit agreement as of December 31, 2008. However, our non-compliance with these items has subsequently been waived. Additionally, we are required to pay any dividends on our 6.5% Mandatory Convertible Preferred Stock in common stock until the earlier of the date on which the bridge facility is repaid in full and February 13, 2009, to the extent payment of such dividends in common stock is permitted thereby and under applicable law.
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The February 3, 2009 amendment to the amended and restated credit agreement also requires us to pay an additional fee to our lenders upon effectiveness of the amendment, and on each subsequent July 1st and January 1st, by issuing to the lenders an aggregate amount of a new Series of 12% Convertible Preferred Stock (discussed further inNote 21) equal to 3.75% of the aggregate principal amount of the term facility outstanding on such date until the term facility is paid off in full. Pursuant to this requirement, 42,621 shares of 12% Convertible Preferred Stock were issued to the lenders in February 2009.
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 may be adversely affected. 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 credit facilities, 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 credit facilities when it becomes due, the lenders under the credit facilities could proceed against the assets which we have pledged to them as security.
Note 8: 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, a 21-square-mile site located near Kellogg, Idaho (the “Bunker Hill site”). The 1994 Consent Decree (the “Bunker Hill Decree” or “Decree”) settled our response-cost responsibility under CERCLA at the Bunker Hill site. Parties to the Decree included us, Sunshine Mining and Refining Company (“Sunshine”) and ASARCO Incorporated (“ASARCO”). Sunshine subsequently filed bankruptcy and settled all of its obligations under the Bunker Hill Decree.
In 1994, we entered into a cost-sharing agreement with other potentially responsible parties, including ASARCO, relating to required expenditures under the Bunker Hill Decree. ASARCO is in default of its obligations under the cost-sharing agreement and consequently in August 2005, we filed a lawsuit against ASARCO in Idaho State Court seeking amounts due us for work completed under the Decree. Additionally, we have claimed certain amounts due us under a separate agreement related to expert costs incurred to defend both parties with respect to the Coeur d’Alene River Basin litigation in Federal District Court, discussed further below. After we filed suit, ASARCO filed for Chapter 11 bankruptcy protection in United States Bankruptcy Court in Texas in August 2005. As a result of this filing, an automatic stay is in effect for our claims against ASARCO. We are unable to proceed with the Idaho State Court litigation against ASARCO because of the stay, and have asserted our claims in the context of the bankruptcy proceeding.
In late September 2008, we reached an agreement with ASARCO to allow our claim against ASARCO in ASARCO’s bankruptcy proceedings in the amount of approximately $3.3 million. Our claim included approximately $3.0 million in clean up costs incurred by us for ASARCO’s share of such costs under the cost sharing agreement with ASARCO related to the Bunker Hill Decree. The remaining $330,000 is litigation-related costs incurred by us for ASARCO’s share of expert fees in the Basin litigation. The agreement also provides that we and ASARCO release each other from any and all liability under the cost sharing agreement, the Bunker Hill Decree and the Basin CERCLA site (discussed below). The agreement is subject to ASARCO obtaining an order from the Federal District Court in Idaho modifying the existing Consent Decree for the Bunker Hill site. The mutual release of liability provision of the agreement is subject to final bankruptcy court approval of ASARCO’s separate settlement agreement with the United States which, among other things, set and allowed the United States’ claim against ASARCO for ASARCO’s Basin CERCLA liability. We believe the mutual release provision may not become effective due to ASARCO’s separate settlement with the United States not being approved by the Bankruptcy Court or being materially modified. Depending on the resolution of ASARCO’s bankruptcy proceedings, we could receive a portion of or all of our $3.3 million allowed claim against ASARCO in the bankruptcy proceeding. We are unable to predict the outcome and timing of ASARCO’s bankruptcy proceeding.
In December 2005, we received notice that the EPA allegedly incurred $14.6 million in costs relating to the Bunker Hill site from January 2002 to March 2005. The notice was provided so that we and ASARCO might have an opportunity to review and comment on the EPA’s alleged costs prior to the EPA’s submission of a formal demand for reimbursement, which has not occurred as of the date of this filing. We reviewed the costs submitted by the EPA to determine whether we have any obligation to pay any portion of the EPA’s alleged costs relating to the Bunker Hill site. We were unable to determine what costs we will be obligated to pay under the Bunker Hill Decree based on the information submitted by the EPA. We requested that the EPA provide additional documentation relating to these costs. In September 2006, we received from the EPA a certified narrative cost summary, and certain documentation said to support that summary, which revised the EPA’s earlier determination to state that it had incurred $15.2 million in response costs. The September notice stated that it was not a formal demand and invited us to discuss or comment on the matter. In the second quarter of 2007, we were able to identify certain costs submitted by the EPA that we believe it is probable that we may have liability within the context of the Decree, and
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accordingly, in June of 2007, we estimated the range of our potential liability to be between $2.7 million and $6.8 million, and accrued the minimum of the range as we believed no amount in the range was more likely than any other. We will continue to assess the materials relating to the alleged costs sent to us and to discuss the matter with the EPA. If we are unable to reach a satisfactory resolution, we anticipate exercising our right under the Bunker Hill Decree to challenge reimbursement of the alleged costs. However, an unsuccessful challenge would likely require us to further increase our expenditures and/or accrual relating to the Bunker Hill site.
The accrued liability balance at December 31, 2008 relating to the Bunker Hill site was $3.2 million. The liability balance represents our portion of the remaining remediation activities associated with the site, our estimated portion of a long-term institutional controls program required by the Bunker Hill Decree, and potential reimbursement to the EPA of costs allegedly incurred by the agency as described in a notice to us by the agency. We believe ASARCO’s remaining share of its future obligations will be paid through proceeds from an ASARCO trust created in 2003 for the purpose of funding certain of ASARCO’s environmental obligations, as well as distributions to be determined by the Bankruptcy Court. In the event we are not successful in collecting what is due us from the ASARCO trust or through the bankruptcy proceedings, because the Bunker Hill Decree holds us jointly and severally liable, it is possible our liability balance for the remedial activity at the Bunker Hill site could be $18.3 million, the amount we currently estimate to complete the total remaining obligation under the Decree, as well as potential reimbursement to the EPA of costs allegedly incurred by the agency at the Bunker Hill site. There can be no assurance as to the ultimate disposition of litigation and environmental liability associated with the Bunker Hill Superfund site, and we believe it is possible that a combination of various events, as discussed above, or other events could be materially adverse to our financial results or financial condition.
Coeur d’Alene River Basin Environmental Claims
Coeur d’Alene Indian Tribe Claims
In July 1991, the Coeur d’Alene Indian Tribe (“Tribe”) brought a lawsuit, under CERCLA, in Federal District Court in Idaho 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 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 Federal District Court in Idaho against certain mining companies, including us, that conducted historic mining operations in the Silver Valley of northern Idaho. 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 (“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.
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, as well as the Bunker Hill site, 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 Record of Decision (“ROD”) on the Basin in September 2002, proposing a $359.0 million Basin-wide clean-up plan to be implemented over 30 years and establishing a review process at the end of the 30-year period to determine if further remediation would be appropriate.
During 2000 and 2001, we were involved in settlement negotiations with representatives of the United States, the State of Idaho and the Tribe. These settlement efforts were unsuccessful. However, we have resumed efforts to explore possible settlement of these and other matters, but it is not possible to predict the outcome of these efforts.
Phase I of the trial on the consolidated Tribe’s and the United States’ claims commenced in January 2001, and was concluded in July 2001. Phase I addressed the extent of liability, if any, of the defendants and the allocation of liability among the defendants and others, including the United States. In September 2003, the Court issued its Phase I ruling, holding that we have some liability for 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 appropriate clean-up plan is to be addressed in Phase II of the litigation. The Court also left issues on the deference, if any, to be afforded the United States’ clean-up plan, for Phase II.
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The Court 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 significantly limited the scope of the trustee plaintiffs’ resource trusteeship and will require proof in Phase II of the litigation of the trustees’ percentage of trusteeship in co-managed resources. The United States and the Tribe are re-evaluating their claims for natural resource damages for Phase II; such claims may be in the range of $2.0 billion to $3.4 billion. We believe we have limited liability for natural resource damages because of the actions of the Court described above. Because of a number of factors relating to the quality and uncertainty of the United States’ and Tribe’s natural resources damage claims, we are currently unable to estimate what, if any, liability or range of liability we may have for these claims.
Two of the defendant mining companies, Coeur d’Alene Mines Corporation and Sunshine Mining and Refining Company, settled their liabilities under the litigation during 2001. We and ASARCO (which, as discussed above, filed for bankruptcy in August 2005) are the only defendants remaining in the United States’ litigation. Phase II of the trial was scheduled to commence in January 2006. As a result of ASARCO’s bankruptcy filing, the Idaho Federal Court vacated the January 2006 trial date. We anticipate the Court will schedule a status conference to address rescheduling the Phase II trial date once the Bankruptcy Court rules on a motion brought by the United States to declare the bankruptcy stay inapplicable to the Idaho Federal Court proceedings. The Company does not currently have an opinion as to when the Court might rule.
In 2003, we estimated the range of potential liability for remediation in the Basin to be between $18 million and $58 million and accrued the minimum of the range, as we believed no amount in the range was more likely than any other amount at that time. In the second quarter of 2007, we determined that the cash payment approach to estimating our potential liability used in 2003 was not reasonably likely to be successful, and changed to an approach of estimating our liability through the implementation of actual remediation in portions of the Basin. Accordingly, we finalized an upper Basin cleanup plan, including a cost estimate, and reassessed our potential liability for remediation of other portions of the Basin, which caused us to increase our estimate of potential liability for Basin cleanup to the range of $60.0 million to $80.0 million. Accordingly, in June 2007, we recorded a provision of $42.0 million, which increased our total liability for remediation in the Basin from $18.0 million to $60.0 million, the low end of the estimated range of liability, with no amount in the range being more likely than any other amount. The liability is not discounted, as the timing of the expenditures is uncertain, but is expected to occur over the next 20 to 30 years.
In expert reports exchanged with the defendants in August and September 2004, the United States claimed to have incurred approximately $87.0 million for past environmental study, remediation and legal costs associated with the Basin for which it is alleging it is entitled to reimbursement in Phase II. In a July 2006 Proof of Claim filed in the ASARCO bankruptcy case, the EPA increased this claim to $104.5 million. A portion of these costs is also included in the work to be done under the ROD. With respect to the United States’ past cost claims, as of December 31, 2008, we have determined a potential range of liability for this past response cost to be $5.6 million to $13.6 million, with no amount in the range being more likely than any other amount.
Although the United States has previously issued its ROD proposing a clean-up plan totaling approximately $359.0 million and its past cost claim is $87.0 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 Phase II of the 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 $65.6 million to $93.6 million (including the potential range of liabilities of $60.0 million to $80.0 million for Basin cleanup, and $5.6 million to $13.6 million for the United States’ past cost claims as discussed above), with no amount in the range being more likely than any other number at this time. Based upon GAAP, we have accrued the minimum liability within this range, which at December 31, 2008, was $65.6 million. It is possible that our ability to estimate what, if any, additional liability we may have relating to the Basin may change in the future depending on a number of factors, including but not limited to information obtained or developed by us prior to Phase II of the trial and its outcome, and, any interim court determinations. There can be no assurance as to the outcome of the Coeur d’Alene River Basin environmental claims and we believe it is possible that a combination of various events, as discussed above, or other events could be materially adverse to our financial results or financial condition.
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 Basin. 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. Prior to 2008, we have received a total of approximately $7.2 million under the terms of the settlement agreements. Thirty percent of these settlements
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were paid to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill 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 December 31, 2008, 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”) notified us of certain alleged defaults by us under a 1968 lease agreement relating to the Gold Hunter area (also known as the DIA properties) of our Lucky Friday unit. 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. Independence holds an 18.52% net profits interest under the lease agreement that is payable after we recoup our investments in the DIA properties. In addition, after we recoup our investment, Independence has two years within which to elect to convert its net profits interest into a working interest.
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 attorneys’ fees and certain costs, which Independence has paid. In August 2004, Independence filed its Notice of Appeal with the Idaho Supreme Court. Oral arguments were heard by the Idaho Supreme Court in February 2006. In April 2006, the Idaho Supreme Court ruled in our favor on all of Independence’s claims.
In December 2006, Independence filed a lawsuit in the United States District Court for the District of Idaho seeking monetary damages and injunctive relief. Independence alleged that the April 2006 decision by the Idaho Supreme Court violated their civil rights and their constitutional right to due process, and also alleged that we engaged in mail fraud and securities fraud during the term of the lease. We moved to dismiss the lawsuit, and in September 2007, the Court granted our motion to dismiss all claims in the complaint, and the case was dismissed in its entirety. In October 2007, Independence filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit.
In January 2007, Independence filed an action in Idaho State District Court for Shoshone County seeking rescission of the lease based upon the theory of mutual mistake. We responded to the lawsuit with a motion to dismiss. In May 2007, the court issued a decision that found in our favor and dismissed the plaintiff’s complaint on the merits and with prejudice. In addition, the court awarded us costs and attorney’s fees. Independence has appealed the judgment against it to the Idaho Supreme Court.
On February 12, 2008, we and our wholly owned subsidiary Hecla Merger Company entered into an asset purchase agreement with Independence. Under the terms of the Asset Purchase Agreement, Hecla Merger Company acquired substantially all of the assets of Independence in exchange for 6,936,884 shares of Hecla common stock (the “Independence Acquisition”). The Independence Acquisition closed in November 2008, and as of November 21, 2008, all litigation between us and Independence has been dismissed, and we have acquired all of Independence’s right, title and interest to the DIA properties and the related agreements between us and Independence.
Creede, Colorado, Litigation
In February 2007, Wason Ranch Corporation (“Wason”) filed a complaint in Federal District Court in Denver, Colorado, against us, Homestake Mining Company of California (“Homestake”), and Chevron USA Inc. (successor in interest to Chevron Resources Company) (collectively the “defendants”). The suit alleges violations of the Resource Conservation and Recovery Act (“RCRA”) by each of the defendants. In May 2007, Wason amended its complaint to add state tort law claims against us and defendant Ty Poxon (“Poxon”). The suit alleges damage to Wason’s property by each defendant. The suit also alleges violations of the Clean Water Act (“CWA”) by us and Homestake Mining Company of California. The suit alleges that the defendants are past and present owners and operators of mines and associated facilities located in Mineral County near Creede, Colorado, and such operations have released pollutants into the environment, including the plaintiff’s property, in violation of RCRA and CWA. The lawsuit seeks injunctive relief to abate the alleged harm and an unspecified amount of civil penalties for the alleged violations. We responded to the lawsuit with a motion to dismiss. On March 31, 2008, the Court issued a decision that found in our favor and dismissed the plaintiff’s complaint. In April 2008, Wason appealed the decision to the United States Court of Appeals for the Tenth Circuit.
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In October 2008, Wason and defendants Hecla, Homestake, and Poxon reached a settlement where Wason agreed to dismiss its appeal, and release and discharge Hecla from all state law claims arising out of environmental conditions due to mining or milling that were brought, or could have been brought, in its 2007 claim.
Mexico Litigation
In Mexico, our wholly owned subsidiary, Minera Hecla, S.A de C.V., currently is involved in two cases in the State of Durango, Mexico, concerning the Velardeña mill. The Velardeña mill processed ore from our now closed San Sebastian mine, and the mill was placed on care and maintenance upon closure of the mine. In the first case we are interveners in a commercial action initiated in April of 2006 by a creditor to the prior owner of the mill. In that litigation, the creditor to the prior mill owner seeks to demonstrate that he has an ownership interest in the mill arising out of an allegedly unpaid prior debt. We are contesting this action, and deny the assertion that the plaintiff has an ownership interest in the mill. We take this position for a number of reasons, including the fact that the mill was sold to us prior to plaintiff’s obtaining his alleged ownership interest. In the second matter, a civil action involving Minera Hecla that is in a different court within the State of Durango, the same creditor as in the first case claims that his ownership of the Velardeña mill relates back to the time he allegedly performed the work on which the debt was based, rather than the time that he filed his lien relating to the debt, which was after the mill was sold to us. We are contesting the position of the creditor.
In February 2009 we received notice that the court in the first matter referenced above ruled in favor of the creditor, and also in February 2009, we filed a timely appeal. We are currently negotiating with the plaintiff who has offered to purchase the mill from Minera Hecla. If such negotiations are successful, the above referenced litigation will be dismissed with prejudice.
The basis for our defense in the above matter is that we have a judicially determined valid bill of sale for the Velardeña mill. Thus, we believe that the claims of the creditor and his successors are without merit, and that Minera Hecla is the sole owner of the Velardeña mill. We intend to zealously defend our ownership interest. Although there can be no assurance as to the outcome of these proceedings, we believe that the proceedings will not have a material adverse effect on our results from operations or on our financial position.
BNSF Railway Company Claim
In early November 2008, legal counsel for the BNSF Railway Company (“BNSF”) submitted a contribution claim under CERCLA against Hecla for approximately $52,000 in past costs BNSF incurred in investigation of environmental conditions at the Wallace Yard near Wallace, Idaho. BNSF asserts that a portion of the Wallace Yard site includes the historic Hercules Mill owned and operated by Hercules Mining Company and that Hecla Limited is a successor to Hercules Mining Company. BNSF proposes that we reimburse them for the $52,000 in past costs and agree to pay all future clean up for the Hercules mill portion of the site, estimated to be $291,000, and 12.5% of any other site costs that cannot be apportioned. We requested and received additional information from BNSF and are investigating the claim.
Rio Grande Silver Guarantee
On February 21, 2008, our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), entered into an agreement with Emerald Mining & Leasing, LLC (“EML”) and Golden 8 Mining, LLC (“G8”) to acquire the right to earn-in to a 70% interest in the San Juan Silver Joint Venture, which holds a land package in the Creede Mining District of Colorado. On October 24, 2008, Rio entered into an amendment to the agreement which delays the incurrence of qualifying expenses to be paid by Rio pursuant to the original agreement. SeeNote 19 for more information on the original agreement and subsequent amendment to the agreement. In connection with the amended agreement, we are required to guarantee certain environmental remediation-related obligations of EML’s and G8’s to Homestake Mining Company of California (“Homestake”) up to a maximum liability to us of $2.5 million. As of December 31, 2008, we have not been required to make any payments pursuant to the guarantee. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML and G8 fail to meet their obligations to Homestake. However, to the extent that any payments are made by us under the guarantee, EML and G8, in addition to other parties named in the amended agreement, have jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guarantee as of December 31, 2008.
Other Commitments
Our contractual obligations as of December 31, 2008 included approximately $2.2 million for various capital projects at the Greens Creek and Lucky Friday units, and approximately $3.8 million for commitments relating to non-capital items at Greens Creek. In addition, our commitments relating to open purchase orders at December 31, 2008 included approximately $3.9 million and $2.1 million, respectively, for various capital items at the Greens Creek and Lucky Friday units, and approximately $0.9 million and $0.4 million, respectively, for various non-capital costs.
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We periodically use derivative financial instruments to manage certain interest rate and other financial risks. In May 2008, we entered into an interest rate swap agreement that had the economic effect of modifying the LIBOR-based variable interest obligations associated with our term debt facility. SeeNote 11 for more information on our interest rate swap.
Other Contingencies
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. These can include, but are not limited to, legal proceedings and/or claims pertaining to environmental or safety matters. Although there can be no assurance as to the ultimate disposition of these other matters, we believe the outcome of these other proceedings will not have a material adverse effect on our results from operations or financial position.
Note 9: Employee Benefit Plans
Pensions and Post-retirement Plans
We sponsor defined benefit pension plans covering substantially all U.S. employees and provide certain post-retirement benefits for qualifying retired employees. The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the two-year period ended December 31, 2008, and a statement of the funded status as of December 31, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Change in benefit obligation: | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 59,057 | | $ | 58,565 | | $ | 915 | | $ | 1,009 | |
Service cost | | | 1,687 | | | 910 | | | 8 | | | 7 | |
Interest cost | | | 3,640 | | | 3,396 | | | 52 | | | 59 | |
Amendments | | | 1,472 | | | — | | | 8,950 | | | — | |
Actuarial gain | | | 3,403 | | | (283 | ) | | 50 | | | — | |
Benefits paid | | | (3,526 | ) | | (3,531 | ) | | (22 | ) | | (160 | ) |
Benefit obligation at end of year | | | 65,733 | | | 59,057 | | | 9,953 | | | 915 | |
Change in fair value of plan assets: | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | | 84,287 | | | 77,044 | | | — | | | — | |
Actual return (loss) on plan assets | | | (20,818 | ) | | 10,437 | | | — | | | — | |
Employer and employee contributions | | | 337 | | | 337 | | | 22 | | | 160 | |
Benefits paid | | | (3,526 | ) | | (3,531 | ) | | (22 | ) | | (160 | ) |
Fair value of plan assets at end of year | | | 60,280 | | | 84,287 | | | — | | | — | |
Funded status at end of year | | $ | (5,453 | ) | $ | 25,230 | | $ | (9,953 | ) | $ | (915 | ) |
The following table provides the amounts recognized in the consolidated balance sheets as of December 31, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Other non-current assets: | | | | | | | | | | | | | |
Prepaid benefit costs | | $ | 1,516 | | $ | 29,897 | | $ | — | | $ | — | |
Current liabilities: | | | | | | | | | | | | | |
Accrued benefit liability | | | (333 | ) | | (385 | ) | | (88 | ) | | (94 | ) |
Other non- current liabilities: | | | | | | | | | | | | | |
Accrued benefit liability | | | (6,636 | ) | | (4,282 | ) | | (9,865 | ) | | (821 | ) |
Accumulated other comprehensive (income) loss | | | 21,653 | | | (8,205 | ) | | (718 | ) | | (821 | ) |
Net amount recognized | | $ | 16,200 | | $ | 17,025 | | $ | (10,671 | ) | $ | (1,736 | ) |
The benefit obligation and prepaid benefit costs were calculated by applying the following weighted average assumptions:
| | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Discount rate | | | 6.00 | % | | 6.00 | % | | 6.00 | % | | 6.00 | % |
Expected rate of return on plan assets | | | 8.00 | % | | 8.00 | % | | — | | | — | |
Rate of compensation increase | | | 4.00 | % | | 4.00 | % | | — | | | — | |
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The above assumptions were calculated based on information as of December 31, 2008 and September 30, 2007, the measurement dates for the plans. The discount rate is generally based on the rates of return available as of the measurement date from high-quality fixed income investments, which in past years we have used Moody’s AA bond index as a guide to setting the discount rate. The expected rate of return on plan assets is based upon consideration of the plan’s current asset mix, historical long-term return rates and the plan’s historical performance. Our current expected rate on plan assets of 8.0% represents approximately 302% of our past five-year’s average annual return rate of 1.99%.
The Other Benefit plans include an assumed health care cost rate of 8% in 2009. This assumed health care cost rate will decrease by 1% per year until 2013, when a constant rate of 4% is assumed. A 1% change in the assumed health care rate would result in a $148,000 effect on total service and interest cost and a $1,039,000 effect on the postretirement benefit obligation.
Net periodic pension cost (income) for the plans consisted of the following in 2008, 2007 and 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | |
| | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | |
Service cost | | $ | 1,687 | | $ | 910 | | $ | 814 | | $ | 8 | | $ | 7 | | $ | 6 | |
Interest cost | | | 3,640 | | | 3,396 | | | 3,274 | | | 52 | | | 60 | | | 75 | |
Expected return on plan assets | | | (6,409 | ) | | (6,020 | ) | | (5,771 | ) | | — | | | — | | | — | |
Amortization of prior service cost | | | 561 | | | 461 | | | 426 | | | (3 | ) | | (3 | ) | | (3 | ) |
Amortization of net gain (loss) from earlier periods | | | (22 | ) | | (26 | ) | | 36 | | | (50 | ) | | (59 | ) | | 61 | |
Net periodic pension cost (income) | | $ | (543 | ) | $ | (1,279 | ) | $ | (1,221 | ) | $ | 7 | | $ | 5 | | $ | 139 | |
The weighted-average allocations of investments at December 31, 2008 and September 30, 2007, the measurement dates of the plan, by asset category in the Hecla Mining Company Retirement Plan and the Lucky Friday Pension Plan are as follows:
| | | | | | | | | | | | | |
| | Hecla | | Lucky Friday | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Interest-bearing cash | | | 1 | % | | — | % | | 1 | % | | — | % |
Equity securities | | | 34 | % | | 37 | % | | 36 | % | | 37 | % |
Debt securities | | | 46 | % | | 35 | % | | 45 | % | | 35 | % |
Real estate | | | 14 | % | | 12 | % | | 15 | % | | 12 | % |
Absolute return | | | — | % | | 11 | % | | — | % | | 11 | % |
Precious metals and other natural resources | | | 5 | % | | 5 | % | | 3 | % | | 5 | % |
Total | | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Precious metals and other natural resources include our common stock in the amounts of $1.4 million and $4.4 million at December 31, 2008 and September 30, 2007, the measurement dates of the plan, respectively. These investments represent approximately 2.3% and 5.3% of the total combined assets of these plans at December 31, 2008 and September 30, 2007, respectively.
Our target asset allocations are currently set in the ranges that follow:
| | | | |
Equity | | | 19-31 | % |
Fixed income | | | 29-43 | % |
Real estate | | | 12-18 | % |
Absolute return | | | 12-18 | % |
Precious metals and other natural resources | | | 8-12 | % |
Investment objectives are established for each of the asset categories included in the pension plan with comparisons of performance against appropriate benchmarks. Our policy calls for each portion of the investments to be supervised by a qualified investment manager. The investment managers are monitored on an ongoing basis by our outside consultant, with formal reporting to us and the consultant performed each quarter.
The future benefit payments, which reflect expected future service as appropriate, are estimates of what will be paid in the following years (in thousands):
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| | | | | | | | | | | |
| | | | | | | | | | |
Year Ending December 31, | | | Hecla Plan | | Lucky Friday
Plan | | OPEB
Plans | |
2009 | | $ | 2,683 | | $ | 913 | | $ | 93 | |
2010 | | | 2,695 | | | 967 | | | 100 | |
2011 | | | 2,689 | | | 1,023 | | | 111 | |
2012 | | | 2,698 | | | 1,049 | | | 147 | |
2013 | | | 2,735 | | | 1,045 | | | 206 | |
Years 2014-2018 | | | 15,231 | | | 5,116 | | | 2,494 | |
We do not expect to contribute to the pension plans during the next year.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $28.5 million, $29.4 million and $12.5 million, respectively, as of December 31, 2008, and $5.6 million, $4.7 million and zero, respectively, as of December 31, 2007.
For the pension plans and other benefit plans, the following amounts are included in accumulated other comprehensive income on our balance sheet as of December 31, 2008, that have not yet been recognized as components of net periodic benefit cost (in thousands):
| | | | | | | |
| | Pension
Benefits | | Other
Benefits | |
Net actuarial (gain) loss | | $ | 18,145 | | $ | (590 | ) |
Prior-service cost | | | 3,508 | | | (128 | ) |
For the pension plans and other benefit plans, the following amounts are estimated to be recognized as components of net periodic benefit cost during 2009 (in thousands):
| | | | | | | |
| | Pension
Benefits | | Other
Benefits | |
Net actuarial (gain) loss | | $ | 1,232 | | $ | (43 | ) |
Prior-service cost | | | 602 | | | (3 | ) |
During 2009, we do not expect to have any of the plans’ assets returned.
As a result of applying the measurement date provisions of FASB statement 158 (Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans) we adjusted the pension plan assets in the first quarter of 2008 to reflect a measurement date of December 31, 2007. The effect of changing the measurement date from September 30, 2007 to December 31, 2007 resulted in an increase to our pension asset of $0.5 million a reduction of retained earnings of $0.4 million and a reduction of other comprehensive income of $0.1 million.
As a part of our acquisition of the remaining 70.3% of the Greens Creek Joint Venture (see Note 19), we amended our pension plan to include certain employees of the Joint Venture. As a result, the pension plan was re-measured as of March 31, 2008. Due to changes in the market value of securities held by the plan, its assets were reduced by approximately $3.0 million. At the same time, the projected benefit obligation increased by approximately $2.1 million as a result of adding the Greens Creek employees. Of the $5.1 million reduction in the funded status of the plan, $3.0 million was charged to other comprehensive income and $2.1 was charged to the purchase price allocation of the remaining interest in the Joint Venture. In addition, as part of our acquisition of the remaining 70.3% of the Greens Creek Joint Venture, we established another post-employment benefit plan. This plan has a liability balance on our balance sheet of $8.9 million as of December 31, 2008.
Deferred Compensation Plans
We maintain a deferred compensation plan that was approved by our shareholders, which allows eligible officers and key employees to defer a portion or all of their compensation. A total of 6.0 million shares of common stock are authorized under this plan. Deferred amounts may be allocated to either an investment account or a stock account. The investment account is similar to a cash account and bears interest at the prime rate. In the stock account, quarterly deferred amounts and a 10% matching amount are converted into stock units equal to the average closing price of our common stock over a quarterly period. At the end of each quarterly period, participants are eligible to elect to convert a portion of their investment account into the stock account with no matching contribution.
During 2008, 2007 and 2006, participants accumulated 1,463, 1,988 and 3,162 common stock units, respectively, into their stock accounts. In 2008, 2007 and 2006, 1,545, 3,163 and 4,128 common stock units were distributed to participants in the form of common shares. Prior to the fourth quarter of 2006, participants were allowed to purchase discounted stock options. During 2006 and 2005, participants purchased approximately 40,137 and 472,614 discounted stock options,
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respectively, under the plan. During 2008, 2007 and 2006, zero, 25,130 and 207,655, respectively, of those options were exercised. During 2008, no discounted stock options reverted back to the plan upon employee termination.
In the fourth quarter of 2006, we modified 837,261 discounted stock options previously purchased by participants in our deferred compensation plan pursuant to changes in the Internal Revenue Service requirements relating to employee deferred compensation arrangements. As a result, the options were converted to stock equivalent units that will be settled in the employees’ investment accounts. Modification of the options resulted in a charge to compensation expense totaling $1.3 million, a charge to additional paid-in capital for expense previously recognized totaling $1.7 million, and a liability of $3.0 million for the fair value of stock equivalent units then outstanding. The stock units were valued using the Black-Scholes model. At December 31, 2008, 228,400 units remained unexercised with a value of $0.01 million.
As of December 31, 2008 and 2007, the deferred compensation plan, together with matching amounts and accumulated interest, amounted to approximately $1.0 million and $4.7 million, respectively.
During 2008, the Board of Directors approved the grant of 197,810 restricted common stock units, 15,221 of which reverted back to the plan due to employee termination. A total of 181,310 of the stock units will vest in May 2009, and will be distributable based upon predetermined dates as elected by the participants. The remaining stock units will vest in 2009 and 2010.
During 2007, the Board of Directors approved the grant of 125,400 restricted common stock units, 2,000 of which reverted back to the plan due to employee termination. A total of 117,850 of the stock units vested in May 2008, and were distributable based upon predetermined dates as elected by the participants.
During 2006, the Board of Directors approved the grant of 155,600 restricted common stock units, none of which reverted back to the plan due to employee termination. A total of 115,600 of the stock units vested in May 2007, and were distributable based upon predetermined dates as elected by the participants.
Capital Accumulation Plans
In April we amended our employees’ Capital Accumulation Plan, which is now available to all U.S. salaried and certain hourly employees immediately upon employment. Employees may contribute from 2% to 50% of their annual compensation to the plan. We make a matching contribution of 100% of an employee’s contribution up to, but not exceeding, 6% of the employee’s earnings. Our matching contribution was approximately $1.5 million in 2008.
During 2007 our Capital Accumulation Plan was available to all U.S. salaried and certain hourly employees after completion of two months of service. Employees were able to contribute from 2% to 15% of their annual compensation to the plan. We made a matching contribution of 25% of an employee’s contribution up to, but not exceeding, 6% of the employee’s earnings. Our matching contribution was approximately $0.1 million each in 2007 and 2006. In February 2008, our Board of Directors authorized additional profit-sharing contributions of $0.4 million to the participants of the plan.
We also maintain an employees’ 401(k) plan, which is available to all hourly employees at the Lucky Friday unit after completion of six months of service. Employees may contribute from 2% to 50% of their compensation to the plan. We make a matching contribution of 35% of an employee’s contribution up to, but not exceeding, 5% of the employee’s earnings. Our contribution was approximately $154,000 in 2008, $139,000 in 2007 and $79,000 in 2006.
Note 10: Shareholders’ Equity
Common Stock
We are authorized to issue 400,000,000 shares of common stock, $0.25 par value per share, of which 180,461,391 shares of common stock were outstanding as of December 31, 2008. All of our currently outstanding shares of common stock are listed on the New York Stock Exchange under the symbol “HL”.
Subject to the rights of the holders of any outstanding shares of preferred stock, each share of common stock is entitled to: (i) one vote on all matters presented to the stockholders, with no cumulative voting rights; (ii) receive such dividends as may be declared by the Board of Directors out of funds legally available therefore; and (iii) in the event of our liquidation or dissolution, share ratably in any distribution of our assets.
Registration Statements
In September of 2007, we filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission. This registration statement has allowed the Company to offer and sell from time to time, in one or more offerings, shares of common stock, preferred stock, warrants and debt securities. Hecla has used the net proceeds of all securities sold for general corporate purposes and debt service. In December 2007, our 6.5% Mandatory Convertible Preferred Stock was sold pursuant to this registration statement.
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Pursuant to this registration statement, on September 12, 2008, we completed an underwritten public sale of 31 million shares of our common stock for $5 per share, resulting in net proceeds of approximately $147 million after deducting related fees, expenses and underwriting discounts and commissions. On September 23, 2008, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of an additional 3.4 million shares for $5 per share, for additional net proceeds of approximately $16 million. The combined net proceeds of $163.6 million were applied to our bridge debt facility, resulting in a $162.9 million reduction to the bridge facility principal balance, with the remaining $0.9 million being paid in interest (seeNote 7 for further discussion of our debt facility).
Also pursuant to our Form S-3 registration statement and base prospectus, on December 11, 2008, we entered into a definitive agreement to sell securities to selected institutional investors for aggregate proceeds of $21 million. The offering closed in December 2008. The securities in the sale included:
| | |
| • | Approximately 10.24 million shares of our common stock. |
| | |
| • | Series 1 warrants to purchase up to approximately 7.68 million shares of our common stock at an exercise price of $2.45 per share, expiring in five years. The Series 1 warrants are not exercisable until June 9, 2009. |
| | |
| • | Series 2 warrants to purchase up to 7.68 million shares of our common stock at an exercise price of $2.35 per share expiring on February 28, 2009. |
The sale units, including common stock and warrants, were priced at $2.05 per share, resulting in gross proceeds of $21 million. Net proceeds were approximately $19.8 million after related placement costs. In arriving at the relative values of the common stock and warrants, we used the Black-Scholes option pricing model with a risk-free interest rate of 1.55% for Series 1 and 0.11% for Series 2, current stock price at closing on the date before issuance of $1.64, volatility of 162% for Series 1 and 44% for Series 2, dividend yield of 0%, and terms equal to the terms of the warrants. The relative values of our stock and warrants, in thousands, were:
| | | | | | | |
| | Shares | | Value | |
| | | | | | | |
Common Stock | | | 10,243,902 | | $ | 13,859 | |
| | | | | | | |
Series 1 warrants to purchase Common Stock | | | 7,682,927 | | | 5,335 | |
| | | | | | | |
Series 2 warrants to purchase Common Stock | | | 7,682,927 | | | 620 | |
| | | | | | | |
Total | | | | | $ | 19,814 | |
In addition, we granted the agent approximately 460,000 of the Series 1 warrants described above, but at an exercise price of $2.56 per share. Using the Black-Scholes option pricing model, we valued the warrants at $0.4 million, which is included in placement costs.
On February 4, 2009, we entered into an underwriting agreement to sell 32 million units for proceeds of approximately $65.6 million, pursuant to our Form S-3 registration statement and base prospectus. On February 6, 2009, the underwriters exercised their over-allotment option, resulting in the sale of an additional 4.8 million units for proceeds of approximately $9.8 million. Each unit consists of one share of our Common Stock and one-half common share purchase warrant. SeeNote 21 for more information on the offering.
In December 2005, we filed a registration statement with the SEC to issue up to $175.0 million of common stock and warrants in connection with business combinations and/or acquisition activities. This registration statement was also declared effective by the SEC. We issued 6.9 million shares of our common stock in November 2008 pursuant to this registration statement in our acquisition of substantially all of the assets of Independence Lead Mines (seeNote 19 for more information on the acquisition).
Preferred Stock
Our Charter authorizes us to issue 5,000,000 shares of preferred stock, par value $0.25 per share. The preferred stock is issuable in series with such voting rights, if any, designations, powers, preferences and other rights and such qualifications, limitations and restrictions as may be determined by our Board of Directors. The Board may fix the number of shares constituting each series and increase or decrease the number of shares of any series. As of December 31, 2008, 2,170,316 shares were outstanding. As of December 31, 2008, there were 157,816 shares of Series B Cumulative Convertible Preferred Stock outstanding. All of the shares of our Series B Preferred Stock are listed on the New York Stock Exchange under the symbol “HL PB.” In December of 2007, we sold 2,012,500 shares of 6.5% Mandatory Convertible Preferred Stock for proceeds of $194.9 million, net of $6.4 million in related costs. Shares of our Mandatory Convertible Preferred Stock are
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listed on the New York Stock Exchange under the symbol “HL PrC.” A new Series of 12% Convertible Preferred Stock was established in connection with the Fourth Amendment to our Amended and Restated Credit Agreement in February 2009. SeeNote 21 for more information on our 12% Convertible Preferred Stock.
Ranking
The Series B and Mandatory Convertible preferred stock series rank (and the new 12% Convertible Preferred Stock will rank) on parity with respect to each other, and rank senior to our common stock and any shares of Series A preferred shares with respect to payment of dividends, and amounts upon liquidation, dissolution or winding up.
While any shares of Series B, Mandatory Convertible, or 12% Convertible preferred stock are outstanding, we may not authorize the creation or issue of any class or series of stock that ranks senior to the Series B, Mandatory Convertible, and 12% Convertible preferred stock as to dividends or upon liquidation, dissolution or winding up without the consent of the holders of 66 2/3% of the outstanding shares of Series B, Mandatory Convertible, and 12% Convertible preferred stock and any other series of preferred stock ranking on a parity with respect to the Series B, Mandatory Convertible or 12% Convertible preferred stock as to dividends and upon liquidation, dissolution or winding up, voting as a single class without regard to series.
Dividends
Series B preferred stockholders are entitled to receive, when, as and if declared by the Board of Directors out of our assets legally available therefore, cumulative cash dividends at the rate per annum of $3.50 per share of Series B Preferred Stock. Dividends on the Series B Preferred Stock are payable quarterly in arrears on October 1, January 1, April 1 and July 1 of each year (and, in the case of any undeclared and unpaid dividends, at such additional times and for such interim periods, if any, as determined by the Board of Directors), at such annual rate. Dividends are cumulative from the date of the original issuance of the Series B Preferred Stock, whether or not in any dividend period or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on shares of Series B Preferred Stock do not bear interest. We have declared and paid our regular quarterly dividend of $0.875 per share on the outstanding Preferred B shares through the third quarter of 2008. Aggregate cash dividends declared and paid on our Series B Preferred shares in 2008 totaled $0.4 million, or $2.62 per share.
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 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. We have declared and paid our quarterly dividends on the Mandatory Convertible Preferred Stock through the third quarter of 2008. On August 29, 2008 the Board of Directors declared that the regular quarterly dividend on the outstanding 6.5% Mandatory Convertible Preferred Stock in the amount of $1.625 per share would be paid in Common Stock of Hecla, for a total amount of approximately $3.27 million in Hecla Common Stock (with cash for fractional shares). The value of the shares of Common Stock issued as dividends was calculated at 97% of the average of the closing prices of Hecla’s Common Stock over the five consecutive trading day period ending on the second trading day immediately preceding the dividend payment date. Aggregate cash dividends declared and paid on our Mandatory Convertible Preferred shares in 2008 totaled $7.0 million, or $3.48 per share.
On December 5, 2008 the board of directors announced that in the interest of cash conservation quarterly payment of dividends to the holders of both the Hecla Series B Cumulative Convertible Preferred Stock and the Mandatory Convertible Preferred Stock would be deferred. Hecla’s common stock is currently below the minimum price needed ($3.395 per share) to pay the Mandatory Convertible Preferred Stock dividend in common stock without incurring an additional cash outlay. As of December 31, 2008, we had accumulated dividends in arrears of approximately $0.1 million, or $0.87 per share, on our Series B Preferred shares and approximately $3.3 million, or $1.63 per share, on our Mandatory Convertible Preferred shares.
Redemption
The Series B Preferred Stock is redeemable at our option, in whole or in part, at $50 per share, plus, in each case, all dividends undeclared and unpaid on the Series B Preferred Stock up to the date fixed for redemption, upon giving notice as provided below. The Mandatory Convertible Preferred Stock is not redeemable.
Liquidation Preference
The Series B preferred stockholders are entitled to receive, in the event that we are liquidated, dissolved or wound up, whether voluntary or involuntary, $50 per share of Series B preferred stock plus an amount per share equal to all dividends undeclared and unpaid thereon to the date of final distribution to such holders (the “Liquidation Preference”), and no more. Until the Series B preferred stockholders have been paid the Liquidation Preference in full, no payment will be made to any holder of Junior Stock upon our liquidation, dissolution or winding up. The term “Junior Stock” means our common stock and any other class of our capital stock issued and outstanding that ranks junior as to the payment of dividends or amounts
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payable upon liquidation, dissolution and winding up to the Series B preferred stock. As of December 31, 2008 and 2007, our Series B preferred stock had a liquidation preference of $8.0 million and $7.9 million, respectively.
In the event of our voluntary or involuntary liquidation, winding-up or dissolution, each holder of the Mandatory Convertible Preferred Stock will be entitled to receive a liquidation preference in the amount of $100 per share of the mandatory convertible preferred stock, plus an amount equal to accumulated and unpaid dividends on the shares to the date fixed for liquidation, winding-up or dissolution. The amounts payable with respect to the liquidation preference are to be paid out of our assets available for distribution to our shareholders, after satisfaction of liabilities to our creditors and distributions to holders of senior stock, and before any payment or distribution is made to holders of Junior Stock (including our common stock). If, upon our voluntary or involuntary liquidation, winding-up or dissolution, the amounts payable with respect to the liquidation preference, plus an amount equal to accumulated and unpaid dividends of the Mandatory Convertible Preferred Stock and all parity stock, are not paid in full, the holders of the Mandatory Convertible Preferred Stock and the parity stock will share equally and ratably in any distribution of our assets. The distribution of our assets will be shared in proportion to the liquidation preference and an amount equal to accumulated and unpaid dividends to which they are entitled. After payment of the full amount of the liquidation preference and an amount equal to accumulated and unpaid dividends to which they are entitled, the holders of the Mandatory Convertible Preferred Stock will have no right or claim to any of our remaining assets. As of December 31, 2008 and 2007, our Mandatory Convertible Preferred Stock had a liquidation preference of $204.5 million and $201.7 million, respectively.
Voting Rights
Except in certain circumstances and as otherwise from time to time required by applicable law, the Series B and Mandatory Convertible preferred stockholders have no voting rights and their consent is not required for taking any corporate action. When and if the Series B preferred stockholders are entitled to vote, each holder will be entitled to one vote per share. When and if the Mandatory Convertible preferred shareholders are entitled to vote, the number of votes that each share of the Mandatory Convertible Preferred Stock shall have shall be in proportion to the liquidation preference of such share.
Conversion
Each share of Series B preferred stock is convertible, in whole or in part at the option of the holders thereof, into shares of common stock at a conversion price of $15.55 per share of common stock (equivalent to a conversion rate of 3.2154 shares of common stock for each share of Series B preferred stock). The right to convert shares of Series B preferred stock called for redemption will terminate at the close of business on the day preceding a redemption date (unless we default in payment of the redemption price).
Each share of our Mandatory Convertible Preferred Stock will automatically convert on January 1, 2011, into between 8.4502 and 10.3093 shares of our common stock, representing a minimum of 17,006,028 common shares and a maximum of 20,747,467 common shares that can be issued, subject to anti-dilution adjustments. At any time prior to January 1, 2011, holders may elect to convert each share of our Mandatory Convertible Preferred Stock into shares of common stock at the minimum conversion rate of 8.4502, subject to anti-dilution adjustments. In the event of a cash acquisition of us, under certain circumstances the conversion rate will be adjusted during the cash acquisition conversion period. The effective provisional conversion rate as of December 31, 2008 was 10.3093 shares of common stock per one share of Mandatory Convertible Preferred Stock.
Stock Award Plans
We use stock-based compensation plans to aid us in attracting, retaining and motivating our officers and key employees, as well as to provide us with the ability to provide incentives more directly linked to increases in stockholder value. These plans provide for the grant of options to purchase shares of our common stock and the issuance of restricted shares units of our common stock.
Stock-based compensation expense recognized for the years ended December 31, 2008, 2007 and 2006 were approximately $4.0 million, or $0.03 per basic and diluted share, $3.4 million, or $0.03 per basic and diluted share, and $2.5 million, or $0.02 per basic and diluted share, respectively. Over the next twelve months, we expect to recognize approximately $0.5 million in additional compensation expense as the remaining options and units vest as required by SFAS No. 123(R).
1995 Stock Incentive Plan
Our 1995 Stock Incentive Plan, as amended in 2004, authorizes the issuance of up to 11.0 million shares of our common stock pursuant to the grant or exercise of awards under the plan. The Board of Directors committee that administers the 1995 plan has broad authority to fix the terms and conditions of individual agreements with participants, including the duration of the award and any vesting requirements. The 1995 plan will terminate 15 years after the effective date of the plan.
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Deferred Compensation Plan
We maintain a deferred compensation plan that allows eligible officers and key employees to defer a portion or all of their compensation. Deferred amounts may be allocated to either an investment account, which is similar to cash, or to a stock account. Until the fourth quarter of 2006, amounts in participants’ investment accounts could be used to purchase discounted stock options; however, most options were modified to cash-settled stock equivalent units in the fourth quarter of 2006, and investment account balances may no longer be applied to the purchase of discounted stock options. However, funds may still be applied to the purchase of stock units. For further information seeNote 9 ofNotes to Consolidated Financial Statements.
Directors’ Stock Plan
In 1995, we adopted the Hecla Mining Company Stock Plan for Nonemployee Directors (the “Directors’ Stock Plan”), which may be terminated by our Board of Directors at any time. Each nonemployee director is to be credited on May 30 of each year with that number of shares determined by dividing $24,000 by the average closing price for our common stock on the New York Stock Exchange for the prior calendar year. All credited shares are held in trust for the benefit of each director until delivered to the director. Delivery of the shares from the trust occurs upon the earliest of: (1) death or disability; (2) retirement; (3) a cessation of the director’s service for any other reason; or (4) a change in control. The shares of our common stock credited to non-employee directors pursuant to the Directors’ Stock Plan may not be sold until at least six months following the date they are delivered. A maximum of one million shares of common stock may be granted pursuant to the Directors’ Stock Plan. During 2008, 2007 and 2006, respectively, 19,488, 29,561 and 36,949 shares were credited to the nonemployee directors. During 2008, 2007 and 2006, $176,000, $250,000 and $191,000, respectively, were charged to operations associated with the Directors’ Stock Plan. At December 31, 2008, there were 742,454 shares available for grant in the future under the plan.
Status of Stock Options
The fair value of the options granted during the years ended December 31, 2008, 2007, and 2006 were estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions given below:
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Weighted average fair value of options granted | | $ | 3.72 | | $ | 3.11 | | $ | 2.35 | |
Expected stock price volatility | | | 51.00 | % | | 45.00 | % | | 51.42 | % |
Risk-free interest rate | | | 2.58 | % | | 4.61 | % | | 4.92 | % |
Expected life of options | | | 3.1 years | | | 3.1 years | | | 2.6 years | |
We estimate forfeiture and expected volatility using historical information over the expected life of the options. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent lives of the options. The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms and vesting schedules. We have not paid dividends on common shares in several years and do not anticipate paying them in the foreseeable future, therefore, no assumption of dividend payment is made in the model. The Black-Scholes option-pricing model requires the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility.
During 2008, 2007 and 2006, respectively, options to acquire 542,560, 584,500 and 721,638 shares were granted to our officers and key employees. Of the options granted in 2008 and 2007, 509,560 and 559,500, respectively, were granted without vesting requirements. Of the options granted in 2006, 621,500 were granted without vesting requirements and 40,137 were modified to stock equivalent units to be settled in cash (see discussion below). The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2008 before applicable income taxes was zero, based on our closing stock price of $2.80 per common share at December 31, 2008. The majority of options outstanding were fully vested at December 31, 2008. 16,500 of the 33,000 options issued with vesting requirements during 2008 vested prior to December 31, 2008. The remaining 16,500 unvested options at December 31, 2008 will vest in 2009 if the participant’s requisite service period is met.
During 2008, 2007 and 2006, respectively, 22,082, 29,500 and 808,703 options to acquire shares expired under the 1995 plan, and such options became available for re-grant under the 1995 plan. At December 31, 2008, 2007 and 2006, respectively, there were 735,837, 3,922,253 and 4,603,243 shares available for future grant under the 1995 plan.
In the fourth quarter of 2006, we modified 837,261 discounted stock options purchased by participants in our deferred compensation plan pursuant to reflect changes in the Internal Revenue Service requirements relating to employee deferred compensation arrangements. As a result, the 837,261 options were converted to stock equivalent units that will be settled in the employees’ investment accounts and, accordingly, are now classified as liabilities and marked to market each reporting
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period until exercise. On November 6, 2006 — the date of modification — we recorded a liability of $3.0 million and additional compensation expense of $1.3 million. At December 31, 2008 the fair value of the liability was zero.
Transactions concerning stock options pursuant to our stock option plans are summarized as follows:
| | | | | | | |
| | Shares Subject to Options | | Weighted Average
Exercise Price | |
Outstanding, December 31, 2007 | | | 1,133,500 | | $ | 6.60 | |
Granted | | | 542,560 | | $ | 9.87 | |
Exercised | | | (17,500 | ) | $ | 7.86 | |
Expired | | | (161,381 | ) | $ | 8.92 | |
Outstanding, December 31, 2008 | | | 1,497,179 | | $ | 7.52 | |
Of the outstanding shares above, 1,480,679 were exercisable at December 31, 2008. The weighted average remaining contractual term of options outstanding and exercisable at December 31, 2008 was three years.
The aggregate intrinsic values of options exercised during the years ended December 31, 2008, 2007, and 2006 were $0.1 million, $6.1 million and $2.6 million, respectively. We received cash proceeds of $0.1million for options exercised in 2008, $8.8 million for options exercised in 2007, and $3.9 million for options exercised in 2006.
Restricted Stock Units
Unvested restricted stock units, for which the board of directors has approved grants to employees, are summarized as follows:
| | | | | | | |
| | Shares | | Weighted Average
Grant Date Fair
Value per Share | |
Unvested, January 1, 2007 | | | 142,800 | | $ | 8.37 | |
Granted | | | 197,810 | | $ | 9.51 | |
Expired | | | (15,221 | ) | $ | 9.86 | |
Deferred by recipients | | | (28,896 | ) | $ | 7.14 | |
Distributed | | | (142,800 | ) | $ | 8.37 | |
Unvested, December 31, 2008 | | | 153,693 | | $ | 9.92 | |
Of the 153,693 units unvested at December 31, 2008, all except 16,500 will vest in September of 2009. Remaining units will be distributable based on predetermined dates as elected by the participants, unless participants forfeit their units through termination in advance of vesting. We have recognized approximately $1.2 million in compensation expense since grant date, and will record an additional $0.4 million in compensation expense over the remaining vesting period related to these units.
Approximately 142,800stock units vested in May 2008 and were distributed or deferred as elected by the recipients under the provisions of the deferred compensation plan. We recognized approximately $0.3 million in compensation expense related to these units in 2008. For these units, under the terms of the plan and upon vesting, management authorized a net settlement of distributable shares to employees after consideration of individual employees’ tax withholding obligations, at the election of each employee. In May 2007, we repurchased 24,042 shares for $0.2 million, or approximately $8.67 per share.
Note 11: Derivative Instruments
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, thereby partially offsetting our exposure to fluctuations in the market. These instruments do, however, expose us to other risks, including the amount by which the contract price exceeds the spot price of a commodity, and nonperformance by the counterparties to these agreements. At December 31, 2008, we had no outstanding forward sales contracts, commodity put and call options contracts or other commodity hedging positions.
We periodically use derivative financial instruments to manage interest rate risk. In May 2008, we entered into an interest rate swap agreement that had the economic effect of modifying the LIBOR-based variable interest obligations associated with our term facility. As a result, the interest payable related to $103.3 million of $121.7 million of the term facility balance at December 31, 2008 was effectively fixed at a rate of 9.38% until maturity on March 31, 2011, in accordance with the amortization schedule of the amended and restated credit agreement date April 16, 2008. As a result of an agreement with the bank syndicate to move the $18.3 million principal payment originally scheduled for December 31,
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2008 to February 13, 2009, the terms of the interest rate swap agreement and the notes that the swap agreement pertains to do not match with respect to the maturity date of the $18.3 million payment, with the hedge being slightly ineffective as a result. We realized a $0.5 million hedging loss in 2008 related to the ineffective portion of the swap. At December 31, 2008, the fair value of the swap totaled a liability of $2.5 million, with an accumulated unrealized loss of $2.0 million as a result of changes in fair value of the swap. We estimate that $0.9 million of the net unrealized loss will be reclassified to interest expense within the next twelve months. The interest rate swap is designated as a cash flow hedge. The fair value of the swap is calculated using the discounted cash flow method based on market observable inputs. We are accounting for this swap as a hedge pursuant to FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities.See Note 1 -Q. Risk Management Contracts for more information. At inception and on an ongoing basis, we perform an effectiveness test using the hypothetical derivative method, and the swap was determined to be approximately 98% effective at December 31, 2008. The unrealized loss is included in accumulated other comprehensive income in our consolidated balance sheet and the realized loss is included in interest expense in our consolidated statement of operations, with the fair value payable included in other non-current liabilities in our consolidated balance sheet.
On February 3, 2009, we reached an agreement to amend the terms of our credit facilities to defer all scheduled term facility principal payments due in 2009, totaling $66.7 million, to 2010 and 2011. As a result of the amendment, the original hedging relationship was de-designated, and a new hedging relationship was designated. A retrospective hedge effectiveness test was performed on the original hedging relationship at the date of de-designation, and the original hedging relationship was determined to be ineffective. Consequently, the change in fair value of the swap of $0.2 million between December 31, 2008 and February 3, 2009 was recorded as a gain on the income statement. The amount of unrealized loss included in accumulated other comprehensive income relating to the original hedge will be recognized in the income statement when the hedged interest payments occur. SeeNote 21 ofNotes to Consolidated Financial Statements for further discussion of the amendment.
Note 12: Business Segments
We discover, acquire, develop, produce, and market silver, gold, lead and zinc. Our products consist of both metal concentrates, which we sell to custom smelters, and unrefined bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. We are currently organized and managed by three segments, which represent our operating units and various exploration targets: the Greens Creek unit, the Lucky Friday unit, and the San Sebastian unit and various exploration activities in Mexico.
Prior to the second quarter of 2008, we also reported a fourth segment, the La Camorra unit, representing our operations and various exploration activities in Venezuela. On June 19, 2008, we entered into an agreement to sell our wholly owned subsidiaries holding our business and operations in Venezuela, with the transaction closing on July 8, 2008. Our Venezuelan activities are reported as discontinued operations on the Condensed Consolidated Statement of Operations and Cash Flows for all periods presented (seeNote 13. Discontinued Operations). As a result, we have determined that it is no longer appropriate to present a separate segment representing our operations in Venezuela as of and for the year ended December 31, 2008, and have restated the corresponding information for all periods presented.
On April 16, 2008, we completed the acquisition of the companies owning 70.3% of the joint venture operating the Greens Creek mine for $700 million in cash and 4,365,000 million shares of our common stock, resulting in 100% ownership of Greens Creek by our various wholly owned subsidiaries. Accordingly, the information on our segments presented below reflects our 100% ownership of Greens Creek as of the April 16, 2008 acquisition date, and our previous 29.7% ownership interest prior to that date. SeeNote 19 for more information on the acquisition.
General corporate activities not associated with operating units and their various exploration activities, as well as discontinued operations and idle properties, are presented as “other.” Interest expense, interest income and income taxes are considered general corporate items, and are not allocated to our segments.
Sales of metal concentrates and metal products are made principally to custom smelters and metals traders. The percentage of sales from continuing operations contributed by each segment is reflected in the following table:
| | | | | | | |
| | Year Ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
Greens Creek | | 67.9 | % | 47.3 | % | 56.5 | % |
Lucky Friday | | 32.1 | % | 52.7 | % | 42.8 | % |
San Sebastian | | — | | — | % | 0.7 | % |
| | 100 | % | 100 | % | 100 | % |
The tables below present information about reportable segments as of and for the years ended December 31 (in thousands).
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| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Net sales from continuing operations to unaffiliated customers: | | | | | | | | | | |
Greens Creek | | $ | 130,760 | | $ | 72,726 | | $ | 69,208 | |
Lucky Friday | | | 61,895 | | | 80,976 | | | 52,422 | |
San Sebastian | | | — | | | — | | | 955 | |
| | $ | 192,655 | | $ | 153,702 | | $ | 122,585 | |
Income (loss) from operations: | | | | | | | | | | |
Greens Creek | | $ | (2,489 | ) | $ | 35,212 | | $ | 35,919 | |
Lucky Friday | | | 14,636 | | | 39,451 | | | 20,886 | |
San Sebastian | | | (6,367 | ) | | (9,338 | ) | | (3,783 | ) |
Other | | | (31,139 | ) | | (12,284 | ) | | (37,271 | ) |
| | $ | (25,359 | ) | $ | 53,041 | | $ | 15,751 | |
Capital additions (including non-cash additions): | | | | | | | | | | |
Greens Creek | | $ | 721,387 | | $ | 9,147 | | $ | 7,785 | |
Lucky Friday | | | 58,698 | | | 24,778 | | | 9,409 | |
San Sebastian | | | 39 | | | 148 | | | 57 | |
Discontinued operations | | | — | | | 7,236 | | | 10,429 | |
Other | | | 12,821 | | | 843 | | | 177 | |
| | $ | 792,945 | | $ | 42,152 | | $ | 27,857 | |
Depreciation, depletion and amortization from continuing operations: | | | | | | | | | | |
Greens Creek | | $ | 30,022 | | $ | 8,440 | | $ | 8,192 | |
Lucky Friday | | | 5,185 | | | 3,893 | | | 3,565 | |
San Sebastian | | | — | | | 45 | | | 310 | |
Other | | | — | | | 244 | | | 661 | |
| | $ | 35,207 | | $ | 12,622 | | $ | 12,728 | |
Other significant non-cash items from continuing operations: | | | | | | | | | | |
Greens Creek | | $ | 1,194 | | $ | 170 | | $ | 170 | |
Lucky Friday | | | 18 | | | 18 | | | 20 | |
San Sebastian | | | 22 | | | 51 | | | (4,334 | ) |
Other | | | 10,238 | | | (19,253 | ) | | (45,648 | ) |
| | $ | 11,472 | | $ | (19,014 | ) | $ | (49,792 | ) |
Identifiable assets: | | | | | | | | | | |
Greens Creek | | $ | 800,030 | | $ | 70,671 | | $ | 71,560 | |
Lucky Friday | | | 103,748 | | | 58,350 | | | 33,118 | |
San Sebastian | | | 3,891 | | | 5,041 | | | 4,558 | |
Discontinued operations | | | — | | | 83,131 | | | 105,912 | |
Other | | | 81,122 | | | 433,544 | | | 131,121 | |
| | $ | 988,791 | | $ | 650,737 | | $ | 346,269 | |
The following is sales information by geographic area, based on the location of concentrate shipments and location of parent company for sales from continuing operations to metal traders, for the years ended December 31 (in thousands):
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
United States | | $ | 13,779 | | $ | 3,789 | | $ | 2,806 | |
Canada | | | 99,007 | | | 101,366 | | | 63,196 | |
Mexico | | | 15,684 | | | 122 | | | 4,793 | |
Japan | | | 21,590 | | | 20,491 | | | 25,074 | |
Korea | | | 32,106 | | | 18,224 | | | 22,674 | |
China | | | 10,489 | | | 9,710 | | | 4,042 | |
| | $ | 192,655 | | $ | 153,702 | | $ | 122,585 | |
The following are our long-lived assets by geographic area as of December 31 (in thousands):
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
United States | | $ | 848,930 | | $ | 92,028 | | $ | 71,580 | |
Venezuela | | | — | | | 37,063 | | | 51,291 | |
Mexico | | | 3,183 | | | 3,217 | | | 3,115 | |
| | $ | 852,113 | | $ | 132,308 | | $ | 125,986 | |
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Sales from continuing operations to significant metals customers as a percentage of total sales were as follows for the years ended December 31:
| | | | | | | | | | |
| | 2008 | | 2007 | | 2006 | |
Teck Cominco Ltd. | | | 51.4 | % | | 65.9 | % | | 51.6 | % |
Korea Zinc | | | 16.7 | % | | 11.7 | % | | 14.6 | % |
Dowa/Sumitomo | | | 5.6 | % | | 5.8 | % | | 12.3 | % |
The proportion of sales from continuing operations to Teck Cominco Ltd. represents shipments of concentrates from our Lucky Friday and Greens Creek units to their smelter in British Columbia, Canada. As presented in the table above, sales to this customer have represented a large portion of our overall sales. If our ability to sell concentrates to the Teck Cominco smelter becomes unavailable to us due to disruptions or closure of their operations or other factors, it is possible that our operations and financial results could be adversely affected.
Note 13: Discontinued Operations
During the second quarter of 2008, we committed to a plan to sell all of the outstanding capital stock of El Callao Gold Mining Company (“El Callao”) and Drake-Bering Holdings B.V. (“Drake-Bering”), our wholly owned subsidiaries which together owned our business and operations in Venezuela, the “La Camorra unit.” On June 19, 2008, we announced that we had entered into an agreement to sell 100% of the shares of El Callao and Drake-Bering to Rusoro for $20 million in cash and 3,595,781 shares of Rusoro common stock. The transaction closed on July 8, 2008. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations have been reported in discontinued operations for all periods presented.
The following table details selected financial information included in the loss from discontinued operations in the consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 (in thousands):
| | | | | | | | | | |
| | Year ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
Sales of products | | $ | 23,855 | | $ | 68,920 | | $ | 96,310 | |
Cost of sales and other direct production costs | | | (21,656 | ) | | (52,212 | ) | | (53,235 | ) |
Depreciation, depletion and amortization | | | (4,785 | ) | | (14,557 | ) | | (27,039 | ) |
Exploration expense | | | (1,167 | ) | | (3,885 | ) | | (5,558 | ) |
Other operating income (expense) | | | (44 | ) | | (1,175 | ) | | 633 | |
Gain on disposition of properties, plants, equipment and mineral interests | | | — | | | — | | | 106 | |
Provision for closed operations | | | (502 | ) | | (1,347 | ) | | (40 | ) |
Interest income | | | 212 | | | 672 | | | 399 | |
Foreign exchange loss | | | (13,308 | ) | | (12,003 | ) | | (4,851 | ) |
Income tax benefit (provision) | | | — | | | 627 | | | (2,391 | ) |
(Loss) income from discontinued operations | | $ | (17,395 | ) | $ | (14,960 | ) | $ | 4,334 | |
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Note 14: Fair Value Measurement
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our financial assets and financial liabilities without a material effect on our results of operations and financial position. The effective date of SFAS No. 157 for non-financial assets and non-financial liabilities has been deferred by FSP 157-2 to fiscal years beginning after November 15, 2008, and we are currently evaluating the impact of adopting SFAS 157 for non-financial assets and non-financial liabilities on our results of operations and financial position.
SFAS No. 157 expands disclosure requirements to include the following information for each major category of assets and liabilities that are measured at fair value on a recurring basis:
| | |
a. | the fair value measurement; |
| | |
b. | the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); |
| | |
c. | for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: |
| | |
| 1) | total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); |
| | |
| 2) | the amount of these gains or losses attributable to the change in unrealized gains or losses relating to those assets liabilities still held at the reporting period date and a description of where those unrealized gains or losses are reported; |
| | |
| 3) | purchases, sales, issuances, and settlements (net); and |
| | |
| 4) | transfers in and/or out of Level 3. |
The table below sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2008, and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category.
| | | | | | | |
| | Balance at
December
31, 2008 | | Input
Hierarchy
Level | |
| | | | | |
Assets: | | | | | | | |
Cash and cash equivalents | | $ | 36,470 | | | Level 1 | |
Trade accounts receivable | | | 8,314 | | | Level 2 | |
Current restricted cash | | | 2,107 | | | Level 1 | |
Non-current investments | | | 3,118 | | | Level 1 | |
Non-current restricted cash | | | 13,133 | | | Level 1 | |
| | | | | | | |
Liabilities: | | | | | | | |
Interest rate swap | | | 2,481 | | | Level 2 | |
The provisions of SFAS No. 159, “The Fair Value Option for Financial Liabilities,” also became effective for us on January 1, 2008. SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. The provisions of SFAS No. 159 have not had a material effect on our financial position or results of operations as of and for the year ended December 31, 2008, as we have not elected an option to value any assets or liabilities at fair value pursuant to SFAS No. 159.
Note 15: Income (Loss) per Common Share
We calculate basic earnings per share on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based on the basis of the weighted average number of common shares outstanding during the period plus the effect of potential dilutive common shares during the period using the treasury stock method.
Potential dilutive common shares include outstanding stock options, restricted stock awards, stock units, warrants and convertible preferred stock for periods in which we have reported net income. For periods in which we reported net losses, potential dilutive common shares are excluded, as their conversion and exercise would be anti-dilutive.
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A total of 2,170,316 shares of preferred stock were outstanding at December 31, 2008, of which 2,012,500 shares are convertible to common stock at the minimum rate of 8.4502 until January 1, 2011.
The following table represents net earnings per common share – basic and diluted (in thousands, except earnings per share):
| | | | | | | | | | |
| | Year ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
Numerator | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (37,173 | ) | $ | 68,157 | | $ | 64,788 | |
Preferred stock dividends | | | (13,633 | ) | | (1,024 | ) | | (552 | ) |
Income (loss) from continuing operations applicable to common shares | | | (50,806 | ) | | 67,133 | | | 64,236 | |
Income (loss) on discontinued operations, net of tax | | | (17,395 | ) | | (14,960 | ) | | 4,334 | |
Loss on sale of discontinued operations, net of tax | | | (11,995 | ) | | — | | | — | |
Net income (loss) applicable to common shares for basic and diluted earnings per share | | $ | (80,196 | ) | $ | 52,173 | | $ | 68,570 | |
| | | | | | | | | | |
Denominator | | | | | | | | | | |
Basic weighted average common shares | | | 141,272 | | | 120,420 | | | 119,255 | |
Dilutive stock options and restricted stock | | | — | | | 651 | | | 447 | |
Diluted weighted average common shares | | | 141,272 | | | 121,071 | | | 119,702 | |
| | | | | | | | | | |
Basic earnings per common share | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.36 | ) | $ | 0.56 | | $ | 0.54 | |
Income (loss) from discontinued operations | | | (0.12 | ) | | (0.13 | ) | | 0.03 | |
Loss on sale of discontinued operations | | | (0.09 | ) | | — | | | — | |
Net income (loss) applicable to common shares | | $ | (0.57 | ) | $ | 0.43 | | $ | 0.57 | |
| | | | | | | | | | |
Diluted earnings per common share | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.36 | ) | $ | 0.56 | | $ | 0.54 | |
Income (loss) from discontinued operations | | | (0.12 | ) | | (0.13 | ) | | 0.03 | |
Loss on sale of discontinued operations | | | (0.09 | ) | | — | | | — | |
Net income (loss) applicable to common shares | | $ | (0.57 | ) | $ | 0.43 | | $ | 0.57 | |
For the years ended December 31, 2007 and 2006, 138,700 shares and 1,371,981 shares, respectively, for which the exercise price exceeded our stock price have been excluded from our calculation of earnings per share, as their conversion and exercise would have no effect on the calculation of dilutive shares.
On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock at a price of $2.05 per unit in an underwritten public offering. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units. SeeNote 21 for more information.
Note 16: Other Comprehensive Income (Loss)
Due to the availability of U.S. net operating losses and related deferred tax valuation allowances, there is no tax effect associated with any component of other comprehensive income (loss). The following table lists the beginning balance, yearly activity and ending balance of each component of accumulated other comprehensive income (loss) (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | Unrealized
Gains
(Losses)
On Securities | | Minimum
Pension
Liability
Adjustment | | Adjustment
For SFAS No. 158 | | Change in
Derivative
Contracts | | Cumulative
Translation
Adjustment | | Total
Accumulated
Other
Comprehensive
Income (Loss) | |
Balance January 1, 2006 | | $ | 21,145 | | $ | (1,399 | ) | $ | — | | $ | — | | $ | — | | $ | 19,746 | |
2006 change | | | (16,197 | ) | | 1,399 | | | 3,952 | | | — | | | — | | | (10,846 | ) |
Balance December 31, 2006 | | | 4,948 | | | — | | | 3,952 | | | — | | | — | | | 8,900 | |
2007 change | | | 5,235 | | | — | | | 5,074 | | | — | | | (7,146 | ) | | 3,163 | |
Balance December 31, 2007 | | | 10,183 | | | — | | | 9,026 | | | — | | | (7,146 | ) | | 12,063 | |
2008 change | | | (12,305 | ) | | — | | | (29,959 | ) | | (1,967 | ) | | 7,146 | | | (37,085 | ) |
Balance December 31, 2008 | | $ | (2,122 | ) | $ | — | | $ | (20,933 | ) | $ | (1,967 | ) | $ | — | | $ | (25,022 | ) |
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The $7.1 million change in cumulative translation adjustment in 2008 resulted from the July 2008 sale of our discontinued Venezuelan operations. The 2007 translation adjustment originated from a change in the functional currency for our now-divested Venezuelan operations from the U.S. Dollar to the Bolívar, the currency in Venezuela, implemented on January 1, 2007. The translation adjustment was reclassified from accumulated other comprehensive income to be included in the loss on sale of discontinued operations upon the sale. SeeNote 13 for more information on our discontinued Venezuelan operations. SeeNote 2 for more information on our marketable securities,Note 9 for more information on our employee benefit plans, andNote 11 for more information on our derivative contracts.
Note 17: Investment in Greens Creek Joint Venture
The Greens Creek unit is operated through a joint venture arrangement, of which we own an undivided 100% interest in its assets through our various subsidiaries. On April 16, 2008, we completed the acquisition the equity of the Rio Tinto subsidiaries owning a 70.3% in the Greens Creek Joint Venture. Prior to the acquisition, we owned 29.7% of the Greens Creek Joint Venture. SeeNote 19 ofNotes to Consolidated Financial Statements for further discussion of the acquisition.
The Greens Creek Joint Venture restated its historical financial statements as a result of the identification of reporting errors in periods prior to January 1, 2007, relating to the calculation of depletion and amortization. The Joint Venture determined that the calculations that had been used in periods prior to January 1, 2007, were not consistent with guidelines established by the Securities Exchange Commission (“SEC”), and, as a result, changed their methodology to calculate depletion and amortization using only historical capitalized costs, applied against remaining proven and probable reserve production estimates, valued using SEC approved pricing methodology. Accordingly, the Joint Venture restated the balance sheet as of December 31, 2007 and 2006, and the statements of operations, cash flows, and changes in venturers’ equity for the years ended December 31, 2006 and 2005. The restatement has not affected the consolidated financial statements of Hecla Mining Company because Hecla’s calculations of depletion and amortization were historically performed independently of those performed by the Joint Venture. The following summarized balance sheets as of December 31, 2007, and the related summarized statements of operations for the years ended December 31, 2007 and 2006, are derived from the audited financial statements of the Greens Creek joint venture and reflect the restatements described above. The financial information below is presented on a 100% basis (in thousands).
| | | | | | | | |
Balance Sheet | | | | | | 2007 | |
Assets: | | | | | | | | |
Current assets | | | | | $ | 47,365 | |
Properties, plants and equipment, net | | | | | | 149,599 | |
Securities held for reclamation fund | | | | | | 30,012 | |
Total assets | | | | | $ | 226,976 | |
Liabilities and equity: | | | | | | | |
Liabilities | | | | | $ | 50,316 | |
Equity | | | | | | 176,660 | |
Total liabilities and equity | | | | | $ | 226,976 | |
| | | | | | | | |
Summary of Operations | | | 2007 | | 2006 | |
Net revenue | | | $ | 252,960 | | $ | 240,747 | |
Operating income | | | $ | 128,217 | | $ | 127,499 | |
Net income | | | $ | 130,214 | | $ | 129,235 | |
Our portion of the assets and liabilities of the Greens Creek unit were recorded pursuant to the proportionate consolidation method, whereby 29.7% of the assets and liabilities of the Greens Creek unit were included in our consolidated financial statements prior to our April 16, 2008 acquisition of the remaining 70.3% joint venture interest, subject to adjustments to conform with our accounting policies.
Our balance sheet as of December 31, 2008 reflects our 100% ownership of the Greens Creek Joint Venture, while our 2008 operating results reflect our 100% ownership of the joint venture since our April 16, 2008 acquisition for the remaining
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70.3% interest, and our previous 29.7% ownership portion prior to the acquisition date. We have adjusted various asset and liability balances as of the acquisition date to reflect the purchase price allocation for the acquisition of the 70.3% joint venture interest. SeeNote 19 for more information on the purchase price allocation. In addition, our 2008 operating results reflect depreciation, depletion and amortization on the allocation of purchase price to the acquired 70.3% portion of property, plant, equipment and mineral interests.
Note 18: Related Party Transactions
Prior to the acquisition of the remaining 70.3% interest in the Greens Creek Joint Venture (“The Venture”) by our various subsidiaries on April 16, 2008 (discussed further below), payments were made on behalf of the Venture by Kennecott and its affiliates, which were related parties to the Venture, for payroll expenses, employee benefits, insurance premiums and other miscellaneous charges. These charges were reimbursed by the Venture monthly. We were a 29.7% partner in the Venture prior to our acquisition of the remaining 70.3%.
Prior to the acquisition, under the terms of the Joint Venture Agreement, Kennecott Greens Creek Mining Company (“KGCMC”), as manager of the Venture, received a management fee equal to 4.25% of the first $1 million of total monthly cash operating expenditures (including capital investments) plus 1% of monthly expenditures in excess of $1 million. KGCMC also paid certain direct expenses associated with services provided to the Venture by Kennecott Minerals, Kennecott Utah Copper, Rio Tinto Services and Rio Tinto Procurement, which were related parties. Prior to our acquisition of the remaining 70.3% in the Venture, KGCMC charged the following amounts to the Venture in the years ended December 31, 2008, 2007 and 2006 (on a 100% basis, in thousands):
| | | | | | | | | | |
| | Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
Management fees | | $ | 619 | | $ | 1,631 | | $ | 1,388 | |
Direct expenses | | | 1,942 | | | 2,433 | | | 1,385 | |
Total | | $ | 2,561 | | $ | 4,064 | | $ | 2,773 | |
In addition to the charges paid to KGCMC, the Venture contracted with Rio Tinto Marine, a related party, to act as its agent in booking shipping vessels with third parties. Rio Tinto Marine earned a 1.5% commission on shipping charges. Commissions paid totaled approximately $2.3 million for the year ended December 31, 2008, and $0.1 million for each of the years ended December 31, 2007 and 2006, respectively, on a 100% basis.
Beginning in 2004, the Venture contracted with Rio Tinto Procurement, a related party, to act as its agent in procurement issues. A fixed monthly fee was charged for procurement services, and charges were quoted for other related contracting and cataloging services. Charges paid, on 100% basis, totaled $0.1 million for the year ended December 31, 2008, and $0.2 million for each of the years ended December 31, 2007 and 2006.
On April 16, 2008, we completed the acquisition of the equity of the Rio Tinto subsidiaries owning the remaining 70.3% interest in the Greens Creek mine. As a result, the related party relationships described above between the Venture and Kennecott and its affiliates will terminated upon closure of the transaction, with the exception of certain transitional services provided by Kennecott and its affiliates on a temporary basis, in accordance with the acquisition agreement. SeeNote 19 for further discussion of the transaction.
In the fourth quarter of 2007, we committed to the establishment of the Hecla Charitable Foundation to operate exclusively for charitable and educational purposes, with a particular emphasis in those communities in which we have employees or operations. In December 2007, our Board of Directors made an unconditional commitment to donate 550,000 shares of our common stock, valued at $5.1 million as of the commitment date. Accordingly, the contribution was recorded as other expense, with a credit to stockholders’ equity as of and for the year ended December 31, 2007. The contributed shares of our common stock were issued to the Foundation in January 2008. The Hecla Charitable Foundation was established by Hecla as a not-for-profit organization which is seeking 501(c)(3) status from the Internal Revenue Service. Its financial statements are not consolidated by Hecla.
Note 19: Acquisitions
Acquisition of 70.3% of Greens Creek
On April 16, 2008, we completed the acquisition of all of the equity of the Rio Tinto, PLC subsidiaries holding a 70.3% interest in the Greens Creek mine, consolidating our ownership. We announced the agreement for this transaction on February 12, 2008. Our wholly-owned subsidiary, Hecla Alaska LLC, previously owned an undivided 29.7% joint venture interest in the assets of Greens Creek. The acquisition gives our various subsidiaries control of 100% of the Greens Creek mine.
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The purchase price was composed of $700 million in cash and 4,365,000 shares of our common stock valued at $53.4 million, and estimated acquisition related costs of $5.1 million for a total acquisition price of $758.5 million. The number of common shares issued, 4,365,000, was determined by dividing $50 million by the volume-weighted average trading price for the 20 trading days immediately prior to the second trading day immediately preceding the closing date. For purchase accounting, the valuation of the shares was based upon the average closing price of Hecla shares a few days before and after April 14, 2008 (two days prior to the closing date of the acquisition on April 16, 2008).
The cash portion of the purchase price was partially funded by a $380 million debt facility, which included a $140 million three-year term facility and a $240 million bridge facility, the latter of which was subsequently reduced to a $40 million bridge facility which now matures in February 2009, subject to certain conditions. We utilized $220 million from the bridge facility at the time of closing the Greens Creek transaction, and the remaining $20 million for general corporate purposes in September 2008. In September 2008, the Company applied $162.9 million in proceeds from the public issuance of 34.4 million shares of our common stock was applied against the bridge facility principal balance. SeeNote 7- Long-term Debt and Credit AgreementandNote 21 – Subsequent Events for additional disclosure regarding the status of the Company’s credit agreement.
The following summarizes the allocation of purchase price to the fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
| | | | |
Consideration: | | | | |
Cash payments | | $ | 700,000 | |
Hecla stock issued (4,365,000 shares at $12.23 per share) | | | 53,384 | |
Acquisition related costs | | | 5,074 | |
Total purchase price | | $ | 758,458 | |
| | | | |
Fair value of net assets acquired: | | | | |
Cash | | $ | 16,938 | |
Product inventory | | | 28,510 | |
Other current assets | | | 15,597 | |
Property, plants, equipment and mineral interests, net | | | 689,687 | |
Identified intangible | | | 5,995 | |
Deferred tax asset | | | 23,000 | |
Other assets | | | 21,278 | |
Total assets | | | 801,005 | |
| | | | |
Less: Liabilities assumed | | | 42,547 | |
| | | | |
Net assets acquired | | $ | 758,458 | |
Included in the acquired assets are accounts receivable valued at approximately $9.8 million due under provisional sales contracts based on the fair values of the underlying metals at acquisition date. Final pricing settlements on all receivables acquired on April 16, 2008 occurred at various times during the second quarter of 2008, at which time negative price adjustments were recorded as reductions of revenue.
The $689.7 million fair value for “Property, plants, equipment and mineral interests, net” acquired is comprised of $5.0 million for the asset retirement obligation, $266.7 million for development costs, $67.2 million for plants and equipment, $7.2 million for land, and $343.6 million for value beyond proven and probable reserves.The $343.6 million attributed to value beyond proven and probable reserves consists primarily of exploration potential generally representing the anticipated expansion of the existing mineralized material delineated at the mine. Exploration interests have been defined as specific exploration targets which capture anticipated at or near mine site extensions to known ore bodies. While we have a fair degree of confidence that mineralization exists, as of yet, there is insufficient geological sampling data to classify such material as a reserve or other mineralized material. We perform a reserve study each year and determine the quantity of metals added to proven and probable reserves based on, among other factors, the cutoff value per ton net smelter return. As ore is added to proven and probable reserves, value per ton based on the initial purchase price allocation will be reclassified to development costs each year. After reclassification to development, costs will be depreciated on a units-of-production basis over the life of the proven and probable reserves.
As noted in the table above, we attributed approximately $6.0 million of the purchase price to an intangible asset. Amortization of the intangible asset is expected to total approximately $1.2 million annually through the year 2012.
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The results of operations of this acquisition have been included in theConsolidated Financial Statements from the date of acquisition. As a result, product and material and supplies inventory balances at December 31, 2008 reflect our 100% share of Greens Creek’s balances, while December 31, 2007 amounts reflect our 29.7% ownership prior to the acquisition. The value of the acquired 70.3% portion of Greens Creek product inventory was based upon its fair market value as of the acquisition date, resulting in increased cost of sales by approximately $16.6 million during the second quarter of 2008. The acquired product inventory was all sold in the second quarter of 2008.
The unaudited pro forma financial information below represents the combined results of our operations as if the Greens Creek acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the periods presented, nor is it indicative of future operating results.
| | | | | | | |
| | Year ended December 31, | |
| | 2008 | | 2007 | |
Sales of products | | $ | 231,578 | | $ | 324,453 | |
Net income (loss) from continuing operations | | | (26,520 | ) | | 99,511 | |
Income (loss) applicable to common shareholders | | | (69,543 | ) | | 70,446 | |
Basic and diluted income (loss) per common share | | | (0.50 | ) | | 0.56 | |
The pro forma financial information includes adjustments to reflect the depreciation and amortization of assets acquired, an estimate of the interest expense that would have been incurred, and the dividends on the mandatory convertible preferred stock that would have been incurred. Also included in the pro forma amounts for the year ended December 31, 2007 is a nonrecurring adjustment of $16.6 million for the purchase accounting valuation for product inventory.
Independence Acquisition
On November 6, 2008, we completed the acquisition of substantially all of the assets of Independence Lead Mines Company (“Independence”), located in northern Idaho’s Silver Valley, for 6,936,884 shares of our common stock, which had an estimated value of $14.2 million based on the closing price of our stock on the acquisition date. Included in the assets acquired is a land position near our Lucky Friday unit in the Silver Valley, in close proximity to where we have initiated a significant generative exploration program. The assets acquired also include mining claims previously held by Independence pertaining to an agreement with us, which includes all future interest or royalty obligation by us to Independence.
Acquisition of San Juan Silver Mining Joint Venture earn-in rights
On February 21, 2008, we announced that our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), acquired the right to earn into a 70% interest in the San Juan Silver Joint Venture, which holds an approximately 25-square-mile consolidated land package in the Creede Mining District of Colorado, for a total of 927,716 shares of our common stock, valued at $9.4 million at the time of the transaction. The agreement originally consisted of a three-year buy-in with a total value of $23.2 million, consisting of exploration work and cash. Under the original agreement, Rio could earn up to a 70% joint interest by paying Emerald Mining & Leasing, LLC (“EML”), and Golden 8 Mining, LLC (“G8”), a total of $11.2 million in common stock, by spending $6 million in exploration on the property during the first year, and by committing to an additional total of $6 million in exploration work over the subsequent two years.
On October 24, 2008, Rio entered into an amendment to the agreement which delays the incurrence of the qualifying expenses to be paid by Rio. Pursuant to the amendment, Rio must now incur $9 million in qualifying expenses on or before the fourth anniversary of the agreement date, and incur $12 million in qualifying expenses on or before the fifth anniversary of the agreement date, extending the payment dates under the original agreement for such qualifying expenses from the second anniversary and the third anniversary of the agreement date, respectively. As a result of the amendment, Rio no longer is required to incur the initial $6 million in qualifying expenses on or before the first anniversary of the agreement date. In addition, the amendment required us to issue to EML and G8 $2 million ($1 million each) in unregistered shares of Hecla common stock in November 2008. The agreement originally required such issuance on or before the first anniversary of the agreement date. The amendment also requires us to guarantee certain indemnification obligations of EML and G8 up to a maximum liability of $2.5 million.
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Note 20: Hollister Sale
In April 2007, we completed the sale of our interest in the Hollister Development Block gold exploration project in Nevada to our former partner, Great Basin Gold, Inc., for $45 million in cash and $15 million in Great Basin Gold common stock, based on the average closing share price for the 20 trading days prior to the announcement of the transaction. The number of shares of Great Basin Gold stock transferred to Hecla was 7,930,214, which had a current value of $18.6 million as of the close of market on April 18, 2007, the last price prior to the closing of the transaction. We spent approximately $31.6 million to develop an underground ramp and conduct underground exploration at Hollister toward meeting the requirements of an earn-in agreement with Rodeo Creek Gold, Inc., a wholly owned subsidiary of Great Basin Gold, and most of these costs were treated as exploration and pre-development expense as incurred. As a result of the sale, we recognized a pre-tax gain of $63.1 million in the second quarter of 2007.
Note 21: Subsequent Events
Credit agreement amendment
On February 3, 2009, we announced we had entered into the Fourth Amendment to our Amended and Restated Credit Agreement (the “Fourth Amendment”). The Fourth Amendment deferred all of our scheduled principal payments on our term facility in 2009 so that our next scheduled principal payments are $15 million on March 31, 2010 and on the last day of each calendar quarter thereafter until the maturity date of March 31, 2011. On that date, the then remaining $53.7 million principal amount is due and payable. In exchange for this principal payment deferral, we agreed in the Fourth Amendment to (i) pay off our bridge facility with funds from an equity offering of at least $50 million on or before February 12, 2009, (ii) pay an additional fee to our lenders upon effectiveness of the Fourth Amendment, and on each subsequent July 1st and January 1st, by issuing to the lenders an aggregate amount of a new Series of 12% Convertible Preferred Stock (discussed further below) equal to 3.75% of the aggregate principal amount of the term facility outstanding on such date until the term facility if paid off in full, (iii) revise our financial covenants, including, without limitation, the addition of a liquidity covenant, and extend certain additional limitations on our covenants until the March 31, 2011 maturity date of the term facility, and (iv) make additional mandatory prepayments of our remaining term facility with 75% of our semi-annual excess cash flow and with proceeds we receive from asset sales and the issuance of additional equity and debt, with limited exceptions. The Fourth Amendment was not effective until certain conditions were met, including the receipt of net proceeds from an equity offering by February 12, 2009 of at least $50 million and payment of our bridge facility. On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for gross proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional gross proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (seeUnderwritten equity offering below for more information).
Pursuant to the Fourth Amendment, 42,621 shares of 12% Convertible Preferred Stock were issued to the lenders in February 2009. Below is information on the characteristics of the new Series of 12% Convertible Preferred Stock established in connection with the Fourth Amendment to our Amended and Restated Credit Agreement.
Ranking
The 12% Convertible Preferred Stock ranks senior to our Common Stock and any shares of Series A preferred stock (“Junior Stock”), and on parity with our Series B and Mandatory Convertible preferred stock.
Dividends
Holders of shares of outstanding 12% Convertible Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefore, cumulative dividends at the rate per annum of 12% per share on the sum of the liquidation preference plus all accrued and unpaid dividends thereon from and including the date of issuance (“Dividend Rate”), payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year. Dividends will be cumulative from the most recent date as to which dividends shall be paid, or if no dividends have been paid, from the date of issuance, whether or not in any dividend period or periods there shall have been funds legally available for payment of such dividends. The Dividend Rate on accrued but unpaid dividends shall be compounded quarterly on January 1, April 1, July 1 and October 1 of each year.
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Redemption
The 12% Convertible Preferred Stock will be redeemable as follows:
| | | |
• | All outstanding 12% Convertible Preferred Stock will be redeemed by us on February 10, 2014, at a price equal to the sum of 100% of the liquidation preference plus all accumulated and unpaid dividends thereon, from and including date of issuance. |
| |
• | At the option of the shareholder at a price of 101% of the liquidation preference plus all accumulated and unpaid dividends, from and including the date of issuance. |
| |
• | At our option, in whole, or, from time to time, in part, out of funds legally available for such purpose, at any time, as follows: |
| |
| | 1. | from the date of issuance through March 31, 2011, at a price equal to 103% of the sum of the liquidation preference plus all accumulated and unpaid dividends, from and including the date of issuance; |
| | | |
| | 2. | from April 1, 2011 through March 31, 2012, at a price equal to 102% of the sum of the liquidation preference plus all accumulated and unpaid dividends, from and including the date of issuance; |
| | | |
| | 3. | from April 1, 2012 through March 31, 2013, at a price equal to 101% of the sum of the liquidation preference plus all accumulated and unpaid dividends, from and including the date of issuance; and |
| | | |
| | 4. | from April 1, 2013 and thereafter, at a price equal to 100% of the sum of the liquidation preference plus all accumulated and unpaid dividends, from and including the date of issuance. |
Liquidation Preference
The 12% Convertible Preferred shareholders will be entitled to receive, in the event that we are liquidated, dissolved or wound up, whether voluntary or involuntary, $100 per share of 12% Convertible Preferred Stock plus an amount per share equal to accumulated and unpaid dividends on the shares to the date fixed at liquidation, winding-up or dissolution, to be paid out of assets available for distribution to our shareholders, after satisfaction of liabilities owed to our creditors and distributions to holders of stock senior to the 12% Convertible Preferred Stock, and before any payment or distribution is made on any Junior Stock, including, without limitation, Common Stock.
Voting Rights
Except under specific circumstances as set forth in the Certificate of Designations or as otherwise from time to time required by applicable law, the 12% Convertible Preferred shareholders will have no voting rights and their consent will not be required for taking any corporate action.
Conversion
Each share of 12% Convertible Preferred Stock will be convertible, in whole or in part at the option of the holder thereof, at any time after the issuance, into shares of Common Stock at the conversion price of $1.74 per share of Common Stock (equivalent to a conversion rate of 57.47 shares of common stock for each share of 12% Convertible Preferred Stock).
Underwritten offering
On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock. The units were sold at a price of $2.05 per unit in an underwritten public offering for gross proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional gross proceeds of approximately $9.8 million. The net proceeds from the offering, including the over-allotment option, were approximately $71.3 million. The offering was made pursuant to our existing shelf-registration statement and base prospectus filed with the Securities and Exchange Commission. Each whole warrant will entitle the holder to purchase one share of our Common Stock, exercisable at a price of $2.50 per share for a period of 5 ½ years from the closing date of the sale. The warrant shares are not exercisable for the first six months from the closing date. $40 million of the total proceeds were used for the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009. The remaining proceeds are available for general working capital requirements.
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Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-K – December 31, 2008
Index to Exhibits
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2.1 | Stock Purchase Agreement, dated as of February 12, 2008, by and among Kennecott Minerals Holdings Company, Hecla Admiralty Company, and Hecla Mining Company. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on February 19, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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2.2 | Exploration, Development and Mining Operating Agreement, dated February 21, 2008, by and among Emerald Mining & Leasing, LLC, Golden 8 Mining, LLC, and Rio Grande Silver, Inc. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on February 26, 2008 (File No. 1-8491), and incorporated herein by reference.* |
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2.3 | First Amendment to that certain Exploration, Development and Mine Operating Agreement dated February 21, 2008, between Emerald Mining & Leasing, LLC, Golden 8 Mining, LLC, and Rio Grande Silver, Inc. by and among Emerald Mining & Leasing, LLC, EML, Emerald Ranch Limited Liability Company, Brian F. Egolf, Golden 8 Mining, LLC, and Rio Grande Silver, Inc. Filed as exhibit 2.2 to Registrant’s Current Report on Form 8-K filed on October 30, 2008 (Filed No. 1-8491), and incorporated herein by reference. |
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2.4 | Asset Purchase Agreement, dated as of February 13, 2008, by and among Hecla Mining Company, Hecla Merger Company and Independence Lead Mines Company. Filed as exhibit 2.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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2.5 | 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. |
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2.6 | 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. * |
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2.7 | 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 filed on July 3, 2008 (File No. 1-8491), and incorporated herein by reference. |
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3.1 | Certificate of Incorporation of the Registrant as amended to date. ** |
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3.2 | Bylaws of the Registrant as amended to date. Filed as exhibit 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. |
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4.1(a) | Form of Series 1 Common Stock Purchase Warrant. Filed as exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on December 11, 2008 (File No. 1-8491), and incorporated herein by reference. |
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4.1(b) | Form of Series 2 Common Stock Purchase Warrant. Filed as exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on December 11, 2008 (File No. 1-8491), and incorporated herein by reference. |
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4.1(c) | Form of Series 3 Common Stock Purchase Warrant. Filed as exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on February 9, 2009 (File No. 1-8491), and incorporated herein by reference. |
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4.2(a) | Certificate of Designations of 6.5% Mandatory Convertible Preferred Stock of the Registrant. Filed as part of Exhibit 3.1 hereto and incorporated herein by reference. |
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4.2(b) | Form of 6.5% Mandatory Convertible Preferred Stock Certificate. Filed as exhibit 4.1 to Registrant’s Current Report on Form 8-K filed December 14, 2007 (File No. 1-8491), and incorporated herein by reference. |
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4.2(c) | 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. |
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4.2(d) | Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as part of Exhibit 3.1 hereto and incorporated herein by reference. |
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4.2(e) | Certificate of Designations, Preferences and Rights of 12% Convertible Preferred Stock of the Registrant. Filed as part of Exhibit 3.1 hereto and incorporated herein by reference. |
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10.1 | Underwriting Agreement, dated September 8, 2008, between Hecla Mining Company and Merrill Lynch, Pierce, Fenner & Smith incorporated and Scotia Capital (USA) Inc., as representatives of the underwriters identified therein. Filed as exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on September 9, 2008 (File No. 1-8491), and incorporated herein by reference. |
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10.2 | Placement Agency Agreement, dated December 10, 2008, by and between Hecla Mining Company and Rodman & Renshaw, LLC. Filed as exhibit 1.1 to Registrant’s Current Report on Form 8-K filed on December 11, 2008 (File No. 1-8491), and incorporated herein by reference. |
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10.3 | Stock Purchase Agreement, dated as of February 12, 2008, by and among Kennecott Minerals Holdings Company, Hecla Admiralty Company, and Hecla Mining Company. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on February 16, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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10.4 | Asset Purchase Agreement, dated as of February 12, 2008, by and among Hecla Mining Company, Hecla Merger Company and Independence Lead Mines Company. Filed as exhibit 2.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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10.5 | Agreement to Amend the Asset Purchase Agreement, dated August 12, 2008, by and among Independence Lead Mines Company, Hecla Mining Company and Hecla Merger Company. 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. * |
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10.6 | Shareholder Agreement, dated as of February 12, 2008 by and among Hecla Merger Company and each of Bernard C. Lannen, Wayne L. Schoonmaker, Gordon Berkhaug, and Robert Bunde. Filed as Exhibit 3 to Independence Lead Mines Company’s Schedule 13D filed by Hecla Mining Company on February 22, 2008 (File No. 005-81828), and incorporated herein by reference. |
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10.7 | 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. * |
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10.8 | 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 filed on July 3, 2008 (File No. 1-8491), and incorporated herein by reference. |
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10.9(a) | Amended and Restated Bank Credit Agreement, dated as of 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 |
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| Registrant’s Current Report on Form 8-K filed on April 22, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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10.9(b) | Guaranty, dated as of April 16, 2008, by Hecla Mining Company. Filed as exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on April 22, 2008 (File No. 1-8491), and incorporated herein by reference. |
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10.9(c) | 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 filed on October 16, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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10.9(d) | Second Amendment to Amended and Restated Credit Agreement, dated December 9, 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 10.4 to Registrant’s Current Report on Form 8-K filed on December 11, 2008 (File No. 1-8491), and incorporated herein by reference. * |
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10.9(e) | Letter Agreement dated December 9, 2008, between Hecla Mining Company and The Bank of Nova Scotia, as the Administrative Agent for the Lenders. Filed as exhibit 10.5 to Registrant’s Current Report on Form 8-K filed on December 11, 2008 (File No. 1-8491), and incorporated herein by reference. |
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10.9(f) | Third Amendment to Amended and Restated Credit Agreement, dated December 30, 2008. Filed as exhibit 10.4 to Registrant’s Current Report on Form 8-K filed on January 2, 2009 (File No. 1-8491), and incorporated herein by reference. * |
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10.9(g) | Fourth Amendment to Amended and Restated Credit Agreement, dated February 3, 2009. Filed as exhibit 10.5 to Registrant’s Current Report on Form 8-K on February 3, 2009 (File No. 1-8491), and incorporated herein by reference. * |
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10.10 | Securities Purchase Agreement, dated as of December 10, 2008 between Hecla Mining Company and the purchasers identified on the signature pages thereto. Filed as exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 11, 2008 (File No. 1-8491), and incorporated herein by reference. |
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10.11 | Underwriting Agreement, dated February 4, 2009 between Hecla Mining Company and Cannacord Adams Inc. and Canaccord Capital. Filed as exhibit 1.1 to Registrant’s Current Report on Form 8-K filed on February 9, 2009 (File No. 1-8491), and incorporated herein by reference. |
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10.12 | Exploration, Development and Mining Operating Agreement, dated February 21, 2008, by and among Emerald Mining & Leasing, LLC, Golden 8 Mining, LLC, and Rio Grande Silver, Inc. Filed as exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on February 26, 2008 (File No. 1-8491), and incorporated herein by reference.* |
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10.13 | First Amendment to that certain Exploration, Development and Mine Operating Agreement dated February 21, 2008, between Emerald Mining & Leasing, LLC, Golden 8 Mining, LLC, and Rio Grande Silver, Inc. by and among Emerald Mining & Leasing, LLC, EML, Emerald Ranch Limited Liability Company, Brian F. Egolf, Golden 8 Mining, LLC, and Rio Grande Silver, Inc. Filed as exhibit 2.2 to Registrant’s Current Report on Form 8-K filed on October 30, 2008 (Filed No. 1-8491), and incorporated herein by reference. |
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10.14 | Employment Agreement dated June 1, 2007, between Registrant and Phillips S. Baker, Jr. (Registrant has substantially identical agreements with each of Messrs. Ronald W. Clayton, Philip C. Wolf, Lewis E. Walde, Michael H. Callahan, Dean W. McDonald, Don Poirier and Ms. Vicki Veltkamp). An identical Employment Agreement was entered into between the Registrant and Don Poirier on July 9, 2007, as well as with James A. Sabala on March 26, 2008. Filed as exhibit |
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| 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 1-8491), and incorporated herein by reference. (1) |
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10.15 | Form of Indemnification Agreement dated November 8, 2006, between Registrant and Phillips S. Baker, Jr., Philip C. Wolf, Ronald W. Clayton, Lewis E. Walde, Michael H. Callahan, Dean McDonald, Vicki Veltkamp, Ted Crumley, John H. Bowles, David J. Christensen, George R. Nethercutt, Jr., and Anthony P. Taylor. An identical Indemnification Agreement was entered into between the Registrant and Charles B. Stanley and Terry V. Rogers on May 4, 2007, Don Poirier on July 9, 2007, and James A. Sabala on March 26, 2008. Filed as exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-8491). (1) |
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10.16(a) | Hecla Mining Company Executive and Senior Management Long-Term Performance Payment Plan. (1) ** |
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10.16(b) | Hecla Mining Company Performance Pay Compensation Plan incorporated by reference herein to Exhibit 10.5(a) to Registrant’s Form 10-K for the year ended December 31, 2004. (1) |
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10.16(c) | Hecla Mining Company 1995 Stock Incentive Plan, as amended. Filed as exhibit 10.2(b) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-8491), and incorporated herein by reference. (1) |
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10.16(d) | Hecla Mining Company Stock Plan for Nonemployee Directors, as amended. Filed as exhibit 10.4(c) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 1-8491), and incorporated herein by reference. (1) |
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10.16(e) | Hecla Mining Company Key Employee Deferred Compensation Plan, as amended. (1) ** |
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10.16(f) | 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, as amended. Filed as exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 1-8491), and incorporated herein by reference. (1) |
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10.17(a) | Hecla Mining Company Retirement Plan for Employees and Supplemental Retirement and Death Benefit Plan. (1) ** |
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10.17(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 (File No. 1-8491), and incorporated herein by reference. (1) |
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10.17(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 (File No. 1-8491), and incorporated herein by reference. (1) |
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10.18 | 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 (File No. 1-8491), and incorporated herein by reference. |
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10.19 | Engagement letter between Hecla Mining Company and Alvarez & Marsal North America, LLC, dated December 29, 2008. (1)** |
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21. | List of subsidiaries of Registrant.** |
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23.1 | Consent of BDO Seidman, LLP.** |
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23.2 | Consent of AMEC E&C Services, Inc.** |
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31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
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31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
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32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
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32.2 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
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(1) | Indicates a management contract or compensatory plan or arrangement. |
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* | 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. |
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** | Filed herewith. |
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