1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 1-8491
--------------------------------------------------------
HECLA MINING COMPANY
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0126240
- --------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83815-8788
- -------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
208-769-4100
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding April 28, 2000
- -------------------------- --------------------------
Common stock, par value 66,782,464 shares
$0.25 per share
2
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended March 31, 2000
I N D E X*
Page
PART I. - Financial Information
Item l - Consolidated Balance Sheets - March 31,
2000 and December 31, 1999 3
- Consolidated Statements of Operations and
Comprehensive Loss - Three Months
Ended March 31, 2000 and 1999 4
- Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. - Other Information
Item 1 - Legal Proceedings 26
Item 6 - Exhibits and Reports on Form 8-K 29
*Items omitted are not applicable.
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[CAPTION]
Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
March 31, December 31,
2000 1999
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,951 $ 2,719
Restricted investments 9,941 - -
Accounts and notes receivable 31,168 29,202
Inventories 19,483 24,033
Other current assets 4,203 2,548
--------- ---------
Total current assets 74,746 58,502
Investments 2,419 2,130
Restricted investments 6,040 5,998
Properties, plants and equipment, net 186,438 191,026
Other noncurrent assets 10,975 10,701
--------- ---------
Total assets $ 280,618 $ 268,357
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 14,092 $ 12,135
Accrued payroll and related benefits 4,528 4,394
Preferred stock dividends payable 2,012 2,012
Current portion of long-term debt 10,582 782
Accrued taxes 2,334 2,369
Accrued reclamation and closure costs 8,346 8,384
--------- ---------
Total current liabilities 41,894 30,076
Deferred income taxes 300 300
Long-term debt 65,284 55,095
Accrued reclamation and closure costs 40,191 40,941
Other noncurrent liabilities 9,287 9,244
--------- ---------
Total liabilities 156,956 135,656
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued
and outstanding - 2,300,000 shares, liquidation preference $117,012 575 575
Common stock, $0.25 par value, authorized 100,000,000 shares;
issued 2000 and 1999 - 66,844,575 16,711 16,711
Capital surplus 400,205 400,205
Accumulated deficit (287,865) (278,533)
Accumulated other comprehensive loss (4,578) (4,871)
Less stock held by grantor trust; 2000 and 1999 - 132,290 common shares (500) (500)
Less treasury stock, at cost; 2000 and 1999 - 62,111 common shares (886) (886)
--------- ---------
Total shareholders' equity 123,662 132,701
--------- ---------
Total liabilities and shareholders' equity $ 280,618 $ 268,357
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended
-------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
Sales of products $ 38,883 $ 41,658
--------- ---------
Cost of sales and other direct production costs 32,819 31,346
Depreciation, depletion and amortization 5,820 6,052
--------- ---------
38,639 37,398
--------- ---------
Gross profit 244 4,260
--------- ---------
Other operating expenses:
General and administrative 1,952 2,011
Exploration 1,722 1,162
Depreciation and amortization 73 92
Provision for closed operations and environmental matters 866 267
--------- ---------
4,613 3,532
--------- ---------
Income (loss) from operations (4,369) 728
--------- ---------
Other income (expense):
Interest and other income 624 696
Miscellaneous expense (1,184) (549)
Interest expense (1,668) (924)
--------- ---------
(2,228) (777)
--------- ---------
Loss before income taxes, extraordinary item and cumulative
effect of change in accounting principle (6,597) (49)
Income tax provision (76) (65)
--------- ---------
Loss before extraordinary item and cumulative effect of change
in accounting principle (6,673) (114)
Extraordinary item, net of tax (647) --
Cumulative effect of change in accounting principle, net of tax - - (1,385)
--------- ---------
Net loss (7,320) (1,499)
Preferred stock dividends (2,012) (2,012)
--------- ---------
Loss applicable to common shareholders (9,332) (3,511)
--------- ---------
Other comprehensive income, net of tax:
Unrealized holding gains on securities 293 17
--------- ---------
Other comprehensive income 293 17
--------- ---------
Comprehensive loss applicable to common shareholders $ (9,039) $ (3,494)
========= =========
Basic and diluted loss per common share before extraordinary
item and cumulative effect of change in accounting principle $ (0.13) $ (0.04)
Extraordinary item (0.01) - -
Cumulative effect of change in accounting principle - - (0.02)
--------- ---------
Basic and diluted loss per common share $ (0.14) $ (0.06)
========= =========
Weighted average number of common shares outstanding 66,782 55,201
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three Months Ended
-------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
Operating activities:
Net loss $ (7,320) $ (1,499)
Noncash elements included in net loss:
Depreciation, depletion and amortization 5,893 6,144
Cumulative effect of change in accounting principle - - 1,385
Extraordinary item 647 - -
Loss on sale of MWP division of MWCA 778 - -
Gain on disposition of properties, plants and equipment (148) (87)
Provision for reclamation and closure costs 277 168
Change in:
Accounts and notes receivable (1,972) (8,238)
Income tax refund receivable - - 1,068
Inventories (2,229) 1,072
Other current and noncurrent assets (1,094) 166
Accounts payable and accrued expenses 1,341 833
Accrued payroll and related benefits 134 381
Accrued taxes (35) 227
Accrued reclamation and closure costs and other
noncurrent liabilities (1,116) (998)
--------- ---------
Net cash provided (used) by operating activities (4,844) 622
--------- ---------
Investing activities:
Proceeds from sale of MWP division of MWCA 8,728 - -
Additions to properties, plants and equipment (3,418) (2,158)
Proceeds from disposition of properties, plants and equipment 614 203
Decrease (increase) in restricted investments (9,983) 4
Purchase of investments and change in cash surrender value
of life insurance, net 4 45
Other, net (35) (85)
--------- ---------
Net cash used by investing activities (4,090) (1,991)
--------- ---------
Financing activities:
Issuance of common stock, net of offering costs - - 450
Dividends on preferred stock (2,012) (2,012)
Payments for debt issuance costs (1,811) - -
Borrowings against cash surrender value of life insurance - - 925
Borrowings on long-term debt 76,500 8,500
Repayments on long-term debt (56,511) (5,504)
--------- ---------
Net cash provided by financing activities 16,166 2,359
--------- ---------
Change in cash and cash equivalents:
Net increase in cash and cash equivalents 7,232 990
Cash and cash equivalents at beginning of period 2,719 2,480
--------- ---------
Cash and cash equivalents at end of period $ 9,951 $ 3,470
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
Note 1.
The notes to the consolidated financial statements as of December 31, 1999,
as set forth in Hecla Mining Company's (Hecla) 1999 Annual Report on Form 10-K,
substantially apply to these interim consolidated financial statements and are
not repeated here. For additional information, please refer to such notes.
Note 2.
The financial information given in the accompanying unaudited interim
consolidated financial statements reflects all adjustments which, in the opinion
of management, are necessary to a fair statement of the results for the interim
periods reported. All such adjustments are of a normal recurring nature with
the exception of an adjustment recognized in 2000 for the early extinguishment
of debt as described in Note 7 and an adjustment recognized in 1999 for the
cumulative effect of a change in accounting principle. All financial statements
presented are unaudited. However, the balance sheet as of December 31, 1999, was
derived from the audited consolidated balance sheet referenced in Note 1 above.
Certain consolidated financial statement amounts have been reclassified to
conform to the 2000 presentation. These reclassifications had no effect on the
net loss or accumulated deficit as previously reported.
Note 3.
On March 15, 2000, Hecla completed the sale of its MWCA - Mountain West
Products (MWP) division for $8.7 million in cash. The sale of MWP resulted in a
loss on disposal of $0.8 million. The proceeds from the sale were used to pay
down amounts outstanding under Hecla's previously existing revolving credit
facility. Hecla has received letters of intent to purchase the assets of the
Colorado Aggregate division of MWCA and expects the sales transactions to close
later in 2000, although there can be no assurance that the sales transactions
will be completed.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 4.
The components of the income tax provision for the three months ended
March 31, 2000 and 1999 were as follows (in thousands):
2000 1999
------ ------
Current:
State income taxes $ 67 $ 68
Federal income taxes - - (7)
Foreign income taxes 9 4
------ ------
Total $ 76 $ 65
====== ======
Hecla's income tax provision for the first three months of 2000 and 1999
varies from the amount that would have been provided by applying the statutory
rate to the loss before income taxes primarily due to the inability to use tax
losses in 2000 and 1999.
Note 5.
Inventories consist of the following (in thousands):
March 31, Dec. 31,
2000 1999
-------- --------
Concentrates, bullion, metals
in transit and other products $ 6,204 $ 3,947
Industrial mineral products 4,666 9,275
Materials and supplies 8,613 10,811
-------- --------
$ 19,483 $ 24,033
======== ========
At March 31, 2000, Hecla had forward sales commitments through December 31,
2004 for 280,903 ounces of gold at an average price of $287.95 per ounce and
forward sales commitments through December 29, 2000 for 300,000 ounces of silver
at an average price of $5.51 per ounce. Also at March 31, 2000, Hecla had swap
contracts through June 2000 for 1,500 metric tons of lead at an average price of
$0.245 per pound and 4,500 metric tons of zinc at an average price of $0.513 per
pound through December 2000. All of the aforementioned contracts were
designated as hedges at March 31, 2000. Hecla is exposed to certain losses,
generally the amount by which the contract price exceeds the spot price of a
commodity, in the event of nonperformance by the counterparties to these
agreements. The
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
London Final gold price at March 31, 2000 was $276.75 per ounce. The Handy &
Harman silver price at March 31, 2000 was $5.03 per ounce. At March 31, 2000,
the LME cash lead price was $0.197 per pound and the LME cash zinc price was
$0.494 per pound.
Note 6. Contingencies
- - Bunker Hill Superfund Site
In 1994, Hecla, as a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA),
entered into a consent decree with the Environmental Protection Agency (EPA) and
the state of Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located at Kellogg, Idaho. The consent decree
settled Hecla's response-cost liability under CERCLA at the Bunker Hill site.
As of March 31, 2000, Hecla has estimated and accrued an allowance for liability
for remedial activity costs at the Bunker Hill site of $7.4 million. These
estimated expenditures are anticipated to be made over the next three to five
years. Although Hecla believes the allowance is adequate based upon current
estimates of aggregate costs, Hecla will reassess its obligations under the
consent decree as new information is developed. Depending on the results of any
reassessment, it is reasonably possible that Hecla's estimate of its obligations
may change in the near term.
- - Coeur d'Alene River Basin Natural Resource Damage Claims
- Coeur d'Alene Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against Hecla 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. Hecla answered the Tribe's complaint denying liability for natural
resource damages. In October 1996, following a court imposed four-year
suspension of the proceeding, the Tribe's natural resource damage litigation was
consolidated with the United States Natural Resources Damage litigation
described below for discovery and other limited pretrial purposes.
- U.S. Government Claims
In March 1996, the United States filed a lawsuit in Idaho Federal District
Court against certain mining companies that conducted historic mining operations
in the Silver Valley of northern Idaho, including Hecla. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks recovery for
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
alleged damages to or loss of natural resources located in the Coeur d'Alene
River Basin in northern Idaho for which the United States asserts to be the
trustee under CERCLA. The lawsuit asserts 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 Hecla
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.
Hecla answered the complaint in May 1996, denying liability to the United States
under CERCLA and the Clean Water Act and asserted a counterclaim against the
United States for the federal government's involvement in mining activities in
the Basin which contributed to the releases and damages alleged by the United
States. Hecla believes it also has 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, in support of its response cost claims asserted in its March
1996 lawsuit.
On September 30, 1998, the Federal District Court granted Hecla's summary
judgment motion with respect to the applicable statute of limitations and
dismissed the United States' natural resources damage claims due to the failure
of the EPA to comply with federal law and EPA regulations in expanding the
national priority list site boundaries to include the entire Coeur d'Alene
River/Lake Coeur d'Alene Basin which would have the effect of extending the
statute of limitations. The United States has appealed the Federal District
Court's decision to the Ninth Circuit Court of Appeals. On March 31, 1999, the
court issued a case management order setting trial in this case for November
2000. On September 30, 1999, the court issued an order on one of the
defendant's challenges to the constitutionality of the retroactive application
of liability under CERCLA. Although the court held that the statute did not
facially violate the due process or taking clauses of the U.S. Constitution, the
court also stated that the constitutionality of retroactive application of
liability to the defendants in this case cannot be resolved at this stage of
litigation as genuine issues of material fact exist and liability has not been
established.
The Federal District Court case is proceeding through discovery. A number
of Summary Judgement motions filed by both the plaintiffs and the defendants are
currently pending before the court.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- - Insurance Coverage Litigation
In 1991, Hecla initiated litigation in the Idaho State District Court in
Kootenai County, Idaho, against a number of insurance companies which provided
comprehensive general liability insurance coverage to Hecla and its
predecessors. Hecla believes that the insurance companies have a duty to defend
and indemnify Hecla under their policies of insurance for all liabilities and
claims asserted against Hecla by the EPA and the tribe under CERCLA related to
the Bunker Hill site and the Basin in northern Idaho. In 1992, the Idaho State
District Court ruled that the primary insurance companies had a duty to defend
Hecla in the Tribe's lawsuit. During 1995 and 1996, Hecla entered into
settlement agreements with a number of the insurance carriers named in the
litigation. Hecla has received a total of approximately $7.2 million under the
terms of the settlement agreements. Thirty percent of these settlements were
paid to the EPA to reimburse the U.S. government for past costs under the Bunker
Hill site consent decree. Litigation is still pending against one insurer with
trial suspended until the underlying environmental claims against Hecla are
resolved or settled. The remaining insurer in the litigation with a second
insurer not named in the litigation are providing Hecla with a partial defense
in all Basin environmental litigation. As of March 31, 2000, Hecla had not
reduced its accrual for reclamation and closure costs to reflect the receipt of
any anticipated insurance proceeds.
- - Other Claims
In 1997, Hecla's subsidiary, Kentucky-Tennessee Clay, terminated shipments
of 1% of annual ball clay production, sold to animal feed producers, when the
Food and Drug Administration determined trace elements of dioxin were present in
poultry. Dioxin is inherently present in ball clays generally. Hecla believes
$11.0 million of insurance coverage is available for approximately $9.2 million
in claims to date. On September 22, 1999, Riceland Foods (the primary purchaser
of ball clay from K-T Clay used in animal feed) commenced litigation against K-T
Clay in State Court in Arkansas to recover their losses and their insurance
company's payments to downstream users of their animal feed. The complaint
alleges negligence, strict liability and breach of implied warranties. Legal
counsel retained by the insurance company for K-T Clay has had the case removed
to Federal Court in Arkansas and has answered the complaint denying liability.
Although the outcome of the litigation or insurance coverage cannot be assured,
Hecla currently believes that there will be no material adverse effect on
Hecla's results of operations, financial condition or cash flows from this
matter.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Hecla is subject to other legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, it is the opinion of Hecla's
management that the outcome of these matters will not have a material adverse
effect on the financial condition of Hecla. However, it is possible that these
matters could have a material effect on quarterly or annual operating results
and cash flows, when they are resolved, in future periods.
Note 7.
On March 31, 2000, Hecla entered into a new $55.0 million term loan
facility due on April 10, 2001. Proceeds from the term loan facility were
utilized to repay amounts outstanding under the previous bank credit agreement,
to fund a restricted account to repay revenue bonds, to repay the subordinated
debt, and to fund general corporate purposes. As security for the loan, Hecla
pledged the common stock of certain of Hecla's subsidiaries and certain other
assets. Interest rates are to be based on LIBOR plus 2.25%. At March 31, 2000,
$55.0 million was outstanding under the new term loan facility and classified as
long-term debt.
As part of the refinancing, $9.9 million of the proceeds from the new term
loan credit facility were placed into a restricted investment account to repay
the $9.8 million in outstanding revenue bonds. On May 1, 2000, the revenue
bonds were repaid. At March 31, 2000, the $9.8 million in outstanding revenue
bonds were classified as current portion of long-term debt.
At March 31, 2000, Hecla's wholly owned subsidiary, HRIL, had $11.0 million
outstanding under a credit agreement utilized to finance the acquisition of the
La Camorra gold mine in Venezuela. At March 31, 2000, HRIL was in compliance
with restrictive covenants related to the available ore reserves and financial
performance of the La Camorra mine. At March 31, 2000, $10.25 million of the
project financing debt was classified as long-term debt, with the remaining
$0.75 million classified as current portion of long-term debt.
In connection with refinancing the previously existing debt, Hecla recorded
a $0.6 million extraordinary charge in the first quarter of 2000 to write-off
capitalized issuance costs associated with the extinguished debt. Due to the
availability of net operating losses, there was no tax effect associated with
the charge.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 8.
The following table presents a reconciliation of the numerators (net loss)
and denominators (shares) used in the basic and diluted loss per common share
computations. Also shown is the effect that has been given to preferred stock
dividends in arriving at loss applicable to common shareholders for the three
months ended March 31, 2000 and 1999 in computing basic and diluted loss per
common share (dollars and shares in thousands, except per-share amounts).
Three Months Ended March 31,
---------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
Net Per-Share Net Per-Share
Loss Shares Amount Loss Shares Amount
-------- ------ --------- -------- ------- ---------
Net loss before preferred stock
dividends $ (7,320) $ (1,499)
Less: Preferred
stock dividends (2,012) (2,012)
-------- --------
Basic loss applicable to
common shareholders (9,332) 66,782 $ (0.14) (3,511) 55,201 $ (0.06)
Effect of dilutive
securities - - - - - - - - - - - -
-------- ------ ------- -------- ------ -------
Diluted loss applicable
to common shareholders $ (9,332) 66,782 $ (0.14) $ (3,511) 55,201 $ (0.06)
======== ====== ======= ======== ====== =======
These calculations of diluted earnings per share for the three months ended
March 31, 2000 and 1999 exclude the effects of $115,000,000 of convertible
preferred stock as such conversion would be antidilutive. Also excluded from
these calculations are the effects of common stock issuable upon exercise of
stock options as of March 31, 2000 and 1999, as their exercise would be
antidilutive, as follows:
Three Months Ended
-----------------------
March 31,
2000 1999
---------- ----------
2,124,000 1,653,000
The calculations of diluted earnings per share for the three months ended
March 31, 2000, also exclude 1,506,998 warrants to purchase common stock, as
their exercise would be antidilutive.
Note 9.
Hecla is organized and managed primarily on the basis of the principal
products being produced from its ten operating units.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three of the operating units have been aggregated into the Metals-Gold segment,
two of the operating units have been aggregated into the Metals-Silver segment,
and six operating units have been combined to form the Industrial Minerals
segment. On March 15, 2000, Hecla sold the MWCA - Mountain West Products
division. Following the sale, the Industrial Minerals segment consists of five
operating units. General corporate activities not associated with operating
units as well as idle properties are presented as Other.
The following tables present information about reportable segments for the
three months ended March 31 (in thousands):
2000 1999
--------- ---------
Net sales to unaffiliated customers:
Metals-Gold $ 6,329 $ 6,391
Metals-Silver 11,299 12,569
Industrial Minerals 21,255 22,698
--------- ---------
$ 38,883 $ 41,658
========= =========
2000 1999
--------- ---------
Income (loss) from operations:
Metals-Gold $ (2,307) $ (412)
Metals-Silver (457) 875
Industrial Minerals 1,286 2,635
Other (2,891) (2,370)
--------- ---------
$ (4,369) $ 728
========= =========
The following table presents identifiable assets by reportable segment as
of March 31, 2000, and December 31, 1999 (in thousands):
March 31, December 31,
2000 1999
--------- ------------
Identifiable assets:
Metals-Gold $ 55,437 $ 56,018
Metals-Silver 118,188 121,814
Industrial Minerals 62,856 65,580
Other 44,137 24,945
-------- --------
$280,618 $268,357
======== ========
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 10.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" was issued. SFAS 137 defers the effective date of
SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000; however, earlier application is encouraged as of the beginning of any
fiscal quarter. Hecla is presently evaluating the effect the adoption of this
standard will have on Hecla's financial condition, results of operations, and
cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Introduction
Hecla Mining Company is involved in the exploration, development, mining
and processing of gold, silver, lead, zinc and industrial minerals. Hecla's gold
and silver segment revenues and profitability are strongly influenced by world
prices of gold, silver, lead and zinc, which fluctuate widely and are affected
by numerous factors beyond Hecla's control, including inflation and worldwide
forces of supply and demand for precious and base metals. The aggregate effect
of these factors is not possible to accurately predict. In the current metals
price environment, Hecla's industrial minerals segment has been a significant
contributor to overall revenues, including 55% of total revenue during the first
quarter of 2000. In the following descriptions, where there are changes that
are attributable to more than one factor, Hecla presents each attribute in
descending order relative to the attribute's importance to the overall change.
Except for the historical information contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
matters discussed below are forward-looking statements that involve risks and
uncertainties, including:
- the timely development of existing properties and reserves and future
projects,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- the impact of metal prices and metal production volatility,
- changing market conditions and the regulatory environment,
- ability to repay indebtedness, and
- the other risks detailed from time to time in Hecla's Form 10-K and
Form 10-Qs filed with the Securities and Exchange Commission (see also
"Investment Considerations" of Part I, Item 1 of Hecla's 1999 Annual
Report on Form 10-K).
As a result of the above factors and potentially others, actual results may
differ materially from those projected, forecasted or implied. These forward-
looking statements represent Hecla's judgment as of the date of this filing.
Hecla disclaims, however, any intent or obligation to update these forward-
looking statements as circumstances may change or develop.
During the first quarter of 2000, Hecla produced approximately 32,000
ounces of gold compared to approximately 29,000 ounces in the first quarter of
1999. The following table displays the actual gold production (in ounces) by
operation for the three months ended March 31, 2000 and 1999, projected gold
production for the year ending December 31, 2000, and actual gold production for
the year ended December 31, 1999:
Actual Actual Projected Actual
March 31, March 31, Dec. 31, Dec. 31,
Operation 2000 1999 2000 1999
- --------- --------- --------- --------------- --------
La Camorra(1) 19,000 - - 75,000-81,000 17,000
Greens Creek 6,000 7,000 20,000-22,000 24,000
Rosebud 6,000 16,000 18,000-25,000 56,000
Other(2) 1,000 6,000 2,000 13,000
-------- -------- --------------- --------
Totals 32,000 29,000 115,000-130,000 110,000
======== ======== =============== ========
(1) Production commenced under Hecla's ownership in October 1999 at
the La Camorra mine.
(2) Includes production from the La Choya mine, which completed
mining in December 1998, and other sources.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
In the first quarter of 2000, Hecla produced approximately 2.2 million
ounces of silver compared to approximately 1.8 million ounces in the first
quarter of 1999. The following table displays the actual silver production (in
ounces) by operation for the three months ended March 31, 2000 and 1999,
projected silver production for the year ending December 31, 2000, and actual
silver production for the year ended December 31, 1999 (in thousands):
Actual Actual Projected Actual
March 31, March 31, Dec. 31, Dec. 31,
Operation 2000 1999 2000 1999
- --------- -------- -------- ------------- --------
Lucky Friday 1,455 1,021 5,200-5,450 4,441
Greens Creek 743 699 2,950-3,090 3,051
Rosebud 22 53 50-60 124
Other sources - - 1 - - 1
-------- -------- ----------- --------
Totals 2,220 1,774 8,200-8,600 7,617
======== ======== ============= ========
In 1999, Hecla shipped approximately 1,072,000 tons of product, which
included ball clay, kaolin and feldspar, from the Kentucky-Tennessee Clay group.
Hecla's shipments of industrial minerals from the Kentucky-Tennessee Clay group
are expected to increase to approximately 1,091,000 tons in 2000. During the
first quarter of 2000, Hecla shipped approximately 21,000 tons of specialty
aggregates from the Colorado Aggregate division of Hecla's subsidiary MWCA, and
approximately 130,000 cubic yards of landscape material from the Mountain West
Products (MWP) division of MWCA. On March 15, 2000, Hecla sold substantially
all of the assets of its MWP division of MWCA for $8.7 million in cash. The
sale of MWP resulted in a loss on disposal of $0.8 million. The proceeds from
the sales transaction were used to pay down amounts outstanding under Hecla's
previously existing revolving credit facility. Hecla has received letters of
intent to purchase the assets of the Colorado Aggregate division of MWCA and
expects the sales transactions to close later in 2000, although there can be no
assurance that the sales transactions will be completed.
Results of Operations
Hecla recorded a net loss, before an extraordinary charge and preferred
stock dividend, of approximately $6.7 million, or $0.10 per common share, in the
first quarter of 2000 compared to a net loss of approximately $0.1 million,
before a cumulative effect of change in accounting principle and preferred stock
dividend, or nil per common share, in the first quarter of 1999. After
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
recognizing a $0.6 million extraordinary charge for the write-off of debt
issuance costs related to extinguished debt, and after $2.0 million in dividends
to holders of the Hecla's Series B Cumulative Convertible Preferred Stock,
Hecla's loss applicable to common shareholders for the first quarter of 2000 was
approximately $9.3 million, or $0.14 per common share, compared to a loss of
$3.5 million, or $0.06 per common share, after recognizing a $1.4 million charge
to write off unamortized start-up costs associated with the Greens Creek mine,
in the first quarter of 1999. The increased loss in 2000 compared to the same
period in 1999 was attributable to a variety of factors, the most significant
which are discussed below.
Sales of products decreased by approximately $2.8 million, or 7%, in the
first quarter of 2000 compared to the first quarter of 1999 primarily due to:
- decreased sales totaling $1.4 million from Hecla's industrial minerals
segment principally due to decreased shipments at the MWCA group of $2.2
million due to the sale of the MWCA - Mountain West Products division
completed on March 15, 2000 and lower sales from the Colorado Aggregate
division of MWCA, partly offset by an increase in sales at the K-T Clay
group of $0.8 million,
- decreased sales totaling $1.3 million from silver operations primarily
resulting from the timing of concentrate shipments at the Greens Creek
mine and reduced income from hedging activities in the 2000 period, and
- decreased sales totaling $0.1 million from gold operations, including
$2.8 million at the Rosebud mine due to lower gold production and at the
La Choya mine of $1.6 million due to lower gold recovery from residual
leaching. These were partly offset by sales of $4.3 million from the La
Camorra mine which was acquired in June 1999.
The following table compares the average metal prices for the first quarter of
2000 with the comparable 1999 period:
Metal 2000 1999 $ Change % Change
------------------ ------- ------- -------- --------
Gold-Realized ($/oz.) $ 290 $ 299 $ (9) (3)%
Gold-London Final ($/oz.) 290 287 3 1
Silver-Handy & Harman ($/oz.) 5.21 5.30 (0.09) (2)
Lead-LME Cash ($/pound) 0.206 0.229 (0.023) (10)
Zinc-LME Cash ($/pound) 0.512 0.450 0.062 14
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Cost of sales and other direct production costs increased approximately
$1.5 million, or 5%, in the first quarter of 2000 compared to the first quarter
of 1999 primarily due to:
- increased cost of sales from the La Camorra mine ($2.7 million) as a
result of Hecla's purchase of La Camorra in June 1999,
- increased cost of sales at the K-T Clay group ($1.0 million)
principally associated with increased sales,
- decreased cost of sales at the La Choya mine ($1.0 million) associated
with lower gold production and completion of mining in 1998,
- decreased cost of sales at the MWCA group ($0.9 million) due to the
sale of the Mountain West Products division and lower sales at the
Colorado Aggregate division, and
- decreased cost of sales at the Lucky Friday mine ($0.3 million)
primarily gained by improved economies of scale provided by the Lucky
Friday expansion area developed in 1998 and 1999.
Cost of sales and other direct production costs as a percentage of sales
from products increased to 84.4% in the first quarter of 2000 from 75.2% in the
first quarter of 1999. The change was due to decreased margins from the gold
segment resulting from decreased production and sales at the Rosebud and La
Choya mines, decreased margins from the Industrial Minerals segment due to lower
sales at MWCA and lower margins from the silver segment due to lower silver and
lead prices.
Depreciation, depletion, and amortization decreased $0.2 million, or 4%, in
the first quarter of 2000 from the first quarter of 1999 principally due to:
- decreased depreciation at the Rosebud mine ($0.6 million) as a result
of lower gold production in the first quarter of 2000,
- decreased depreciation at the La Choya mine ($0.5 million), due
to decreased gold production in 2000, and
- increased depreciation from the La Camorra mine ($1.0 million) as a
result of Hecla's purchase of La Camorra in June 1999.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Exploration expense increased $0.6 million, or 48%, in the first quarter of
2000, compared to the first quarter of 1999, principally due to increased
expenditures in Mexico ($0.5 million), primarily at the Saladillo property, and
at the Rosebud mine ($0.5 million). These increases were partly offset by
decreased expenditures at other South American targets ($0.4 million).
Hecla's provision for closed operations and environmental matters increased
$0.6 million in the first quarter of 2000, compared to the first quarter of
1999, principally for expenditures associated with the Grouse Creek mine.
Miscellaneous expense increased $0.6 million in the first quarter of 2000,
compared to the first quarter of 1999, primarily as a result of recognizing a
loss ($0.8 million) on the sale of the MWP division of MWCA.
Interest expense increased $0.7 million in the first quarter of 2000
compared to the first quarter of 1999. The increase was principally the result
of interest and fees associated with project financing and debt utilized for the
acquisition of MRIL ($0.4 million) combined with increased interest and expense
on the revolving credit facility ($0.3 million).
An extraordinary charge of $0.6 million was recorded in 2000 to write off
previously unamortized debt issuance costs associated with the extinguishment of
debt.
The cumulative effect of change in accounting principle, totaled $1.4
million in 1999 due to the write off of unamortized start-up costs relating to
Hecla's 29.73% ownership interest in the Greens Creek mine. The adjustment was
the result of the required application of Statement of Position No. 98-5,
"Reporting on the Costs of Start-up Activities."
Cash operating, total cash, and production cost per gold ounce increased to
$246, $249 and $328, respectively, in the first quarter of 2000 from $156, $169
and $269 in the first quarter of 1999, respectively. The increases in costs per
gold ounce were primarily attributable to higher costs per ounce at the Rosebud
mine associated with mining of lower grade ore in 2000.
Cash operating, total cash, and total production cost per silver ounce
decreased to $3.68, $3.69 and $5.02, respectively, in the first quarter of 2000
from $3.70, $3.70, and $5.27 in the first quarter of 2000, respectively. The
decreases in the costs per silver ounce were due primarily to the positive
impacts of
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Lucky Friday's increased silver production resulting from increased tons mined
and a 16% higher silver grade.
Financial Condition and Liquidity
A substantial portion of Hecla's revenue is derived from the sale of
products, the prices of which are affected by numerous factors beyond Hecla's
control. Prices may change dramatically in short periods of time and such
changes have a significant effect on revenues, profits and liquidity of Hecla.
Hecla is subject to many of the same inflationary pressures as the U.S. economy
in general. Hecla continues to seek and implement cost-cutting measures in an
effort to reduce per unit production costs. Management believes, however, that
Hecla may not be able to continue to offset the impact of inflation over the
long term through cost reductions alone. However, the market prices for
products produced by Hecla have a much greater impact than inflation on Hecla's
revenues and profitability. Moreover, the discovery, development and
acquisition of mineral properties are in many instances unpredictable events.
Future metals prices, the success of exploration programs, changes in legal and
regulatory requirements, and other property transactions can have a significant
impact on the need for capital.
At March 31, 2000, assets totaled approximately $281 million and
shareholders' equity totaled approximately $124 million. Cash and cash
equivalents increased by $7.2 million to $9.9 million at March 31, 2000 from
$2.7 million at December 31, 1999.
During the first quarter of 2000, approximately $16.2 million of cash was
provided by financing activities. The major source of cash was borrowings of
long-term debt of $76.5 million. This source was partly offset by repayments of
long-term debt of $56.5 million, payment of preferred stock dividends of $2.0
million and payments for debt issuance costs of $1.8 million.
Operating activities used approximately $4.8 million of cash during the
first quarter of 2000. Significant uses of cash included (1) increases in
inventories of $2.2 million primarily due to increases at La Camorra and Lucky
Friday; (2) increases in accounts and notes receivable of $2.0 million
principally due to seasonal increases at MWCA and increased sales at the K-T
Clay group; (3) cash required for reclamation activities and other noncurrent
liabilities of $1.1 million; and (4) increased other current and noncurrent
assets of $1.1 million. These uses of cash were partly offset by increased
accounts payable and accrued expenses of $1.3 million. Principal noncash
charges included depreciation, depletion and amortization of $5.9 million, an
$0.8 million loss on the sale of MWP, and an extraordinary charge of $0.6
million for the write off of debt issuance costs related to extinguished debt.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Hecla's investing activities used $4.1 million of cash during the first
quarter of 2000. The most significant uses of cash were for restricted
investments of $10.0 million, utilized to repay revenue bonds on May 1, 2000,
and additions to properties, plants, and equipment totaling $3.4 million,
including significant additions at the industrial minerals segment, principally
for the Mexican plant expansion project, of $1.6 million, the Greens Creek mine
of $0.9 million, and at the La Camorra of $0.8 million. These uses of cash were
partly offset by proceeds of $8.7 million from the sale of the MWP division of
MWCA.
Hecla estimates that capital expenditures to be incurred during the
remainder of 2000 will be approximately $13.1 million. These capital
expenditures consist primarily of:
Property Expenditure
---------------------------- ------------
Greens Creek (29.73% interest) $5.5 million
Industrial minerals segment $3.2 million
La Camorra $2.4 million
Lucky Friday $2.0 million
These planned capital expenditures will depend, in large part, on Hecla's
ability to obtain the required funds from operating activities, potential asset
sales, and the possible issuance of additional equity. There can be no
assurance that actual capital expenditures will be as projected based upon the
uncertainties associated with the estimates for capital projects, uncertainties
associated with possible development projects, and Hecla' ability to generate
adequate funding for the projected capital expenditures.
Hecla's estimate of its capital expenditure requirements assumes, with
respect to the Greens Creek and Rosebud properties, that Hecla's joint venture
partners will not default with respect to their portion of development costs and
capital expenditures.
On March 31, 2000, Hecla entered into a new $55.0 million term loan
facility due on April 10, 2001. Proceeds from the term loan facility were
utilized to repay amounts outstanding under the previous bank credit agreement,
to fund a restricted account to repay revenue bonds, to repay the subordinated
debt, and to fund general corporate purposes. As security for the loan, Hecla
pledged the common stock of certain of Hecla's subsidiaries and certain other
assets. Interest rates are to be based on LIBOR plus a margin of 2.25%. At
March 31, 2000, $55.0 million was outstanding under the new term loan facility
and classified as long-term debt.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As part of the refinancing, $9.9 million of the proceeds from the new term
loan credit facility were placed into a restricted investment account to repay
the $9.8 million in outstanding revenue bonds. On May 1, 2000, the revenue
bonds were repaid. At March 31, 2000, the $9.8 million in outstanding revenue
bonds were classified as current portion of long-term debt.
Hecla is considering alternatives available to it to repay or restructure
the $55.0 million in indebtedness due in April, 2001, including refinancings,
public offerings of equity and/or debt securities and possible asset sales.
There can be no assurance that Hecla will be successful in refinancing the debt,
issuing equity, or selling assets.
At March 31, 2000, Hecla's wholly owned subsidiary, HRIL, had $11.0 million
outstanding under a credit agreement utilized to finance the acquisition of the
La Camorra gold mine in Venezuela. At March 31, 2000, HRIL was in compliance
with restrictive covenants related to the available ore reserves and financial
performance of the La Camorra mine. At March 31, 2000, $10.25 million of the
project financing debt was classified as long-term debt, with the remaining
$0.75 million classified as current portion of long-term debt.
As of March 31, 2000, Hecla's unrestricted cash balance totaled $9.95
million. Based upon Hecla's estimate of metals prices and metals production for
the rest of 2000, Hecla believes that its operating cash flows and current
unrestricted cash balance will be adequate to fund its anticipated cash
requirements for the year 2000, including anticipated capital expenditures, idle
property expenditures, and exploration expenditures. Hecla continues to
evaluate and implement cost cutting measures to reduce operating cash costs, as
well as continuing to pursue the sale of the MWCA - Colorado Aggregate Division,
considering other asset sales, and pursuing equity offerings in order to provide
funds for possible expansion projects, acquisition, or other cash requirements.
Hecla has entered into letters of intent to sell the operating assets of
its MWCA - Colorado Aggregate Division and expects to close on the transactions
during the second quarter of 2000, although there can be no assurance that Hecla
will be successful in completing sales transactions for the operating assets of
Colorado Aggregate. Hecla doesn't anticipate any significant gain or loss from
the sale of MWCA - Colorado Aggregate Division.
Pursuant to a Registration Statement filed with the Securities and Exchange
Commission and declared effective in the
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
third quarter of 1995, Hecla can, at its option, issue debt securities, common
shares, preferred shares or warrants in an amount not to exceed $100.0 million
in the aggregate. As of March 31, 2000, Hecla has issued $62.2 million of
Hecla's common shares and warrants under the Registration Statement.
Reserves for closure costs, reclamation and environmental matters totaled
$48.5 million at March 31, 2000. Hecla anticipates that expenditures relating
to these reserves will be made over the next several years. Although Hecla
believes the allowance is adequate based on current estimates of aggregate
costs, Hecla plans to periodically reassess its environmental and reclamation
obligations as new information is developed. Depending on the results of the
reassessment, it is reasonably possible that Hecla's estimate of its obligations
may change in the near term.
For information on hedged positions and derivative instruments, see Item 7A
"Quantitative and Qualitative Disclosure About Market Risk."
Hecla is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been finally adjudicated (see Part
II. Item 1. Legal Proceedings and Note 7 of Notes to Consolidated Financial
Statements). Although the ultimate disposition of these matters and various
other pending legal actions and claims is not presently determinable, it is the
opinion of Hecla's management that the outcome of these matters will not have a
material adverse effect on the financial position of Hecla and its subsidiaries.
However, it is possible that these matters could have a material effect on
quarterly or annual operating results and cash flows, when they are resolved, in
the future periods.
New Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. In June 1999,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" was issued. SFAS 137
defers the effective date of SFAS 133 to all fiscal quarters of all fiscal years
beginning after June 15,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
2000; however, earlier application is encouraged as of the beginning of any
fiscal quarter. Hecla is presently evaluating the effect the adoption of this
standard will have on the Hecla's financial condition, results of operations and
cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The following discussion about Hecla's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
The following tables summarize the financial instruments and derivative
instruments held by Hecla at March 31, 2000, which are sensitive to changes in
interest rates and commodity prices. Hecla believes that there has not been a
material change in its market risk since the end of its last fiscal year. In
the normal course of business, Hecla also faces risks that are either
nonfinancial or nonquantifiable (See "Investment Considerations" of Part I, Item
1 of Hecla's 1999 Annual Report on Form 10-K).
Interest-Rate Risk Management
At March 31, 2000, Hecla's debt was subject to changes in market interest
rates and was sensitive to those changes. Hecla currently has no derivative
instruments to offset the risk of interest rate changes. Hecla may choose to
use derivative instruments, such as interest rate swaps to manage the risk
associated with interest rate changes.
The following table presents principal cash flows for debt outstanding at
March 31, 2000, by maturity date and the related average interest rate. The
variable rates are estimated based on implied forward rates in the yield curve
at the reporting date.
(in thousands)
2000 2001 2002 2003 2004 Thereafter Total Value
------- -------- ------- ------- ------- ---------- -------- --------
Bank credit agreement $ - - $ 55,000 $ - - $ - - $ - - $ - - $ 55,000 $ 55,000
Average interest rate 9.00% 9.47% - - - - - - - -
Revenue bonds $ 9,800 $ - - $ - - $ - - $ - - $ - - $ 9,800 $ 9,800
Average interest rate 4.14% - - - - - - - - - -
Project financing debt $ 750 $ 3,250 $ 3,000 $ 3,000 $ 1,000 $ - - $ 11,000 $ 11,000
Average interest rate 9.25% 9.78% 9.73% 9.70% 9.75% - -
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Commodity-Price Risk Management
Hedging
Hecla uses commodity forward sales commitments, commodity swap contracts,
and commodity put and call option contracts to manage its exposure to
fluctuation in the prices of certain metals which it produces. Contract
positions are designed to ensure that Hecla will receive a defined minimum price
for certain quantities of its production. Hecla uses these instruments to
reduce risk by offsetting market exposures. Hecla is exposed to certain losses,
generally the amount by which the contract price exceeds the spot price of a
commodity, in the event of nonperformance by the counterparties to these
agreements. The instruments held by Hecla are not leveraged and are held for
purposes other than trading. All of these contracts were designated as hedges at
March 31, 2000.
The following table provides information about Hecla's forward sales
commitments and commodity swap contracts at March 31, 2000. The table presents
the notional amount in ounces or tonnes, the average forward sales price, and
the total-dollar contract amount expected by the maturity dates, which occur
between April 30, 2000, and December 31, 2004.
Expected Expected Expected Expected Expected Estimated
Maturity Maturity Maturity Maturity Maturity Fair
2000 2001 2002 2003 2004 Value
---------- ---------- ---------- ---------- ---------- -----------
Forward contracts:
Gold sales (ounces) 49,735 62,010 60,428 59,802 48,928
Future price (per ounce) $ 287 $ 288 $ 288 $ 288 $ 288
Contract amount (in $000's) $ 14,253 $ 17,874 $ 17,418 $ 17,238 $ 14,103 $ (7,643)
Silver sales (ounces) 300,000 - - - - - - - -
Future price (per ounce) $ 5.51 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 1,652 $ - - $ - - $ - - $ - - $ 105
Swap contracts:
Zinc (tonnes) 4,500 - - - - - - - -
Future price (per pound) $ 0.513 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 5,089 $ - - $ - - $ - - $ - - $ 21
Lead (tonnes) 1,500 - - - - - - - -
Future price (per pound) $ 0.245 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 810 $ - - $ - - $ - - $ - - $ 136
In addition to the above contracts, Hecla has a quarterly Gold Lease Rate
Swap at a fixed rate of 1.5% on 257,242 ounces of the above gold forward
contracts. The ounces covered under the
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
swap are adjusted each quarter, commencing June 30, 2000, in accordance with the
expiration of the gold forward contracts. The estimated cost to close out the
Gold Lease Rate Swap at March 31, 2000 was $876,000.
Trading
On July 30, 1999, Hecla sold call options for 300,000 ounces of silver
through June 30, 2000, at an average strike price of $5.50. Hecla sold the call
options to provide additional cash flow. The sale of the options are designed
to provide some price protection, to the extent of the amount of the call
premium received, in the event of a decline in the price of silver. These
contracts also limit the maximum that Hecla may receive on a portion of Hecla's
silver production to the strike price of the options plus the premium received.
Hecla is exposed to price risk on these call options, and the value of the call
options are marked to market with a gain or loss, if any, recorded in earnings.
During the first quarter of 2000, Hecla recognized revenue of $60,000 from
expired call option contracts and a mark to market adjustment.
The following table provides information about Hecla's silver call options
at March 31, 2000. The table presents the notional amount in ounces, the
weighted average strike price, and the total-dollar contract amount expected by
the maturity dates, which occur between April 30, 2000 and June 30, 2000.
Expected Estimated
Maturity Fair
2000 Value
--------- ---------
Sold call options:
Silver calls (ounces) 150,000
Weighted average strike price (per ounce) $ 5.50
Contract amount (in $000's) $ 825 $ 44
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Part II - Other Information
Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
- - Bunker Hill Superfund Site
In 1994, Hecla, as a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA),
entered into a consent decree with the Environmental Protection Agency (EPA) and
the state of Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located at Kellogg, Idaho. The consent decree
settled Hecla's response-cost liability under CERCLA at the Bunker Hill site.
As of March 31, 2000, Hecla has estimated and accrued an allowance for liability
for remedial activity costs at the Bunker Hill site of $7.4 million. These
estimated expenditures are anticipated to be made over the next three to five
years. Although Hecla believes the allowance is adequate based upon current
estimates of aggregate costs, Hecla will reassess its obligations under the
consent decree as new information is developed. Depending on the results of any
reassessment, it is reasonably possible that Hecla's estimate of its obligations
may change in the near term.
- - Coeur d'Alene River Basin Natural Resource Damage Claims
- Coeur d'Alene Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against Hecla 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. Hecla answered the Tribe's complaint denying liability for natural
resource damages. In October 1996, following a court imposed four-year
suspension of the proceeding, the Tribe's natural resource damage litigation was
consolidated with the United States Natural Resources Damage litigation
described below for discovery and other limited pretrial purposes.
- U.S. Government Claims
In March 1996, the United States filed a lawsuit in Idaho Federal District
Court against certain mining companies that conducted historic mining operations
in the Silver Valley of northern Idaho, including Hecla. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks recovery for alleged
damages to or loss of natural resources located in the Coeur d'Alene River Basin
in northern Idaho for which the United States asserts to be the trustee under
CERCLA. The lawsuit asserts that the defendants' historic mining activity
resulted in releases of hazardous substances and damaged natural resources
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Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
within the Basin. The suit also seeks declaratory relief that Hecla 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. Hecla
answered the complaint in May 1996, denying liability to the United States under
CERCLA and the Clean Water Act and asserted a counterclaim against the United
States for the federal government's involvement in mining activities in the
Basin which contributed to the releases and damages alleged by the United
States. Hecla believes it also has 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, in support of its response cost claims asserted in its March
1996 lawsuit.
On September 30, 1998, the Federal District Court granted Hecla's summary
judgment motion with respect to the applicable statute of limitations and
dismissed the United States' natural resources damage claims due to the failure
of the EPA to comply with federal law and EPA regulations in expanding the
national priority list site boundaries to include the entire Coeur d'Alene
River/Lake Coeur d'Alene Basin which would have the effect of extending the
statute of limitations. The United States has appealed the Federal District
Court's decision to the Ninth Circuit Court of Appeals. On March 31, 1999, the
court issued a case management order setting trial in this case for November
2000. On September 30, 1999, the court issued an order on one of the
defendant's challenges to the constitutionality of the retroactive application
of liability under CERCLA. Although the court held that the statute did not
facially violate the due process or taking clauses of the U.S. Constitution, the
court also stated that the constitutionality of retroactive application of
liability to the defendants in this case cannot be resolved at this stage of
litigation as genuine issues of material fact exist and liability has not been
established.
The Federal District Court case is proceeding through discovery. A number
of Summary Judgement motions filed by both the plaintiffs and the defendants are
currently pending before the court.
- - Insurance Coverage Litigation
In 1991, Hecla initiated litigation in the Idaho State District Court in
Kootenai County, Idaho, against a number of insurance companies which provided
comprehensive general liability insurance coverage to Hecla and its
predecessors. Hecla believes that the insurance companies have a duty to defend
and indemnify Hecla under their policies of insurance for all
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Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
liabilities and claims asserted against Hecla by the EPA and the tribe under
CERCLA related to the Bunker Hill site and the Basin in northern Idaho. In
1992, the Idaho State District Court ruled that the primary insurance companies
had a duty to defend Hecla in the Tribe's lawsuit. During 1995 and 1996, Hecla
entered into settlement agreements with a number of the insurance carriers named
in the litigation. Hecla has received a total of approximately $7.2 million
under the terms of the settlement agreements. Thirty percent of these
settlements were paid to the EPA to reimburse the U.S. government for past costs
under the Bunker Hill site consent decree. Litigation is still pending against
one insurer with trial suspended until the underlying environmental claims
against Hecla are resolved or settled. The remaining insurer in the litigation
with a second insurer not named in the litigation are providing Hecla with a
partial defense in all Basin environmental litigation. As of March 31, 2000,
Hecla had not reduced its accrual for reclamation and closure costs to reflect
the receipt of any anticipated insurance proceeds.
- - Other Claims
In 1997, Hecla's subsidiary, Kentucky-Tennessee Clay, terminated shipments
of 1% of annual ball clay production, sold to animal feed producers, when the
Food and Drug Administration determined trace elements of dioxin were present in
poultry. Dioxin is inherently present in ball clays generally. Hecla believes
$11.0 million of insurance coverage is available for approximately $9.2 million
in claims to date. On September 22, 1999, Riceland Foods (the primary purchaser
of ball clay from K-T Clay used in animal feed) commenced litigation against K-T
Clay in State Court in Arkansas to recover their losses and their insurance
company's payments to downstream users of their animal feed. The complaint
alleges negligence, strict liability and breach of implied warranties. Legal
counsel retained by the insurance company for K-T Clay has had the case removed
to Federal Court in Arkansas and has answered the complaint denying liability.
Although the outcome of the litigation or insurance coverage cannot be assured,
Hecla currently believes that there will be no material adverse effect on
Hecla's results of operations, financial condition or cash flows from this
matter.
Hecla is subject to other legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, it is the opinion of Hecla's
management that the outcome of these matters will not have a material adverse
effect on the financial condition of Hecla. However, it is possible that these
matters could have a material effect on quarterly or annual operating results
and cash flows, when they are resolved, in future periods.
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30
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 - Fixed Charge Coverage Ratio Calculation
27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated March 24, 2000, related to the Facility Agreement
by and between Hecla Mining Company and Standard Bank London Limited
Items 2, 3, 4, and 5 of Part II are omitted from this report as inapplicable.
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31
Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HECLA MINING COMPANY
-----------------------------------
(Registrant)
Date: May 11, 2000 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: May 11, 2000 By /s/ Lewis E. Walde
---------------------------------
Lewis E. Walde,
Controller (Chief Accounting Officer)
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32
Exhibit Index
-------------
Exhibit
No. Description
- -------- ------------------
12 Fixed Charge Coverage Ratio Calculation
27 Financial Data Schedule
-32-