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 September 30, 2001
Commission file number 1-8491
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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
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(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 October 31, 2001
- -------------------------- -----------------------------
Common stock, par value 72,987,645 shares
$0.25 per share
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Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2001
I N D E X*
Page
PART I. - Financial Information
Item l - Financial Statements 3
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 18
Item 3 - Quantitative and Qualitative Disclosure
of Market Risk 34
PART II. - Other Information
Item 1 - Legal Proceedings 36
Item 6 - Exhibits and Reports on Form 8-K 37
*Items omitted are not applicable.
3
Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,806 $ 1,373
Accounts and notes receivable 11,248 11,164
Inventories 9,693 11,269
Other current assets 1,543 2,105
Net assets of discontinued operations 2,394 44,057
--------- ---------
Total current assets 32,684 69,968
Investments 66 502
Restricted investments 6,374 6,268
Properties, plants and equipment, net 108,377 108,343
Other noncurrent assets 12,279 9,755
--------- ---------
Total assets $ 159,780 $ 194,836
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 9,314 $ 7,520
Accrued payroll and related benefits 5,551 4,732
Current portion of long-term debt 6,028 59,274
Accrued taxes 2,501 2,188
Accrued reclamation and closure costs 7,506 12,060
--------- ---------
Total current liabilities 30,900 85,774
Deferred income taxes 300 300
Long-term debt 13,774 10,041
Accrued reclamation and closure costs 46,383 46,650
Other noncurrent liabilities 7,596 7,326
--------- ---------
Total liabilities 98,953 150,091
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000
shares; issued and outstanding - 2,300,000 shares,
liquidation preference 2001 - $125,061 and 2000 - $119,025 575 575
Common stock, $0.25 par value, authorized 100,000,000 shares;
issued 2001 - 73,049,761 shares and 2000 - 66,859,752 shares 18,262 16,715
Capital surplus 404,406 400,236
Accumulated deficit (360,999) (366,523)
Accumulated other comprehensive loss (135) (4,858)
Less stock held by grantor trust; 2001 - 122,532 and
2000 - 139,467 common shares (396) (514)
Less treasury stock, at cost; 2001- 62,116 common shares and
2000 - 62,114 common shares (886) (886)
--------- ---------
Total shareholders' equity 60,827 44,745
--------- ---------
Total liabilities and shareholders' equity $ 159,780 $ 194,836
========= =========
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 Income (Loss) (Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Nine Months Ended
--------------------------------------- --------------------------------------
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------- ------------------ ------------------ ------------------
Continuing Operations:
Sales of products $ 22,501 $ 20,044 $ 63,479 $ 58,677
--------- -------- -------- --------
Cost of sales and other direct production costs 17,064 16,042 45,067 47,129
Depreciation, depletion and amortization 5,167 4,084 14,932 14,027
--------- -------- -------- --------
22,231 20,126 59,999 61,156
--------- -------- -------- --------
Gross profit (loss) 270 (82) 3,480 (2,479)
--------- -------- -------- --------
Other operating expenses:
General and administrative 1,654 1,658 4,976 5,810
Exploration 455 1,942 1,749 5,212
Depreciation and amortization 67 69 203 213
Reduction in carrying value of mining properties - - - - - - 9,072
Provision for closed operations and
environmental matters 232 522 1,223 4,020
--------- -------- -------- --------
2,408 4,191 8,151 24,327
--------- -------- -------- --------
Loss from operations (2,138) (4,273) (4,671) (26,806)
--------- -------- -------- --------
Other income (expense):
Interest and other income 1,425 1,505 2,525 3,968
Miscellaneous expense (662) (473) (1,510) (1,575)
Interest expense (662) (2,098) (3,279) (5,813)
--------- -------- -------- --------
101 (1,066) (2,264) (3,420)
--------- -------- -------- --------
Loss from continuing operations before income taxes
and extraordinary charge (2,037) (5,339) (6,935) (30,226)
Income tax provision - - (2) - - (12)
--------- -------- -------- --------
Loss from continuing operations before
extraordinary charge (2,037) (5,341) (6,935) (30,238)
Discontinued operations:
Income (loss), net of income tax (352) 1,719 (192) 4,161
Gain (loss) on disposal, net of income tax (67) - - 12,651 (929)
Extraordinary charge, net of income tax - - - - - - (647)
--------- -------- -------- --------
Net income (loss) (2,456) (3,622) 5,524 (27,653)
Preferred stock dividends (2,013) (2,013) (6,038) (6,038)
--------- -------- -------- --------
Loss applicable to common shareholders (4,469) (5,635) (514) (33,691)
--------- -------- -------- --------
Other comprehensive income (loss), net of income tax:
Cumulative effect of a change in accounting principle - - - - (136) - -
Change in derivative contracts (38) - - (38) - -
Reclassification adjustment of loss included in net
income (loss) 10 - - 29 - -
Unrealized holding gains (losses) on securities (41) (150) (31) 64
Change in foreign currency items - - - - 4,898 - -
--------- -------- -------- --------
Other comprehensive income (loss) (69) (150) 4,722 64
--------- -------- -------- --------
Comprehensive income (loss) applicable to
common shareholders $ (4,538) $ (5,785) $ 4,208 $(33,627)
========= ======== ======== ========
Basic and diluted income (loss) per common share:
Loss from continuing operations $ (0.06) $ (0.11) $ (0.19) $ (0.54)
Income from discontinued operations - - 0.03 0.18 0.05
Extraordinary charge - - - - - - (0.01)
--------- -------- -------- --------
Basic and diluted income (loss) per common share $ (0.06) $ (0.08) $ (0.01) $ (0.50)
========= ======== ======== ========
Weighted average number of common shares outstanding 70,946 66,798 68,194 66,789
========= ======== ======== ========
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)
Nine Months Ended
-----------------------------------------
September 30, 2001 September 30, 2000
------------------ ------------------
Operating activities:
Net income (loss) $ 5,524 $(27,653)
Noncash elements included in net income (loss):
Depreciation, depletion and amortization 15,135 17,289
Extraordinary charge - - 647
(Gain) loss on sale of discontinued operations (12,651) 929
Gain on disposition of properties, plants and equipment (327) (1,292)
Reduction of carrying value of mining properties - - 9,072
Provision for reclamation and closure costs 766 2,124
Change in net assets of discontinued operations 1,283 - -
Change in assets and liabilities:
Accounts and notes receivable (84) 2,510
Inventories (194) (1,829)
Other current and noncurrent assets (1,628) (578)
Accounts payable and accrued expenses 1,794 (1,472)
Accrued payroll and related benefits 818 1,826
Accrued taxes 313 131
Accrued reclamation and closure costs and other noncurrent liabilities (5,317) (6,410)
-------- --------
Net cash provided (used) by operating activities 5,432 (4,706)
-------- --------
Investing activities:
Proceeds from sale of discontinued operations 59,761 9,677
Additions to properties, plants and equipment (15,934) (11,455)
Proceeds from disposition of properties, plants and equipment 464 1,946
Proceeds from sale of investments - - 283
Increase in restricted investments (106) (264)
Purchase of investments and change in cash
surrender value of life insurance, net 406 1,114
Other, net (8) 175
-------- --------
Net cash provided by investing activities 44,583 1,476
-------- --------
Financing activities:
Common stock issued under stock and stock option plans - - 35
Common stock issuance, net of offering costs 5,890 - -
Dividends paid on preferred stock - - (6,038)
Payments for debt issuance costs - - (1,811)
Borrowings on long-term debt 12,309 79,500
Repayments on long-term debt (61,781) (66,689)
-------- --------
Net cash provided (used) by financing activities (43,582) 4,997
-------- --------
Net increase in cash and cash equivalents 6,433 1,767
Cash and cash equivalents at beginning of period 1,373 2,719
-------- --------
Cash and cash equivalents at end of period $ 7,806 $ 4,486
======== ========
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, 2000,
set forth in Hecla Mining Company's (Hecla) 2000 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. All financial statements presented are unaudited. However, the balance
sheet as of December 31, 2000, 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 income (loss) or accumulated deficit
as previously reported.
The accompanying financial statements have been prepared assuming Hecla
will continue as a going concern. In order to provide Hecla additional
liquidity, management is currently evaluating a number of financing alternatives
including debt financing and asset sales. Proceeds from these planned financings
will be available for general corporate purposes. Hecla also continues to
pursue the sale of the remaining assets of the Colorado Aggregate division of
MWCA (CAC), which had $2.4 million of net assets at September 30, 2001. There
can be no assurance that Hecla will be successful in obtaining financing or in
completing a sales transaction for the remaining assets of CAC.
Based upon Hecla's estimate of metals prices and metals production for the
remainder of 2001, Hecla currently believes that its existing cash and cash
equivalents, operating cash flows and debt facilities will be adequate to fund
anticipated minimum capital expenditures, idle property expenditures and
exploration expenditures in 2001. Cash flows from operations, however, could be
significantly impacted if the market price of gold, silver, zinc and lead
fluctuate. In the event that cash balances decline to a level that cannot
support the operations of the Company, management will defer certain planned
capital and exploration expenditures as needed to conserve cash for operations.
If management's plans are not successful, operations and liquidity may be
adversely affected.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 3.
On March 27, 2001, Hecla completed a sale of the Kentucky-Tennessee Clay
Company, Kentucky-Tennessee Feldspar Corporation, Kentucky-Tennessee Clay de
Mexico and certain other minor inactive industrial minerals companies
(collectively the K-T Group) for $62.5 million subject to customary post-closing
adjustments. Hecla recorded a gain on the sale of the K-T Group of $13.0
million in the first quarter of 2001. The proceeds from the sale were used to
repay a term loan facility of $55.0 million, and to repay amounts outstanding
under a $2.0 million revolving bank agreement. The remaining net proceeds were
available for general corporate purposes. During the second and third quarters
of 2001, adjustments of $0.3 million and $0.1 million were made to reduce the
gain relating to the K-T Group. Hecla also continues to pursue the sale of the
remaining assets of CAC, although there can be no assurance that a sales
transaction will be completed. At September 30, 2001, the remaining net assets
of CAC are approximately $2.4 million. Including the gain on sale, Hecla
recorded income from discontinued operations of approximately $12.5 million, or
$0.18 per common share, in the first nine months of 2001 compared to income of
approximately $3.2 million, or $0.05 per common share, in the same period in
2000.
Note 4.
Hecla's income tax provision for the first nine months of 2001 and 2000
varies from the amount that would have been provided by applying the statutory
rate to the income (loss) before income taxes primarily due to the inability to
use tax losses in 2001 and 2000. During the first nine months of 2000, Hecla
recognized a $12,000 provision for foreign income taxes.
Note 5.
Inventories consist of the following (in thousands):
September 31, Dec. 31,
2001 2000
------------- ---------
Concentrates, bullion, metals
in transit and other products $ 4,225 $ 5,932
Materials and supplies 5,468 5,337
--------- --------
$ 9,693 $ 11,269
======== ========
At September 30, 2001, Hecla had forward sales commitments through December
31, 2004 for 214,606 ounces of gold at an average price of $289 per ounce.
Hecla intends to physically
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
deliver metal in accordance with the terms of certain of the forward sales
contracts. As such, Hecla has elected to designate these contracts as normal
sales in accordance with SFAS 138 and as a result, these contracts are not
required to be accounted for as derivatives under SFAS 133. Certain other
forward contracts where delivery is not certain have been designated as cash
flow hedges, and the changes in fair value of these cash flow hedges are
recorded in other comprehensive income until the contract is closed out. 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 London Final gold price at
September 28, 2001 was $293.10 per ounce.
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.
In August 2000, Sunshine Mining and Refining Company which was also a party to
the 1994 Consent Decree, filed for Chapter 11 bankruptcy and in January 2001,
the Federal District Court approved a new Consent Decree between Sunshine, the
U.S. Government and the Coeur d'Alene Indian Tribe which settled Sunshine's
environmental liabilities in the Coeur d'Alene Basin lawsuits described below
and released Sunshine from further obligations under the 1994 Consent Decree.
In September 2001, the Idaho Federal District Court held a hearing on the
Company's motion to relieve the Company from some or all of the obligations
under the 1994 Consent Decree based on a number of arguments including the
impact of changed circumstances because EPA determined to utilize a broad
remedial investigation feasibility study (RI/FS) CERCLA process to address
environmental issues in the Coeur d'Alene Basin outside the Bunker Hill Site.
In a September 30, 2001, Order, amended October 15, 2001, the Court held that
sufficient changed circumstances had occurred to support modification of the
1994 Consent Decree. In the Order, as amended, the Court permitted the mining
companies to terminate further work under the 1994 Consent Decree for 2001
except for a few high-risk yards and stated the Court would make a final
decision on the request to modify the Consent Decree after EPA's Record of
Decision (ROD) on the Basin cleanup is issued. EPA recently issued its proposed
plan for the cleanup of the Coeur d'Alene Basin and a ROD on the cleanup plan is
expected to be issued by EPA in early 2002. As of September 30, 2001, Hecla has
9
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
estimated and accrued an allowance for liability for remedial activity costs at
the Bunker Hill site of $10.2 million. These estimated expenditures are
anticipated to be made over the next three to five years. Although Hecla
believes the accrual is adequate based upon current estimates of aggregate
costs, it is reasonably possible that Hecla's estimate of its obligations may
change in the near or longer term.
Coeur d'Alene River Basin Environmental Claims
- Coeur d'Alene Indian Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against 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. The Tribe's natural resource damage litigation has been consolidated
with the United States' litigation described below.
- 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
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 has
asserted a number of defenses to the United States' claims.
In May 1998, the EPA announced that it had commenced a RI/FS under CERCLA
for the entire Basin, including Lake Coeur d'Alene, in support of its response
cost claims asserted in its March 1996 lawsuit. In October 2001, the EPA issued
its proposed cleanup plan for the Basin.
The first phase of the trial commenced on the consolidated Coeur d'Alene
Indian Tribe's and The United States' Federal District Court cases on January
22, 2001 and was concluded on July 30, 2001. In the first phase of the trial,
the Court has been asked to determine the extent of liability, if any, of the
defendants for the plaintiffs' CERCLA claims. The Court has also been asked to
determine the liability of the United States for
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
its historic involvement in the Basin. No decision on the issues before the
Court in the first phase of the litigation has been issued. If liability is
determined in the first phase, a second trial will be scheduled for 2002 to
address damages and remedy selection. Two of the defendant mining companies,
Coeur d'Alene Mines Corporation and Sunshine Mining and Refining Company,
settled their liabilities under the litigation during the first quarter of 2001.
Hecla and ASARCO are the only defendants remaining in the litigation.
During 2000 and into 2001, Hecla was involved in settlement negotiations
with representatives of the U.S. government and the Coeur d'Alene Indian Tribe.
The Company also participated with certain of the other defendants in the
litigation in a state of Idaho led settlement effort. On August 16, 2001, the
Company entered into an Agreement in Principle with the United States and the
State of Idaho to settle the governments' claims for natural resource damages
and cleanup costs related to the historic mining practices in the Coeur d'Alene
Basin in northern Idaho. The settlement, if, and when finalized in the form of
a Consent Decree, would release the Company from further liability to the
governments for its historic mining practices in the Coeur d'Alene Basin. The
Agreement in Principle caps for a period of ten years the majority of the
cleanup related expenditures the Company is responsible for annually at the
Bunker Hill Superfund Site, the Grouse Creek mine and Stibnite site in central
Idaho. The Agreement limits these payments to the Government and/or cleanup
obligations at these sites to a fixed annual cap of $5 million for each of the
first two years of the Agreement and $6 million for each of the next eight
years. Hecla is committed to work and/or make payments of $4 million annually
for the following 20 years thereafter. In addition to the fixed work and
payment obligations, Hecla would make cash payments based upon a small
percentage of positive cash flow generated by operations during the term of the
Agreement. The Agreement in Principle does not include the Coeur d'Alene Tribe;
however, the Company hopes to be able to include the Tribe as a party to the
settlement under the terms of a final consent decree. Representatives of the
United States, the State of Idaho and the Company continue to work on terms of a
definitive consent decree incorporating the terms of the Agreement in Principle.
However, there are a number of significant issues which will need to be resolved
prior to finalizing the definitive consent decree.
As of September 30, 2001, Hecla has accrued $45.2 million for future costs
of environment cleanup costs at the properties outlined in the Agreement in
Principle. It is reasonably possible that Hecla's obligation may change in the
near or longer term depending on a number of factors, including the finalization
and entry of a Consent Decree. In addition, an adverse ruling against Hecla on
liability and damages in this matter could have a material adverse effect on the
Company.
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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 that provided
comprehensive general liability insurance coverage to Hecla and its
predecessors. Hecla believes 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, along with a
second insurer not named in the litigation, is providing Hecla with a partial
defense in all Basin environmental litigation. As of September 30, 2001, Hecla
had not reduced its accrual for reclamation and closure costs to reflect the
receipt of any potential insurance proceeds.
Other Claims
In 1997, Hecla's subsidiary, Kentucky-Tennessee Clay Company (K-T Clay),
terminated shipments (comprising approximately 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. 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 its
losses and its insurance company's payments to downstream users of its animal
feed. The complaint alleged negligence, strict liability and breach of implied
warranties and seeks damages in excess of $7.0 million. Legal counsel retained
by the insurance company for K-T Clay had the case removed to Federal Court in
Arkansas. In July 2000, a second complaint was filed against K-T Clay and Hecla
in Arkansas State Court by Townsends, Inc. another purchaser of animal feed
containing ball clay sold by K-T Clay. A third complaint was filed in the
United States District Court in Arkansas on August 31, 2000, by Archer Daniels
Midland Company a successor in interest to Quincy Soybean Company a third
purchaser of ball clay sold by K-T Clay and used in the animal feed industry.
The Townsends and Archer Daniels lawsuits allege damages totaling approximately
$300,000 and $1.4
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
million, respectively. These complaints contain similar allegations to the
Riceland Foods' case and legal counsel retained by the insurance carrier is
defending K-T Clay and Hecla in these lawsuits. The Company believes that these
claims comprise substantially all the potential claims related to this matter.
In January 2001, Hecla was dismissed from the only lawsuit in which it had been
named as a defendant. In March 2001, prior to trial, K-T Clay settled the
Riceland Foods litigation against K-T Clay through settlement payment
substantially funded by K-T Clay's insurance carrier. K-T Clay contributed
$230,000 toward the Riceland Foods settlement. In August 2001, the Federal
District Court dismissed the Archer Daniels litigation without any payment from
K-T Clay or Hecla. The defense of the remaining Townsends lawsuit is being
covered by insurance. The Company believes that K-T Clay's insurance coverage
is available to cover the remaining claims. On March 27, 2001, Hecla sold its
interest in K-T Clay. However, Hecla agreed to indemnify the purchaser of K-T
Clay from all liability resulting from these dioxin claims and litigation to the
extent not covered by insurance. Although the outcome of the remaining
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 not disclosed above
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 other matters, it is the opinion of Hecla's management that
the outcome of these other matters will not have a material adverse effect on
the financial condition of Hecla.
Note 7.
As of September 30, 2001, Hecla's wholly owned subsidiary Hecla Resource
Investments Limited (HRIL), had $8.1 million outstanding under a project
financing agreement, nonrecourse to Hecla, that was utilized to acquire the La
Camorra mine in Venezuela. As collateral for the loan, HRIL granted a security
interest over the stock of its Venezuelan subsidiary, certain Venezuelan real
property assets and all cash proceeds of the La Camorra mine. HRIL must
maintain compliance with certain financial and other restrictive covenants
related to the available ore reserves and financial performance of the La
Camorra mine. The project financing agreement is repayable in semiannual
payments ending December 31, 2004.
The HRIL project financing agreement requires the Company to maintain
hedged gold positions sufficient to cover all dollar loans, operating
expenditures, taxes, royalties and similar fees
13
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
projected for the project through December 31, 2004. At September 30, 2001,
there were 184,606 ounces of gold sold forward at $288.25 per ounce. Portions
of these forward contracts mature quarterly from December 2001 through December
2004. The forward sales agreement assumes the ounces of gold committed to
forward sales at the end of each quarter can be leased at a rate of 1.5% for
each following quarter. The Company entered into a separate quarterly gold
lease rate swap at a fixed rate of 1.5% on the outstanding notional volume of
the flat forward sale. Settlement is made quarterly with the Company receiving
the fixed rate and paying the current floating gold lease rate. All settlements
are made by delivering gold.
As of September 30, 2001, the Company has outstanding a $3.0 million
subordinated loan which is due in three equal semiannual payments commencing in
June of 2003. The loan agreement gives the Company the option to capitalize
interest payments by adding them to the principal amount of the loans. At
September 30, 2001, the interest amount added to principal was approximately
$0.3 million.
The interest rates for borrowings under the project financing and
subordinated debt agreements were 6.20% and 7.71%, respectively, as of September
30, 2001. The interest rates are based on LIBOR rates.
On April 16, 2001, Hecla entered into a new $1.5 million revolving bank
agreement due on June 16, 2001. On June 15, 2001, the Company amended the note
to allow borrowings up to $1.0 million and extended the repayment date until
November 1, 2001. On October 31, 2001, the Company amended the note to allow
borrowings up to $3.0 million and extended the repayment date until April 30,
2002. Amounts available under the bank agreement are available for general
corporate purposes. As collateral for the loan, Hecla pledged its corporate
office building and related property located in Coeur d'Alene, Idaho. The
interest rate is 7%.
On April 30, 2001, Hecla's wholly owned subsidiary, Minera Hecla, S.A. de
C.V. (Minera Hecla) acquired a processing mill at Velardena, Mexico, to process
ore to be mined from the San Sebastian project on the Saladillo mining
concessions located near Durango, Mexico. The purchase price of $7.4 million
was financed by a credit facility between Minera Hecla and the lender. The
credit facility is nonrecourse to Hecla. Under the terms of the credit
facility, Minera Hecla will make monthly payments for principal and interest
over 63 months. The loan is collateralized by the mill at Velardena and the
Saladillo, Saladillo 1 and Saladillo 5 mining concessions.
On May 7, 2001, Minera Hecla entered into a $700,000 short-term loan to
finance the working capital of the San Sebastian
14
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
project. The loan requires monthly interest payments with a final principal
payment due on December 7, 2001. The loan is nonrecourse to Hecla and is
unsecured.
On April 26, 2001, Hecla entered into a factoring agreement, whereas Hecla,
without recourse, will sell all of its right, title and interest in certain
smelter accounts receivable from the Lucky Friday mine, less estimated finance
charges, up to a maximum of $2.0 million. Factored accounts receivable at
September 30, 2001, were $1.1 million.
On June 27, 2001, Hecla entered into a factoring agreement, whereas Hecla
may sell qualified accounts receivable, without recourse except as specifically
provided, certain receivables from MWCA - Colorado Aggregate Division, less
estimated finance charges. The amount of borrowings allowable under the
agreement at any time is a function of the amount of the then outstanding
eligible trade accounts receivable. Factored accounts receivable at September
30, 2001, were $0.7 million.
Note 8.
The following tables present a reconciliation of the numerators (net income
(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 declared
and undeclared cumulative preferred stock dividends in arriving at loss
applicable to common shareholders for the three months and nine months ended
September 30, 2001 and 2000, in computing basic and diluted loss per common
share (dollars and shares in thousands, except per-share amounts). For the
three months and nine months ended September 30, 2001, the $2.0 million and $6.0
million, respectively, have not been declared or paid.
Three Months Ended September 30,
----------------------------------------------------------------
2001 2000
------------------------------ ------------------------------
Net Per-Share Net Per-Share
Loss Shares Amount Loss Shares Amount
--------- ------ --------- --------- ------ ---------
Loss before preferred stock dividends $ (2,456) $ (3,622)
Less: Preferred
stock dividends (2,013) (2,013)
--------- ---------
Basis loss per common share:
Basic loss applicable to common shareholders $ (4,469) 70,946 $ (0.06) $ (5,635) 66,798 $ (0.08)
Effect of dilutive securities - - - - - - - - - - - -
--------- ------ --------- --------- ------ --------
Diluted loss per common share $ (4,469) 70,946 $ (0.06) $ (5,635) 66,798 $ (0.08)
========= ====== ========= ========= ====== ========
15
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Nine Months Ended September 30,
-------------------------------------------------------------------
2001 2000
---------------------------------- ------------------------------
Net Per-Share Net Per-Share
Income (Loss) Shares Amount Loss Shares Amount
------------- ------ --------- --------- ------ ---------
Income (loss) before extraordinary charge $ 5,524 $ (27,006)
Extraordinary charge, net of income tax - - (647)
--------- ---------
Income (loss) before preferred
stock dividends $ 5,524 $ (27,653)
Less: Preferred
stock dividends (6,038) (6,038)
--------- ---------
Basic loss per common share:
Basic loss applicable to
common shareholders (514) 68,194 $ (0.01) (33,691) 66,789 $ (0.50)
Effect of dilutive securities - - - - - - - - - - - -
--------- ------ --------- --------- ------ ---------
Diluted loss per common share $ (514) 68,194 $ (0.01) $ (33,691) 66,789 $ (0.50)
========= ====== ========= ========= ====== =========
These calculations of diluted earnings per share for the three months and
nine months ended September 30, 2001 and 2000 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 September 30, 2001 and 2000,
as their exercise would be antidilutive, as follows:
Three Months Ended Nine Months Ended
---------------------- ----------------------
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
2,329,000 2,168,000 2,329,000 2,168,000
The calculations of diluted earnings per share for the three months and
nine months ended September 30, 2000, also exclude 1,506,998 warrants to
purchase common stock, as their exercise would be antidilutive. The
calculations of diluted earnings per share for the three months and nine months
ended September 30, 2001, also exclude 1,098,801 warrants to purchase common
stock, as their exercise would be antidilutive.
16
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 9.
Hecla is organized and managed primarily on the basis of the principal
products being produced from its operating units. One operating unit has been
aggregated into the Metals-Gold segment, three of the operating units have been
aggregated into the Metals-Silver segment, and five operating units have been
aggregated as part of the Industrial Minerals segment. During November 2000,
the industrial minerals segment was designated as a discontinued operation. On
March 27, 2001, Hecla sold the K-T Group which consisted of four operating
units. Following the sale of the K-T Group, discontinued operations consisted
of one operating unit. 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 and nine months ended September 30 (in thousands):
Three Months Ended Nine Months Ended
------------------- -------------------
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales to unaffiliated customers:
Metals-Gold $ 10,634 $ 8,439 $ 28,741 $ 23,192
Metals-Silver 11,867 11,605 34,738 35,485
-------- -------- -------- --------
$ 22,501 $ 20,044 $ 63,479 $ 58,677
======== ======== ======== ========
Three Months Ended Nine Months Ended
------------------- -------------------
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Income (loss) from operations:
Metals-Gold $ 2,848 $ (842) $ 6,916 $(15,147)
Metals-Silver (3,037) (1,182) (5,259) (2,284)
Other (1,949) (2,249) (6,328) (9,375)
-------- -------- -------- --------
$ (2,138) $ (4,273) $ (4,671) $(26,806)
======== ======== ======== ========
17
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The following table presents identifiable assets by reportable segment as of
September 30, 2001, and December 31, 2000 (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Identifiable assets:
Metals-Gold $ 37,734 $ 42,667
Metals-Silver 92,258 81,572
Discontinued operations 2,394 44,057
Other 27,394 26,540
-------- --------
$159,780 $194,836
======== ========
Note 10.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 was amended in June 2000 with the
issuance of SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS 133, which Hecla adopted effective January 1, 2001,
requires that derivatives be recognized as assets or liabilities and be measured
at fair value. Gains or losses resulting from changes in the fair value of
derivatives in each period are to be accounted for either in current earnings or
other comprehensive income (loss) depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in the fair value or cash flows of the hedging
instruments and the hedged items.
At September 30, 2001, Hecla's hedging contracts, used to reduce exposure
to precious metal prices, consisted of forward sales contracts and a gold lease
rate swap. Hecla intends to physically deliver metal in accordance with the
terms of certain of the forward sales contracts. As such, Hecla has elected to
designate these contracts as normal sales in accordance with SFAS 138 and as a
result, these contracts are not required to be accounted for as derivatives
under SFAS 133. Certain other forward contracts where delivery is not certain
have been designated as cash flow hedges, and the changes in fair value of these
cash flow hedges are recorded in other comprehensive income until the contract
is closed out. Hecla recorded a cumulative effect of a change in accounting
principle in other comprehensive income of approximately $0.1 million loss
related to the gold
18
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
lease rate swap upon adoption of SFAS 133 on January 1, 2001. This amount is
being amortized over the physical settlement of ounces subject to the gold lease
rate swap. During the next twelve months, approximately $40,000 is expected to
be amortized to the income statement.
Note 11.
On July 18, 2001, Hecla announced that operations at its Lucky Friday
silver mine will be reduced, effective October 2001, due to continued low silver
and lead prices. Employment at the mine will decrease from approximately 189
people to approximately 53 employees by November 2001. Production is
anticipated to total approximately 3.3 million ounces of silver in 2001, and
will be further reduced to approximately 1.0 million ounces in 2002. The
reduced production level will allow the mine to remain ready to increase
production if and when silver and lead prices increase. Primary development at
the mine will be suspended and mining will take place in currently developed
areas. Starting in November, production is anticipated to be approximately
7,000 tons per month, which will yield approximately 100,000 ounces of silver
production per month. It is estimated that the currently developed resource can
sustain the lower production levels up to 24 months. Reduced operations will
continue until prices recover as long as the cost of operating is less than the
cost of care and maintenance.
Note. 12.
On August 28, 2001, Hecla issued 5,749,883 shares of its common stock in a
private placement transaction for the benefit of the Hecla Mining Company
Retirement Plan and the Lucky Friday Pension Plan for approximately $5.5
million. Proceeds from the private placement are available for general
corporate purposes.
19
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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. On February 27, 2001,
Hecla signed an agreement to sell the Kentucky-Tennessee Clay Company, Kentucky-
Tennessee Feldspar Corporation, Kentucky-Tennessee Clay de Mexico and certain
other minor inactive industrial minerals companies (collectively the K-T Group).
The sales transaction closed on March 27, 2001. Hecla also intends to sell the
remaining assets of the Colorado Aggregate division of MWCA (CAC), which is a
wholly owned subsidiary of Hecla. As a result of Hecla's decision to sell the
industrial minerals segment in 2000, it is accounted for as discontinued
operation. 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,
- the impact of metal prices and metal production volatility,
- changing market conditions and the regulatory environment,
- limited access to capital markets,
- settlement of environmental litigation
- potential asset sales,
- ability to pay creditors, and
20
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- the other risks detailed from time to time in Hecla's Form 10-K and
Form 10-Q's filed with the Securities and Exchange Commission (see
also "Investment Considerations" of Part I, Item 1 of Hecla's 2000
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.
On April 30, 2001, Hecla's wholly owned subsidiary, Minera Hecla, S.A. de
C.V. (Minera Hecla) acquired a processing mill at Velardena, Mexico, to process
ore to be mined from the San Sebastian project on the Saladillo mining
concessions located near Durango, Mexico. The purchase price of $7.4 million
was financed by a credit facility between Minera Hecla and the lender. The
credit facility is nonrecourse to Hecla. Ore mined from the San Sebastian
project is trucked approximately 100 kilometers to the processing mill. The
mill has a rated capacity of 500 tonnes per day and produces a silver/gold
precipitate which is to be sold to a precious metals refiner. Milling
operations commenced in early May, and production from San Sebastian is
anticipated to be approximately 0.8 million ounces of silver, and 14,000 ounces
of gold in 2001.
On July 18, 2001, Hecla announced that operations at its Lucky Friday
silver mine will be reduced, effective October 2001, due to continued low silver
and lead prices. Employment at the mine will decrease from approximately 189
people to approximately 53 employees by November 2001. Production is
anticipated to total approximately 3.3 million ounces of silver in 2001, and
will be further reduced to approximately 1.0 million ounces in 2002. The
reduced production level will allow the mine to remain ready to increase
production if and when silver and lead prices increase. Primary development at
the mine will be suspended and mining will take place in currently developed
areas. Starting in November, production is anticipated to be approximately
7,000 tons per month, which will yield approximately 100,000 ounces of silver
production per month. It is estimated that the currently developed resource can
sustain the lower production levels up to 24 months. Reduced operations will
continue until prices recover as long as the cost of operating is less than the
cost of care and maintenance.
During the first nine months of 2001, Hecla produced approximately 138,000
ounces of gold compared to approximately 112,000 ounces in the first nine months
of 2000. The following
21
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
table displays the actual gold production (in ounces) by operation for the nine
months ended September 30, 2001 and 2000, projected gold production for the year
ending December 31, 2001, and actual gold production for the year ended December
31, 2000:
Actual Actual Projected Actual
Sept. 30, Sept. 30, Dec. 31, Dec. 31,
Operation 2001 2000 2001 2000
- --------- --------- --------- ---------------- ---------
La Camorra 108,000 68,000 135,000-143,000 93,000
Greens Creek(2) 20,000 19,000 26,000-27,000 25,000
San Sebastian 10,000 - - 14,000-16,000 3,000
Rosebud(1)(2) - - 24,000 - - 24,000
Other - - 1,000 0-1,000 1,000
--------- --------- ---------------- ---------
Totals 138,000 112,000 175,000-187,000 146,000
========= ========= ================ =========
(1) The Rosebud mine completed operations in the third quarter of 2000.
(2) Reflects Hecla's portion.
In the first nine months of 2001, Hecla produced approximately 5.9 million
ounces of silver compared to approximately 6.1 million ounces in the first nine
months of 2000. The following table displays the actual silver production by
operation for the nine months ended September 30, 2001 and 2000, projected
silver production for the year ending December 31, 2001, and actual silver
production for the year ended December 31, 2000 (in thousands of ounces):
Actual Actual Projected Actual
Sept. 30, Sept. 30, Dec. 31, Dec. 31,
Operation 2001 2000 2001 2000
--------- --------- ---------------- ---------
Lucky Friday 2,856 3,904 3,200-3,300 5,012
Greens Creek(1) 2,494 2,091 3,200-3,300 2,754
San Sebastian 547 - - 700-800 177
Rosebud(1) - - 56 - - 56
--------- --------- ---------------- ---------
Totals 5,897 6,051 7,100-7,400 7,999
========= ========= ================ =========
(1) Reflects Hecla's portion.
22
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
In 2000, Hecla shipped approximately 1,078,000 tons of product from the K-T
Group, which included ball clay, kaolin and feldspar, as well as approximately
61,000 tons of specialty aggregates from CAC and 130,000 cubic yards of
landscape material from the Mountain West Products division of MWCA. During the
first nine months of 2001, Hecla shipped approximately 257,000 tons from the
industrial minerals group, including 16,000 tons from CAC. On March 27, 2001,
Hecla completed a sale of the K-T Group for $62.5 million subject to customary
post-closing adjustments. Hecla recorded a gain on the sale of the K-T Group of
$12.7 million. The proceeds were used to repay a term loan facility of $55.0
million and to repay amounts outstanding under a $2.0 million revolving bank
agreement. The remaining net proceeds were available for general corporate
purposes. Hecla continues to pursue a sale of the remaining assets of CAC,
although there can be no assurance that Hecla will complete a sales transaction.
During 2000, Hecla sold substantially all of the assets of its Mountain West
Products division of MWCA and the landscape operations of the Colorado Aggregate
division of MWCA.
Results of Operations
First Nine Months 2001 Compared to First Nine Months 2000
Hecla recorded a net loss from continuing operations, before preferred
stock dividends, of $6.9 million, or $0.10 per common share, for the first nine
months of 2001 compared to a net loss from continuing operations of
approximately $30.2 million, before an extraordinary charge and preferred stock
dividends, or $0.45 per common share, in the first nine months of 2000. After
recognizing $12.5 million in income from discontinued operations and $6.0
million (which have not been declared or paid) in dividends to holders of
Hecla's Series B Cumulative Convertible Preferred Stock, Hecla's loss applicable
to common shareholders for the first nine months of 2001 was approximately $0.5
million, or $0.01 per common share, compared to a loss of $33.7 million, or
$0.50 per common share, after recognizing $3.2 million in income from
discontinued operations, a $0.6 million extraordinary charge for the write-off
of debt issuance costs related to extinguished debt and $6.0 million in
dividends to holders of Hecla's Series B cumulative convertible Preferred Stock
in the first nine months of 2000. Although Hecla has elected not to declare the
dividends for the first, second and third quarters of 2001, because these
dividends are cumulative, the effects of the undeclared dividends are reflected
in the income applicable to common shareholders.
The income during 2001 compared to the loss in the same period of 2000 was
attributable to a variety of factors, the most significant of which are
discussed below.
23
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Sales of products increased by approximately $4.8 million, or 8%, in the
first nine months of 2001 as compared to the same period in 2000 primarily due
to:
- increased sales of $5.5 million from gold operations, principally a
result of increased production and sales at the La Camorra mine ($12.0
million), partly offset by decreased sales at the Rosebud mine ($6.4
million), a result of the completion of mining activity in the third
quarter of 2000, and
- decreased sales totaling approximately $0.7 million from silver
operations, primarily due to lower zinc and silver prices, lower
production at the Lucky Friday mine and reduced hedging activities in
the 2001 period. These factors are partly offset by increased
production at Greens Creek, higher lead prices and increased sales at
the San Sebastian mine due to the commencement of operations in May 2001
($4.5 million).
The following table compares the average metal prices for the first nine
months of 2001 with the comparable 2000 period:
Metal 2001 2000 $ Change % Change
------------------ -------- -------- -------- --------
Gold-Realized ($/oz.) $ 280 $ 286 $ (6) (2)%
Gold-London Final ($/oz.) 269 282 (13) (5)
Silver-Handy & Harman ($/oz.) 4.41 5.08 (0.67) (13)
Lead-LME Cash ($/pound) 0.215 0.203 0.012 6
Zinc-LME Cash ($/pound) 0.420 0.520 (0.10) (19)
Cost of sales and other direct production costs decreased approximately
$2.1 million, or 4%, from the first nine months of 2000 to the comparable 2001
period primarily due to:
- decreased cost of sales at the Rosebud mine ($7.3 million) due to the
completion of mining in the third quarter of 2000,
- decreased cost of sales at the Lucky Friday mine ($2.2 million)
resulting from decreased production of silver and lead and overall cost
cutting measures,
- increased cost of sales at the San Sebastian mine ($3.5 million) due
to the commencement of operations in May 2001, and
- increased cost of sales from the La Camorra and Greens Creek mines
($3.5 million and $0.8 million) due to increased production.
24
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Cost of sales and other direct production costs as a percentage of sales
from products decreased from 80% in the first nine months of 2000 to 71% in the
comparable 2001 period. The change was due to increased margins from the gold
segment resulting from increased production, increased gold ore grade and better
efficiencies at the La Camorra mine, decreased production and sales at the
Rosebud mine due to the completion of mining activity in 2000, partly offset by
lower hedging revenues and lower margins from the silver segment due to lower
silver and zinc prices.
Depreciation, depletion and amortization increased $0.9 million, or 6.5%,
in the first nine months of 2001 from the first nine months of 2000 principally
due to:
- increased depreciation from the La Camorra mine due to increased
production ($3.3 million),
- increased depreciation at the San Sebastian mine ($0.7 million) due to
the commencement of operations in May 2001,
- decreased depreciation at the Lucky Friday mine ($1.3 million), due to
the write-down of assets in December 2000, and
- decreased depreciation at the Rosebud mine ($2.0 million) due to the
completion of mining activity in the third quarter of 2000.
Hecla recorded adjustments to the carrying value of mining properties of
$9.1 million in the second quarter of 2000, including $4.4 million for
properties, plants, and equipment and supply inventory at the Rosebud mine, and
$4.7 million for previously capitalized deferred development costs at the Noche
Buena gold property.
Exploration expense decreased $3.5 million, or 64%, during the first nine
months of 2001 as compared to the same period of 2000 principally due to reduced
exploration activity in Mexico ($1.4 million), decreased expenditures at the
Rosebud mine ($1.3 million), due to completion of operations in the third
quarter of 2000, and South America ($0.2 million).
Hecla's provision for closed operations and environmental matters decreased
$2.8 million, from $4.0 million in the first nine months of 2000 to $1.2 million
in the 2001 period. The decrease resulted principally from decreased costs
during 2001 associated with the Grouse Creek property, combined with reclamation
and closure cost accruals during 2000 of $668,000 for the Rosebud mine and
$590,000 for various other properties.
25
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Interest expense decreased $2.5 million in the first nine months of 2001 as
compared to the same period in 2000. The $2.5 million decrease was the result
of the repayment of the $55.0 term loan facility in March 2001 and decreased
loan fees during 2001 as compared to the 2000 period.
General and administrative expense decreased $0.8 million, from $5.8
million in the 2000 period to $5.0 million in the 2001 period. The decrease in
2001 was principally the result of reduced spending at the corporate level, as
well as reduced staffing levels.
Interest income decreased $1.4 million in the first nine months of 2001 as
compared to the same period in 2000, principally a result of the gains
recognized during 2000 on the sale of assets, recognition of the mark to market
adjustment on the gold lease rate swap contract in 2001 in accordance with SFAS
138 and lower interest income.
Hecla recorded income from discontinued operations of approximately $12.5
million, or $0.18 per common share, in the first nine months of 2001 compared to
income of approximately $3.2 million, or $0.05 per common share, in the same
period in 2000. On March 27, 2001, Hecla completed a sale of the K-T Group for
$62.5 million, subject to customary post-closing adjustments, and recorded a
gain of $12.7 million on the sale in 2001. Other factors contributing to the
change include:
- decreased sales of approximately $40.0 million, a direct result of the
sale of the K-T Group ($34.0 million), as well as decreased shipments at
the MWCA group ($5.5 million) due to the sale of the Mountain West
Products division of MWCA in March 2000 and the landscape operation of
Colorado Aggregate in June 2000,
- decreased cost of sales of $33.2 million, directly due to the lower sales
at the K-T Group and the partial sale of MWCA during 2000,
- decreased depreciation, depletion and amortization of $2.0 million, due
to the sale of the K-T Group and the partial sale of MWCA in 2000,
- a loss of $0.9 million on the sale of the Mountain West Products division
of MWCA in 2000, and
- legal fees during 2001 associated with litigation concerning the
failed sale for the K-T Group in January 2001 ($0.5 million).
26
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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.
Cash operating, total cash and total production cost per gold ounce
decreased from $213, $216 and $281 for the first nine months of 2000 to $134,
$134 and $201 for the first nine months of 2001, respectively. The decreases in
cost per gold ounce were primarily attributable to increased production at the
La Camorra mine, as well as the completion of mining activity in the third
quarter of 2000 at the Rosebud mine.
Cash operating, total cash and total production cost per silver ounce
decreased from $3.90, $3.91 and $5.35 in the first nine months of 2000 to $3.43,
$3.45 and $4.88 in the first nine months of 2001, respectively. The decreases
in the cost per silver ounce were due primarily to the low-cost San Sebastian
mine, which commenced operations in May 2001, and the positive impacts of Greens
Creek's increased silver production during 2001, resulting from a higher silver
grade and increased tons mined. The full cost per ounce was also positively
impacted by decreased per ounce depreciation at the Lucky Friday mine due to the
write-down of the majority of property, plant and equipment in the fourth
quarter of 2000.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Hecla recorded a loss from continuing operations, before preferred stock
dividends, of $2.0 million, or $0.03 per common share, for the three months
ended September 30, 2001, compared to a loss from continuing operations of $5.3
million, or $0.08 per common share, before preferred stock dividends, for the
three months ended September 30, 2000. After recognizing $2.0 million in
dividends to holders of Hecla's Series B Cumulative Convertible Preferred Stock
and a $0.4 million loss from discontinued operations, Hecla's loss applicable to
common shareholders for the third quarter of 2001 was approximately $4.5
million, or $0.06 per common share, compared to a loss for the same period in
2000 of $5.6 million, or $0.08 per common share, after $2.0 million in dividends
to holders of Hecla's Series B cumulative convertible preferred stock and income
of $1.7 million from discontinued operations. The change in loss applicable to
common shareholders during 2001 was attributable to a variety of factors, the
most significant of which are discussed below.
Sales of products increased by approximately $2.5 million, or 12%, in the
third quarter of 2001 as compared to the same period in 2000 primarily due to:
27
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- increased sales of $2.2 million from gold operations, principally a
result of increased production and sales at the La Camorra mine ($5.6
million), partly offset by decreased sales at the Rosebud mine ($3.4
million), a result of the completion of mining activity in the third
quarter of 2000, and
- increased sales totaling approximately $0.3 million from silver
operations primarily due to increased sales at the San Sebastian mine,
due to the commencement of operations in May 2001 ($2.1 million),
increased production from the Greens Creek mine ($0.1 million), partly
offset by lower lead and silver prices, lower production at the Lucky
Friday mine ($1.8 million), as well as reduced hedging activity during
2001 ($0.1 million).
The following table compares the average metal prices for the third quarter
of 2001 with the comparable 2000 period:
Metal 2001 2000 $ Change % Change
------------------ -------- -------- --------- ---------
Gold-Realized ($/oz.) $ 283 $ 281 $ 2 1%
Gold-London Final ($/oz.) 274 277 (3) (1)
Silver-Handy & Harman ($/oz.) 4.28 4.96 (0.68) (14)
Lead-LME Cash ($/pound) 0.213 0.213 - - - -
Zinc-LME Cash ($/pound) 0.375 0.533 (0.158) (30)
Cost of sales and other direct production costs increased to $17.1 million
in the third quarter of 2001 from $16.0 million in 2000. Cost of sales from
gold operations decreased $1.0 million due to lower costs of sales at the
Rosebud mine due to the completion of mining activity, offset by higher costs of
sales at the La Camorra mine due to increased production. Cost of sales from
silver operations increased $2.0 million resulting from increased cost of sales
at the San Sebastian mine, due to the commencement of operations in May 2001,
increased production at the Greens Creek mine, partially offset by decreased
cost of sales at the Lucky Friday mine due to lower production.
Cost of sales and other direct production costs as a percentage of sales
from products decreased from 80% in the third quarter of 2000 to 76% in the
comparable 2001 period. The change was due to increased margins from the gold
segment resulting from increased production, higher gold ore grade and better
efficiencies at the La Camorra mine, decreased production and sales at the
Rosebud mine, due to the completion of mining activity in 2000, partly offset by
lower hedging revenues and lower margins from the silver segment due to lower
silver and zinc prices.
28
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Depreciation, depletion and amortization increased $1.1 million, or 26.5%,
in the third quarter of 2001 from the third quarter of 2000 principally due to:
- increased depreciation from the La Camorra mine due to increased
production ($1.0 million),
- increased depreciation from the San Sebastian mine due to the
commencement of operations in May 2001 ($0.4 million), and
- decreased depreciation at the Lucky Friday mine ($0.4 million), due to
the write-down of assets in December 2000.
Exploration expense decreased $1.5 million, or 77%, during the third
quarter of 2001 as compared to the same period of 2000, principally due to
decreased expenditures in Mexico ($0.9 million), at La Camorra ($0.3 million)
and at the Rosebud mine ($0.2 million).
Interest expense decreased $1.4 million in the third quarter of 2001 as
compared to the same period in 2000. The $1.4 million decrease was the result
of the repayment of the $55.0 term loan facility in March 2001 and decreased
loan fees during 2001 as compared to the 2000 period.
Hecla's provision for closed operations and environmental matters decreased
$0.3 million, from $0.5 million in the third quarter of 2000 to $0.2 million in
the 2001 period. The decrease resulted principally from decreased costs during
2001 associated with the Grouse Creek property.
Hecla recorded a loss from discontinued operations of approximately $0.4
million in the third quarter of 2001 compared to income of approximately $1.7
million, or $0.03 per common share, in the same period in 2000. This decrease
is principally due to the sale of the K-T Group in March 2001.
Cash operating, total cash and total production cost per gold ounce
decreased from $192, $195 and $239 for the third quarter of 2000 to $128, $128
and $190 for the third quarter of 2001, respectively. The decreases in cost per
gold ounce were primarily attributable to increased productivity and higher
average gold ore grade at the La Camorra mine, as well as completion of mining
activity in the third quarter of 2000 at the Rosebud mine.
Cash operating, total cash and total production cost per silver ounce
decreased from $4.23, $4.25 and $5.79 in the third quarter of 2000 to $3.93,
$3.95 and $5.60 in the third quarter of 2001, respectively. The decreases in
the cost per silver ounce
29
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
are due primarily to the low-cost San Sebastian mine, due to high gold by-
product credits, which commenced operations in May 2001. The full cost per
ounce was also positively impacted by decreased per ounce depreciation at the
Lucky Friday mine due to the write-down of the majority of property, plant and
equipment in the fourth quarter of 2000.
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. 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 September 30, 2001, assets totaled approximately $160 million and
shareholders' equity totaled approximately $61 million. Cash and cash
equivalents increased by $6.4 million to $7.8 million at September 30, 2001 from
$1.4 million at December 31, 2000.
Hecla's investing activities provided $44.6 million of cash during the
first nine months of 2001. The most significant source of cash was from the
sale of the K-T Group ($59.8 million), partly offset by additions to properties,
plants and equipment totaling $15.9 million, principally at the San Sebastian
mine to acquire the Velardena mill ($7.4 million), at the La Camorra mine ($4.2
million) and at the Greens Creek mine ($4.2 million).
Operating activities provided approximately $5.4 million of cash during the
first nine months of 2001. Significant sources of cash included cash provided
by La Camorra, increased accounts payable and accrued expenses ($1.8 million)
and increased accrued payroll and related benefits ($0.8 million). Significant
uses of cash included cash required for reclamation activities and other
noncurrent liabilities ($5.3 million) and other current and noncurrent assets
($1.6 million). Principal noncash charges
30
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
included charges for depreciation, depletion and amortization of $15.1 million,
partly offset by a $12.7 million gain on the sale of the K-T Group.
During the first nine months of 2001, approximately $43.6 million of cash
was used by financing activities. The major use of cash was repayment of debt
of $61.8 million, including the Company's $55.0 million term loan facility.
This use was partly offset by borrowings of $12.3 million, including $7.4
million at Minera Hecla to finance the Velardena mill purchase. In addition,
the Company received net proceeds of approximately $5.5 million in a private
placement of 5.7 million common shares to the Company's pension plans.
At September 30, 2001, Hecla's wholly owned subsidiary, HRIL, had $8.1
million outstanding under a credit agreement utilized to finance the acquisition
of the La Camorra gold mine in Venezuela. At September 30, 2001, HRIL was in
compliance with restrictive covenants related to the available ore reserves and
financial performance of the La Camorra mine. At September 30, 2001, $5.0
million of the project financing debt was classified as long-term debt, with the
remaining $3.1 million classified as current portion of long-term debt.
On April 16, 2001, Hecla entered into a new $1.5 million revolving bank
agreement due on June 16, 2001. On June 15, 2001, the Company amended the note
to allow borrowings up to $1.0 million and extended the repayment date until
November 1, 2001. On October 31, 2001, the Company amended the note to allow
borrowings up to $3.0 million and extended the repayment date until April 30,
2002. Amounts available under the bank agreement are available for general
corporate purposes. As collateral for the loan, Hecla pledged its corporate
office building and related property located in Coeur d'Alene, Idaho. The
interest rate is 7%.
On April 30, 2001, Minera Hecla acquired a processing mill at Velardena,
Mexico, to process ore to be mined from the San Sebastian project on the
Saladillo mining concessions located near Durango, Mexico. The purchase price
of $7.4 million was financed by a credit facility between Minera Hecla and the
lender. The credit facility is nonrecourse to Hecla. Under the terms of the
credit facility, Minera Hecla will make monthly payments for principal and
interest over 63 months, including payments of $170,000 a month in 2001. The
loan is collateralized by the mill at Velardena and the Saladillo, Saladillo 1
and Saladillo 5 mining concessions.
On May 7, 2001, Minera Hecla entered into a $700,000 short-term loan to
finance the working capital of the San Sebastian project. The loan requires
monthly interest payments with a final principal payment due on December 7,
2001. The loan is nonrecourse to Hecla and is unsecured.
31
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
On April 26, 2001, Hecla entered into a factoring agreement, whereas Hecla,
without recourse, will sell all of its right, title and interest in certain
smelter accounts receivable from the Lucky Friday mine, less estimated finance
charges, up to a maximum of $2.0 million. Factored accounts receivable at
September 30, 2001, were $1.1 million.
On June 27, 2001, Hecla entered into a factoring agreement, whereas Hecla
may sell qualified accounts receivable, without recourse except as specifically
provided, certain receivables from MWCA - Colorado Aggregate Division, less
estimated finance charges. The amount of borrowings allowable under the
agreement at any time is a function of the amount of the then outstanding
eligible trade accounts receivable. Factored accounts receivable at September
30, 2001, were $0.7 million.
On August 28, 2001, Hecla issued 5,749,883 shares of its common stock in a
private placement transaction for the benefit of the Hecla Mining Company
Retirement Plan and the Lucky Friday Pension Plan for approximately $5.5
million. Proceeds available from the private placement are available for
general corporate purposes.
On July 18, 2001, Hecla announced that operations at its Lucky Friday
silver mine will be reduced, effective October 2001, due to continued low silver
and lead prices. Employment at the mine will decrease from approximately 189
people to approximately 53 employees by November 2001. Production is
anticipated to total approximately 3.3 million ounces of silver in 2001, and
will be further reduced to approximately 1.0 million ounces in 2002. The
reduced production level will allow the mine to remain ready to increase
production if and when silver and lead prices increase. Primary development at
the mine will be suspended and mining will take place in currently developed
areas. Starting in November, production is anticipated to be approximately
7,000 tons per month, which will yield approximately 100,000 ounces of silver
production per month. It is estimated that the currently developed resource can
sustain the lower production levels up to 24 months. Reduced operations will
continue until prices recover as long as the cost of operating is less than the
cost of care and maintenance.
Hecla currently estimates that capital expenditures for the remainder of
2001 will be in the range of $2.0 to $3.0 million, principally for expenditures
at the Greens Creek and La Camorra mines. Expenditures for environmental
remediation and reclamation for the remainder of 2001 are estimated in the range
of $2.0 to $3.0 million, principally for activities at the Grouse Creek property
and the Bunker Hill Superfund site. Hecla also estimates that exploration
expenditures for the remainder of 2001 will be in the range of $0.3 to $0.6
million for expenditures at
32
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
the San Sebastian project in Mexico and at the Greens Creek and La Camorra
mines. These expenditures will be dependent upon Hecla's ability to generate
sufficient operating cash flows, proceeds from potential debt financings,
proceeds generated from the potential sale of assets and possible offerings of
equity and/or debt securities. There can be no assurance that Hecla will be
successful in generating adequate funding for planned capital expenditures,
environmental remediation and reclamation expenditures and for exploration
expenditures.
Reserves for closure costs, reclamation and environmental matters totaled
$53.9 million at September 30, 2001. 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.
In August 2001, Hecla announced it had reached an Agreement in Principle
with the United States and the State of Idaho to settle the governments' claims
for natural resource damages and cleanup costs related to historic mining
practices in the Coeur d'Alene Basin in northern Idaho. The settlement, if, and
when finalized, would release the Company from further liability to the
governments for its historic mining practices in the Coeur d'Alene Basin and cap
the majority of cleanup-related expenditures Hecla is responsible for annually
at the Bunker Hill Superfund Site, the Grouse Creek mine and Stibnite site in
central Idaho over a 10-year period. The Agreement limits these payments and/or
cleanup obligations in the Coeur d'Alene Basin, the Bunker Hill Superfund Site,
Grouse Creek and Stibnite to a fixed annual cap of $5 million for each of the
first two years of the Agreement and $6 million for each of the next eight
years. Hecla is committed to work and/or payments of $4 million annually for
the following 20 years. Over the past three-and-one-half years, Hecla's
environmental expenditures at those four sites have averaged more than $9
million per year. The settlement will reduce Hecla's annual environmental costs
to an amount that is more manageable for the Company. As of September 30, 2001,
the Company has accrued $45.2 million related to the properties covered by the
Agreement in Principle. It is reasonably possible that Hecla's obligation may
change in the near or long term depending on a number of factors, including
finalization and entry of a Consent Decree. In addition, an adverse ruling
against Hecla for liability and damages in this matter could have a material
adverse effect on the Company.
33
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Hecla has 2.3 million shares of Series B Cumulative Convertible Preferred
Stock (the Preferred Shares) outstanding. Holders of the Preferred Shares are
entitled to receive cumulative cash dividends at the annual rate of $3.50 per
share payable quarterly, when and if declared by the Board of Directors, and
have voting rights related to certain amendments to Hecla's Articles of
Incorporation. As of October 31, 2001, Hecla has not declared and paid the
equivalent of five quarterly dividends. If the dividend payment for January
2002 is not made, the holders of Preferred Shares, voting as a class, shall be
entitled to elect two directors at Hecla's next annual shareholders meeting.
Reduction or elimination of the Preferred Shares would reduce or eliminate the
impact from Preferred Share dividends on the Company's income statement. Hecla
has considered several options with regard to the Preferred Stock, including
private and public exchange offers for the Preferred Shares and merger
transactions, where the Preferred Stock could be converted into Hecla Common
Stock, cash and/or other securities. Certain options would not require approval
by holders of Preferred Stock.
Hecla brought suit in January 2001 against Zemex Corporation of Toronto,
Canada, under its guarantee for its subsidiary Zemex U.S. Corporation's failure
to close on the sale of K-T Clay and K-T Mexico. Hecla had announced the agreed
upon sale in November 2000 for $68.0 million and is seeking damages incurred by
Zemex U.S. Corporation's failure to purchase K-T Clay and K-T Mexico as agreed.
The litigation is proceeding through discovery.
Hecla received shareholder approval at its annual shareholders' meeting on
June 11, 2001, allowing a reverse split of its common stock at the discretion of
Hecla's board of directors. The choice of stock split ratios given to the
directors was one for three, one for four or one for five. The directors have
the option to implement a reverse split at one of those ratios any time prior to
June 11, 2003, or not at all. The company requested the board be granted
authority to implement a reverse split from shareholders if necessary to remain
listed on the New York Stock Exchange. Hecla's common stock has been trading
above the minimum average criteria for continued listing on the Exchange since
mid-May 2001. The Exchange's criterion is a minimum average of $1 per share.
The directors have elected not to take any action on the reverse split at this
time, as the Company remains within the minimum criteria for the Exchange.
Pursuant to a Registration Statement filed with the Securities and Exchange
Commission and declared effective in the 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 September 30,
2001, Hecla has issued $62.2 million of Hecla's
34
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
common shares and warrants under the Registration Statement. Due to the current
market capitalization of Hecla and the nonpayment by the Company of certain
dividends on its Series B Convertible Preferred Stock, there can be no assurance
as to the availability of this Registration Statement.
As of September 30, 2001, Hecla's unrestricted cash balance totaled $7.8
million. Maintaining this cash position in the current low precious metals
price environment will require further reductions in spending and implementing
one or more financing alternatives. Hecla is currently evaluating a number of
alternatives including additional debt financing, asset sales and hedging.
Hecla currently anticipates completing one or more financing alternatives during
2001. Proceeds from possible financings will be available for general corporate
purposes. Hecla also continues to pursue the sale of the remaining assets of
CAC. There can be no assurance that Hecla will be successful in obtaining
additional financing or in completing a sales transaction for the remaining
assets of CAC.
Based upon Hecla's estimate of metals prices and metals production for
2001, Hecla currently believes that its existing cash and cash equivalents,
operating cash flows and proceeds from possible financings will be adequate to
fund anticipated minimum capital expenditures, idle property expenditures and
exploration expenditures in 2001. Cash flows from operations, however, could be
significantly impacted if the market price of gold, silver, zinc and lead
fluctuate. In the event that cash balances decline to a level that cannot
support the operations of the Company, management will defer certain planned
capital and exploration expenditures as needed to conserve cash for operations.
If management's plans are not successful, operations and liquidity may be
adversely affected.
Various laws and permits require that financial assurances be in place for
certain environmental and reclamation obligations and other potential
liabilities. Hecla currently has in place such financial assurances in the form
of surety bonds from four bonding companies. One of the bonding companies,
Amwest Surety Insurance Company, has provided $4.8 million of bonds secured with
$1.7 million of cash collateral for certain reclamation requirements at Grouse
Creek and Republic properties. Amwest is in liquidation under Nebraska law and
new financial assurances might be required. There can be no guarantee that Hecla
will be able to maintain and/or put in place the necessary replacement financial
assurances or any additional financial assurances that may be required.
For information on hedged positions and derivative instruments, see Item 3
"Quantitative and Qualitative Disclosure About Market Risk."
35
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Hecla is subject to legal proceedings and claims that have not been finally
adjudicated (see Part II. Item 1. Legal Proceedings and Note 6 of Notes to
Consolidated Financial Statements). The ultimate disposition of these matters
and various other pending legal actions and claims is not presently
determinable. However, an adverse determination in certain of these matters may
have a material adverse effect on the financial position of Hecla and its
subsidiaries.
36
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 3. 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, as well as
summarize the financial instruments and derivative instruments held by Hecla at
September 30, 2001, which are sensitive to changes in interest rates and
commodity prices. Actual results could differ materially from those projected
in the forward-looking statements. 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
2000 Annual Report on Form 10-K).
Interest-Rate Risk Management
At September 30, 2001, 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
September 30, 2001, 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)
2001 2002 2003 2004 Thereafter Total Value
-------- -------- -------- -------- ---------- -------- --------
Subordinated debt $ - - $ - - $ 2,000 $ 1,000 $ - - $ 3,000 $ 3,000
Average interest rate 6.51% 7.02% 8.57% 9.23%
Project financing debt $ 1,625 $ 3,000 $ 3,000 $ 500 $ - - $ 8,125 $ 8,125
Average interest rate 5.01% 5.52% 7.07% 7.73% - -
Project financing debt $ 286 $ 1,243 $ 2,283 $ 837 $ 2,327 $ 6,976 $ 6,976
Average interest rate 13.0% 13.0% 13.0% 13.0% 13.0%
Revolving bank debt $ - - $ 1,000 $ - - $ - - $ - - $ 1,000 $ 1,000
Average interest rate - - 7% - - - - - -
37
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Commodity-Price Risk Management
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 currently held by Hecla are not leveraged and are
held for purposes other than trading. Hecla intends to physically deliver metal
in accordance with the terms of certain of the forward sales contracts. As
such, Hecla has elected to designate these contracts as normal sales in
accordance with SFAS 138 and as a result, these contracts are not required to be
accounted for as derivatives under SFAS 133. Certain other forward contracts
where delivery is not certain have been designated as cash flow hedges, and the
changes in fair value of these cash flow hedges are recorded in other
comprehensive income until the contract is closed out.
The following table provides information about Hecla's forward sales
contracts at September 30, 2001. The table presents the notional amount in
ounces, the average forward sales price and the total-dollar contract amount
expected by the maturity dates, which occur between October 30, 2001, and
December 31, 2004.
Expected Expected Expected Expected Estimated
Maturity Maturity Maturity Maturity Fair
2001 2002 2003 2004 Value
-------- -------- -------- -------- ---------
Forward contracts:
Gold sales (ounces) 35,448 70,428 59,802 48,928
Future price (per ounce) $ 290 $ 289 $ 288 $ 288
Contract amount (in $000's) $ 10,276 $ 20,359 $ 17,238 $ 14,103 $ (2,297)
In addition to the above contracts, Hecla has a quarterly gold lease rate
swap at a fixed rate of 1.5% on 184,606 ounces of the above gold forward
contracts. The ounces covered under the 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
September 28, 2001 was $298,741.
38
Part II - Other Information
Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
For information concerning legal proceedings, refer to Note 6 to
Consolidated Financial Statements of this Form 10-Q.
39
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
(b) Reports on Form 8-K
Form 8-K dated August 20, 2001, related to the Agreement in
Principle between Hecla Mining Company and the United States and State
of Idaho to settle governments' claims for natural resource damages
and cleanup costs related to historic mining practices in the Coeur
d'Alene Basin in northern Idaho.
Form 8-K dated August 28, 2001, related to Hecla Mining Company
closing a private placement transaction of its Common Stock to Copper
Mountain Trust for a total consideration of $5,462,388.85.
Form 8-K dated October 12, 2001, reporting the change in Hecla
Mining Company's independent public accountants to BDO Seidman LLP
from PricewaterhouseCoopers LLP.
40
Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HECLA MINING COMPANY
-----------------------------------
(Registrant)
Date: November 9, 2001 By /s/ Arthur Brown
-------------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: November 9, 2001 By /s/ Lewis E. Walde
-------------------------------------
Lewis E. Walde, Vice President - Controller
(Chief Accounting Officer)
41
Exhibit Index
Exhibit
No. Description
- ------- -----------
12 Fixed Charge Coverage Ratio Calculation