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 JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8491
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HECLA MINING COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 82-0126240
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83814-8788
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(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 July 31, 1996
- --------------------------------------- -------------------------
Common stock, par value $0.25 per share 51,137,248 shares
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HECLA MINING COMPANY and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
I N D E X*
PAGE
PART I. - Financial Information
Item l - Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 3
- Consolidated Statements of Operations -
Three Months and Six Months Ended
June 30, 1996 and 1995 4
- Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1996 and 1995 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. - Other Information
Item 1 - Legal Proceedings 28
Item 4 - Annual Meeting of Shareholders 32
Item 6 - Exhibits and Reports on Form 8-K 33
*Items omitted are not applicable.
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PART I - FINANCIAL INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
June 30, December 31,
1996 1995
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,711 $ 4,024
Accounts and notes receivable 36,657 25,571
Income tax refund receivable 568 737
Inventories 19,896 20,915
Other current assets 2,289 2,038
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Total current assets 65,121 53,285
Investments 2,262 2,200
Restricted investments 16,409 16,254
Properties, plants and equipment, net 186,071 177,374
Other noncurrent assets 10,497 9,077
---------- ---------
Total assets $ 280,360 $ 258,190
========== =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 16,256 $ 14,145
Accrued payroll and related benefits 2,734 3,217
Preferred stock dividends payable 2,012 2,012
Accrued taxes 1,155 1,042
Accrued reclamation costs 5,667 5,549
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Total current liabilities 27,824 25,965
Deferred income taxes 359 359
Long-term debt 33,695 36,104
Accrued reclamation costs 26,669 26,782
Other noncurrent liabilities 5,338 4,864
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Total liabilities 93,885 94,074
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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 1996 - 51,199,324;
issued 1995 - 48,317,324 12,800 12,079
Capital surplus 351,659 330,352
Accumulated deficit (172,955) (173,206)
Net unrealized gain on investments 180 100
Foreign currency translation adjustment (4,898) (4,898)
Less common stock reacquired at cost;
1996 - 62,076 shares, 1995 - 62,072 shares (886) (886)
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Total shareholders' equity 186,475 164,116
---------- ---------
Total liabilities and shareholders' equity $ 280,360 $ 258,190
========== =========
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 (Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Six Months Ended
---------------------------------- ---------------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
Sales of products $ 40,523 $ 42,241 $ 83,470 $ 77,951
--------- --------- ---------- ---------
Cost of sales and other direct production costs 33,072 35,310 66,625 65,540
Depreciation, depletion and amortization 4,423 5,923 9,882 11,565
--------- --------- ---------- ---------
37,495 41,233 76,507 77,105
--------- --------- ---------- ---------
Gross profit 3,028 1,008 6,963 846
--------- --------- ---------- ---------
Other operating expenses:
General and administrative 2,234 2,134 4,505 4,464
Exploration 1,187 1,165 1,990 2,208
Depreciation and amortization 85 85 174 168
Provision for (benefit from) closed
operations and environmental matters (2,618) 171 (2,801) 227
--------- --------- ---------- ---------
888 3,555 3,868 7,067
--------- --------- ---------- ---------
Income (loss) from operations 2,140 (2,547) 3,095 (6,221)
--------- --------- ---------- ---------
Other income (expense):
Interest and other income 714 848 1,408 2,291
Foreign exchange gain (loss) (14) 359 (28) 162
Gain on sale of investments 110 3,772 130 3,893
Interest expense:
Total interest cost (728) (421) (1,349) (586)
Less amount capitalized 566 318 1,043 376
--------- --------- ---------- ---------
648 4,876 1,204 6,136
--------- --------- ---------- ---------
Income (loss) before income taxes 2,788 2,329 4,299 (85)
Income tax (provision) benefit 13 (87) (23) (137)
--------- --------- ---------- ---------
Net income (loss) 2,801 2,242 4,276 (222)
Preferred stock dividends (2,013) (2,013) (4,025) (4,025)
--------- --------- ---------- ---------
Income (loss) applicable to
common shareholders $ 788 $ 229 $ 251 $ (4,247)
========= ========= ========== =========
Income (loss) per common share $ 0.02 $ 0.01 $ 0.01 $ (0.09)
========= ========= ========== =========
Cash dividends per common share $ - - $ - - $ - - $ - -
========= ========= ========== =========
Weighted average number of common
shares outstanding 51,134 48,236 51,131 48,155
========= ========= ========== =========
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)
Six Months Ended
--------------------------------
June 30, 1996 June 30, 1995
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Operating activities:
Net income (loss) $ 4,276 $ (222)
Noncash elements included in net income (loss):
Depreciation, depletion and amortization 10,056 11,733
Loss (gain) on disposition of properties, plants and equipment 149 (244)
Gain on sale of investments (130) (3,893)
Provision for reclamation and closure costs 1,508 535
Change in:
Accounts and notes receivable (11,086) (7,760)
Income tax refund receivable 169 (3)
Inventories 1,019 218
Other current assets (251) (313)
Accounts payable and accrued expenses 2,111 (1,297)
Accrued payroll and related benefits (483) (144)
Accrued taxes 113 402
Accrued reclamation and other noncurrent liabilities (1,029) 657
---------- ----------
Net cash provided (used) by operating activities 6,422 (331)
---------- ----------
Investing activities:
Additions to properties, plants and equipment (18,909) (21,575)
Proceeds from disposition of properties, plants and equipment 91 379
Proceeds from the sale of investments 130 4,664
Increase in restricted investments (155) (284)
Purchase of investments and increase in cash surrender value of
life insurance (383) (639)
Other, net (1,504) (1,110)
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Net cash used by investing activities (20,730) (18,565)
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Financing activities:
Proceeds from the exercise of stock warrants - - 1,239
Issuance of common stock, net of offering costs 22,028 - -
Dividends on preferred stock (4,025) (4,025)
Borrowings against cash surrender value of
life insurance 401 - -
Borrowing on long-term debt 30,500 30,000
Repayment of long-term debt (32,909) (8,902)
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Net cash provided by financing activities 15,995 18,312
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Increase (decrease) in cash and cash equivalents 1,687 (584)
Cash and cash equivalents at beginning of period 4,024 7,278
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Cash and cash equivalents at end of period $ 5,711 $ 6,694
========== ==========
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, 1995, as set forth in the Company's 1995
Annual Report on Form 10-K, substantially apply to these
interim consolidated financial statements and are not
repeated here.
Note 2. The financial information given in the accompanying
unaudited interim consolidated financial statements
reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results
for the interim periods reported. All such adjustments
are of a normal recurring nature. All financial
statements presented herein are unaudited. However, the
balance sheet as of December 31, 1995, was derived from
the audited consolidated balance sheet described in
Note 1 above. Certain consolidated financial statement
amounts have been reclassified to conform to the 1996
presentation. These reclassifications had no effect on
the net income (loss) or accumulated deficit as
previously reported.
Note 3. The components of the income tax provision for the six
months ended June 30, 1996 and 1995 are as follows (in
thousands):
1996 1995
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Current:
State income taxes $ 158 $ 137
Federal income tax benefit (135) - -
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Total current provision 23 137
Deferred provision - - - -
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Total $ 23 $ 137
====== ======
The Company's income tax provision for the first half of
1996 and 1995 varies from the amount that would have been
provided by applying the statutory rate to the income or
loss before income taxes primarily due to the
nonutilization of net operating losses in 1996 and 1995.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Note 4. Inventories consist of the following (in thousands):
June 30, Dec. 31,
1996 1995
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Concentrates, bullion, metals
in transit and other products $ 3,712 $ 2,519
Industrial mineral products 6,514 8,671
Materials and supplies 9,670 9,725
-------- --------
$ 19,896 $ 20,915
======== ========
Note 5. In July 1991, the Coeur d'Alene Indian Tribe (the Tribe)
brought a lawsuit, under the Comprehensive Environmental
Response Liability Act of 1980, as amended (CERCLA), in
Idaho Federal District Court against the Company and a
number of other mining companies asserting claims for
damages to natural resources located downstream from the
Bunker Hill Superfund Site located at Kellogg, Idaho,
over which the Tribe alleges some ownership or control.
The Company has answered the Tribe's complaint denying
liability for natural resource damages and asserted a
number of defenses to the Tribe's claims, including a
defense that the Tribe has no ownership or control over
the natural resources they assert have been damaged. In
July 1992, in a separate action between the Tribe and the
State of Idaho, the Idaho Federal District Court
determined that the Tribe does not own the beds, banks
and waters of Lake Coeur d'Alene and the lower portion of
its tributaries, the ownership of which is the primary
basis for the natural resource damage claims asserted by
the Tribe against the Company. Based upon the Tribe's
appeal of the July 1992 District Court ownership decision
to the 9th Circuit U.S. Court of Appeals, the Court in
the natural resource damage litigation issued an order on
October 30, 1992, staying the court proceedings in the
natural resource damage litigation until a final decision
is handed down on the question of the Tribe's title. On
December 9, 1994, the 9th Circuit Court reversed the
decision of the Idaho Federal District Court and remanded
the case of the Tribe's ownership for trial before the
Idaho Federal District Court. In April 1996, the U.S.
Supreme Court accepted the appeal from the 9th Circuit
Court decision to the U.S. Supreme Court. The case is
currently being briefed by the parties. In July 1994,
the United States, as Trustee for the Coeur d'Alene
Tribe, initiated a separate suit in Idaho Federal
District Court seeking a determination that the Coeur
d'Alene Tribe owns approximately the lower one-third of
Lake Coeur d'Alene. The State has denied the Tribe's
ownership of any portion of Lake Coeur d'Alene and its
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
tributaries. The legal proceedings related to the
Tribe's natural resource damages claim against the
Company and other mining companies continue to be stayed.
On March 22, 1996, the United States brought a lawsuit in
Idaho Federal District Court against the Company and
other mining companies who were involved in historic
mining activity in Northern Idaho. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks
recovery for alleged damages to or loss of natural
resources located in the Coeur d'Alene River Basin in
North Idaho over 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 the Company and other defendants are jointly and
severally liable for response costs under CERCLA for
historic mining impacts in the Coeur d'Alene River Basin
outside the Bunker Hill Superfund Site. The Company
answered the complaint on May 17, 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 activity
in the Coeur d'Alene River Basin which contributed to the
releases and damages alleged by the United States. The
Company believes it also has a number of defenses to the
United States' claims.
On March 22, 1996, the Company entered into an agreement
(the Agreement) with the State of Idaho pursuant to which
the Company agreed to continue certain financial
contributions to environmental cleanup work in the Coeur
d'Alene River Basin being undertaken by a State Trustees
group. In return, the State agreed not to sue the
Company for damage to natural resources for which the
State is a trustee for a period of five years, to pursue
settlement with the Company of the State's natural
resource damage claims and to grant the Company credit
against any such State claims for all expenditures made
under the Agreement and certain other Company
contributions and expenditures for environmental cleanup
in the Coeur d'Alene Basin. In connection with the
Agreement, the Company increased its accrual for closed
operations and environmental matters by $0.5 million
during the first quarter of 1996.
In 1991, the Company initiated litigation in the Idaho
State District Court in Kootenai County, Idaho, against a
number of insurance companies which provided
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
comprehensive general liability insurance coverage to the
Company and its predecessors. The Company believes that
the insurance companies have a duty to defend and
indemnify the Company under their policies of insurance
for all liabilities and claims asserted against the
Company by the Environmental Protection Agency (EPA) and
the Tribe under CERCLA related to the Bunker Hill
Superfund Site and Coeur d'Alene River Basin in northern
Idaho. In 1992, the Court ruled that the primary
insurance companies had a duty to defend the Company in
the Tribe's lawsuit. During 1995 and 1996, the Company
entered into settlement agreements with a number of the
insurance carriers named in the litigation. The Company
has received a total of $7.195 million under the terms of
the settlement agreements. Thirty percent of these
settlements is payable to the EPA to reimburse the U.S.
Government for past costs under the Bunker Hill Superfund
Site Consent Decree previously entered into by the
Company. Litigation is still pending against one insurer
with trial scheduled for October 1996. The remaining
insurance carrier is providing the Company with a partial
defense in all Coeur d'Alene River Basin environmental
litigation. As of June 30, 1996, the Company had not
reduced its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance
proceeds.
In June 1994, a judgment was entered against the Company
in Idaho State District Court in the amount of $10.0
million in compensatory damages and $10.0 million in
punitive damages based on a jury verdict rendered in late
May 1994 with respect to a lawsuit previously filed
against the Company by Star Phoenix Mining Company (Star
Phoenix), a former lessee of the Star Morning Mine, over
a dispute between the Company and Star Phoenix concerning
the Company's November 1990 termination of the Star
Phoenix lease of the Star Morning Mine property. A
number of other claims by Star Phoenix and certain
principals of Star Phoenix against the Company in the
lawsuit were dismissed by the State District Court. On
May 3, 1995, the District Court issued its final opinion
and order on a number of post-trial issues pending before
the Court. The opinion and order included the Court's
denial of the post-trial motions filed by Star Phoenix
and certain of its principals regarding claims which had
been previously dismissed by the Court during trial. The
Court also awarded Star Phoenix approximately $300,000 in
attorneys' fees and costs. The Company's post-trial
motions with respect to the judgment and motions were
denied by the State District Court, and the Company has
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
appealed the District Court judgment to the Idaho State
Supreme Court. Star Phoenix has cross-appealed certain
trial court discovery determinations. Briefing on the
appeal has been completed and oral argument was presented
to the Idaho State Supreme Court on April 10, 1996. A
decision from the Idaho Supreme Court is expected in late
1996. Post-judgment interest will accrue during the
appeal period; the current interest rate is 10.875%. In
order to stay the ability of Star Phoenix to collect on
the judgment during the pendency of the appeal, the
Company has posted an appeal bond in the amount of $27.2
million representing 136% of the District Court judgment.
The Company pledged U.S. Treasury Securities totaling
$10.0 million as collateral for the appeal bond. This
collateral amount is included in restricted investments
at June 30, 1996 and December 31, 1995. The Company has
vigorously pursued its appeal to the Idaho Supreme Court
and it has been the Company's position, and at the
current time it remains the Company's position, that it
will not enter into a settlement with Star Phoenix for
any material amount. Although the ultimate outcome of
the appeal of the Idaho District Court judgment is
subject to the inherent uncertainties of any legal
proceeding, based upon the Company's analysis of the
factual and legal issues associated with the proceeding
before the Idaho District Court and based on the opinions
of outside counsel, as of the date hereof, it is
management's belief that the Company should ultimately
prevail in this matter, although there can be no
assurance in this regard. Accordingly, the Company has
not accrued any liability associated with this
litigation.
The Company 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 the Company's management, based upon
the information available at this time, that the expected
outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the
results of operations and financial condition of the
Company and its subsidiaries.
Note 6. At June 30, 1996, there was $33.0 million outstanding
under the Company's $55.0 million revolving and term loan
facility classified as long-term debt. The Company was
in compliance with all restrictive covenants of the
facility as of June 30, 1996.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Note 7. In January 1996, the Company issued 2,875,000 shares of
its common stock realizing proceeds of approximately
$22.0 million, net of underwriting discount and issuance
costs of approximately $1.7 million. The Company used
$21.0 million of the net proceeds to repay borrowings
under its existing revolving and term loan credit
facility.
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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 (Hecla or the Company) is primarily
involved in the exploration, development, mining and
processing of gold, silver, lead, zinc and industrial
minerals. As such, the Company's 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 the Company's
control, including inflation and worldwide forces of
supply and demand. The aggregate effect of these factors
is not possible to accurately predict. In the following
descriptions, where there are changes that are
attributable to more than one factor, the Company
presents each attribute in descending order relative to
the attribute's importance to the overall change.
Except for the historical information contained herein,
the matters discussed are forward-looking statements that
involve risks and uncertainties, including the timely
development of existing properties and reserves (such as
Greens Creek) and future projects (such as the Rosebud
project), the impact of metals prices and metal
production volatility, changing market conditions and
regulatory environment and the other risks detailed from
time to time in the Company's Form 10-K and Form 10-Qs
filed with the Securities and Exchange Commission
(reference for additional information is also made to
"Investment Considerations" of Part I, Item 1 of the
Company's 1995 Annual Report on Form 10-K). Actual
results may differ materially from those projected.
These forward-looking statements represent the Company's
judgment as of the date of this filing. The Company
disclaims, however, any intent or obligation to update
these forward-looking statements.
The Company incurred losses applicable to common
shareholders for each of the past three years in the
period ended December 31, 1995. If the Company's
estimates of market prices of gold, silver, lead and zinc
are realized in 1996, the Company is anticipating net
income (loss) applicable to common shareholders in the
range of $(3.0) to $2.0 million after the expected
dividends to preferred shareholders totaling
approximately $8.0 million for the year ended
December 31, 1996. Due to the volatility of metals
prices and the significant impact metals price changes
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
have on the Company's operations, there can be no
assurance that the actual results of operations for the
year ending December 31, 1996 will be as projected.
The variability of metals prices requires that the
Company, in assessing the impact of prices on
recoverability of its assets, exercise judgment as to
whether price changes are temporary or are likely to
persist. The Company performs a comprehensive evaluation
of the recoverability of its assets on a periodic basis.
The evaluation includes a review of future cash flows
against the carrying value of the assets. Moreover, a
review is made on a quarterly basis to assess the impact
of significant changes in market conditions and other
factors. Asset write-downs may occur if the Company
determines that the carrying values attributed to
individual assets are not recoverable given reasonable
expectations for future market conditions.
The American Girl gold mine in southern California had
total cash costs in the first six months of 1996 of
approximately $503 per ounce of gold recovered. The
Company holds a 47% interest in the mine through a joint
venture with MK Gold, the operator of the property.
Results for the first six months of 1996 from the Oro
Cruz ore body, which is now being mined, have been
unsatisfactory to the Company. A technical team
consisting of experts from both companies was formed to
address the problems at the property. On July 1, 1996,
MK Gold announced that it had written down its investment
in the American Girl gold mine from $9.1 million to zero.
MK Gold has not provided the Company with an updated
life-of-mine plan that reflects the operator's current
economic outlook for the property. The Company
anticipates receiving relevant data during the third
quarter and expects to complete its evaluation of the
property at that time. At this time, information
provided by MK Gold is insufficient to establish the
necessity or amount of a Hecla write-down, if any. At
June 30, 1996, Hecla's interest in the American Girl gold
mine property, plant and equipment was $7.7 million.
The Company expects to continue mining the Sunbeam pit at
the Grouse Creek mine, in which the Company has an 80.7%
interest, into the second quarter of 1997. An
approximate two-month shutdown of milling operations and
an approximate one-month shutdown of mining operations
were required to enlarge the tailings impoundment, which
reached capacity earlier than expected due to heavy
snowfall and spring runoff. The temporary shutdown of
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
milling operations commenced in late April 1996, and
mining operations ceased in late May 1996. Both mining
and milling activities resumed on July 15, 1996.
At the Grouse Creek mine, the Company is currently
performing further metallurgical studies of the Grouse
deposit to evaluate the feasibility of mining operations
beyond the first quarter of 1997. The Company's Board of
Directors is currently expected to make a decision by the
end of 1996 whether to continue further development and
operation of the Grouse Creek mine beyond the first
quarter of 1997.
If the Grouse Creek mine is not further developed and
operations wind down during the second quarter of 1997,
the property will either be placed on a care-and-
maintenance basis (pending an improvement in metals
prices or other developments) or shut down permanently.
Annual holding costs on a care-and-maintenance basis are
estimated at $3.0 to $5.0 million. If the decision is
made to shut the property down, an accrual for closed
operations and environmental matters in the estimated
range of $16.0 to $20.0 million would be necessary at
that time. A detailed study has not been performed to
establish this estimated range for closed operations and
environmental matters, and, as such, the actual costs
could be higher.
On May 24, 1996, Hecla signed a letter of intent with
Santa Fe Pacific Gold Corporation ("Santa Fe") to enter
into an 50/50 joint venture to develop the Rosebud
property in Pershing County, Nevada, subject to due
diligence and approval of both boards of directors and
other customary conditions. Under the proposed terms of
the joint venture, Hecla would operate the joint venture,
and ore would be trucked approximately 100 miles to Santa
Fe's Twin Creeks Pinon mill for processing. Future mine-
site capital expenditures for the project are expected to
be approximately $20-$25 million. Under the proposed
terms of the joint venture, Santa Fe would fund the first
$12.5 million of mine-site development costs plus
approximately $3 million in road and mill facility
improvements. Santa Fe will also contribute exploration
property adjacent to the Rosebud property, and fund the
first $1 million in exploration expenditures, and two-
thirds of future exploration expenditures beyond the
initial $1 million. The due diligence period has been
extended to August 26, 1996, at which time a final
agreement is expected to be executed. Negotiations with
respect to the definitive joint venture agreement is in
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
process. However, there can be no assurance that a final
agreement will be reached.
The letter of intent with Santa Fe also provides that
Santa Fe will pay Hecla $2.5 million for an immediate 75%
interest in the Golden Eagle joint venture in Ferry
County, Washington. In addition, Santa Fe is obligated
to fund all expenditures required at the Golden Eagle
through the feasibility stage.
On July 29, 1996, Hecla announced that operations had
recommenced at the Greens Creek mine. Grinding and
flotation circuits in the mill were started up ahead of
schedule, which were previously expected to begin in the
first quarter of 1997. The Company holds a 29.73%
interest in the mine through a joint venture with
Kennecott Greens Creek Mining Company, the operator of
the property. It is anticipated that the Greens Creek
mine will reach full production levels in the first
quarter of 1997.
Effective June 1, 1996, the Company adopted the Gold
Production Cost Standard developed by the Gold Institute
in order to facilitate comparisons among companies in the
gold industry. Cost per ounce as reported in prior
periods have been restated. Total cash costs include all
operating costs at the mine sites, including overhead,
and, where applicable, state net profits taxes, royalties
and credits for by-products. Royalties and production
taxes constitute the difference between cash operating
costs and total cash costs under the new standard.
Suspension costs are excluded from all cost per ounce
amounts.
In 1996, the Company expects to produce between 140,000
and 165,000 ounces of gold compared to actual 1995 gold
production of 170,000 ounces of gold. The 1996 estimated
production includes 70,000 to 80,000 ounces from the La
Choya mine, 40,000 to 50,000 ounces from the Company's
80.7% interest in the Grouse Creek mine, 25,000 to 30,000
ounces from the Company's 47% interest in the American
Girl mine, and an additional 5,000 ounces from other
sources. The Company's share of silver production for
1996 is expected to be between 2.0 and 2.4 million ounces
compared to 1995 production of 2.2 million ounces.
In 1995, the Company shipped 991,000 tons of industrial
minerals, including ball clay, kaolin, feldspar, and
specialty aggregates. The Company's shipments of
industrial minerals are expected to increase in 1996 to
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
approximately 1,080,000 tons. Additionally, the Company
expects to ship approximately 976,000 cubic yards of
landscape material from Mountain West Products in 1996
compared to 867,000 cubic yards in 1995.
RESULTS OF OPERATIONS
FIRST SIX MONTHS 1996 COMPARED TO FIRST SIX MONTHS 1995
The Company reported net income of approximately $4.3
million, or $0.08 per share, in the first six months of
1996 compared to a net loss of approximately $0.2
million, or $0.01 per share, in the same period of 1995.
After $4.0 million in dividends to shareholders of the
Company's Series B Cumulative Convertible Preferred
Stock, the Company's net income applicable to common
shareholders for the first six months of 1996 was $0.3
million, or $0.01 per common share, compared to a net
loss of $4.2 million, or $0.09 per common share, in the
comparable 1995 period. The change in net income in the
first six months of 1996 was attributable to a variety of
factors, the most significant of which are discussed
below in descending order of magnitude.
Comparing the average metal prices for the six months of
1996 with the comparable 1995 period, gold increased by
2.9% to $395 per ounce from $384 per ounce, silver
increased by 6.5% to $5.42 per ounce from $5.09 per
ounce, lead increased by 30.1% to $0.359 per pound from
$0.276 per pound, and zinc decreased by 1.9% to $0.469
per pound from $0.478 per pound.
Sales of the Company's products increased by
approximately $5.5 million, or 7.1%, in the first six
months of 1996 as compared to the same period in 1995,
principally the result of increased product sales
totaling approximately $15.0 million, most notably from
the La Choya mine where gold production increased
approximately 16,000 ounces and K-T Kaolin due to the
acquisition of the Langley kaolin plant in June of 1995,
as well as increased sales at Lucky Friday primarily due
to increased production and improved lead and silver
prices, and the American Girl mine primarily due to
increased production from the Oro Cruz ore body. K-T
Mexico, K-T Feldspar, and Colorado Aggregate also
experienced increased sales. These factors were
partially offset by decreased sales of $9.5 million
principally at Grouse Creek due to the approximate two
month shutdown of milling operations necessary to raise
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
the tailings impoundment, the Apex facility which was
sold in September 1995, the Republic mine which completed
operations in February 1995, the Cactus mine which
completed operations in September 1995, as well as other
industrial mineral operations.
Cost of sales and other direct production costs increased
approximately $1.1 million, or 1.7%, from the first six
months of 1995 to the comparable 1996 period primarily
due to (1) increased production costs of $3.0 million at
the Lucky Friday mine due to increased ore processing and
the nonrecurring receipt, in 1995, of $1.1 million in
insurance proceeds related to the ore conveyance accident
in December 1994, (2) increased production costs at K-T
Kaolin of $2.7 million as a result of the acquisition of
the Langley kaolin plant in June 1995, (3) production
cost increases at the American Girl mine of $2.0 million
due to increased production levels and difficulties
associated with mining the Oro Cruz ore body, (4)
production cost increases at the La Choya mine totaling
approximately $1.2 million due to increased production
levels, and (5) increased production costs at K-T Mexico
of $0.6 million and K-T Ball Clay division totaling $0.1
million. These increases in cost of sales and other
direct production costs were partially offset by
decreases in operating costs at other operations totaling
approximately $8.6 million. These decreases are
primarily due to (1) decreased production costs at the
Grouse Creek mine totaling approximately $4.0 million
which are associated with the second quarter 1996
shutdown as well as higher costs in 1995 due to the start
up of the Grouse Creek mine in December 1994, (2)
decreased production costs at the Apex facility of $2.4
million which was sold in September 1995, (3) decreased
production costs at Mountain West Products of $0.7
million, (4) decreased production costs at the Cactus
mine of $0.7 million due to completion of operations in
1995, (5) decreased production costs at the Republic mine
of $0.6 million due to the completion of operations in
February 1995, and (6) decreased production costs at K-T
Feldspar of $0.1 million.
Cost of sales and other direct production costs as a
percentage of sales decreased from 84.1% in the first
half of 1995 to 79.8% in the comparable 1996 period,
primarily due to increased sales and production at the La
Choya mine and higher metals prices.
Cash operating cost, total cash cost and total production
cost per gold ounce decreased from $324, $327, and $445
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
for the first six months of 1995 to $267, $271 and $366
for the comparable 1996 period, respectively. The
decrease in the cash operating cost, total cash, and
total production cost per gold ounce is primarily
attributable to decreased unit production costs at the La
Choya and Grouse Creek mines in the 1996 period.
Cash operating cost, total cash cost and total production
cost per silver ounce decreased from $4.85, $4.85 and
$6.11 in the first six months of 1995 to $4.58, $4.58 and
$5.84 in the comparable 1996 period, respectively. The
decreases in the cost per silver ounce are due primarily
to increased production levels and favorable by-product
prices, principally lead, in the 1996 period at the Lucky
Friday mine.
Depreciation, depletion and amortization decreased
approximately $1.7 million, or 14.6%, from the first six
months of 1995 to the comparable 1996 period primarily
due to (1) the write-down of Grouse Creek property,
plant, and equipment in the third quarter of 1995, the
impact of which was $5.0 million (2) decreased
depreciation at K-T Ball Clay division of approximately
$0.2 million, offset by increased depreciation,
depletion, and amortization at (1) the La Choya mine of
$2.3 million due to increased production, (2) the
American Girl mine of $0.7 million due to an increased
depreciable base associated with capitalized costs at the
Oro Cruz ore body, and (3) K-T Kaolin of $0.2 million due
to the acquisition of the Langley operation in June 1995.
Other operating expenses decreased $3.2 million, or
45.3%, from the 1995 period to the 1996 period, due
principally to (1) decreased provision for closed plants
and environmental matters of approximately $3.0 million
primarily the result of net insurance proceeds of $2.6
million in excess of the current estimated liability for
remediation efforts at the Bunker Hill superfund site,
and timber sales proceeds from the closed Star Unit area
of $0.9 million, and (2) decreased exploration
expenditures of $0.2 million.
Net other income was $1.2 million in the first six months
of 1996 compared to $6.1 million in the comparable 1995
period. The $4.9 million decrease was primarily due to
(1) a decrease in gain on sale of investments totaling
approximately $3.8 million, (2) decreased interest and
other income of $0.9 million, (3) foreign exchange loss
in 1996 compared to a gain in 1995, the impact of which
is a decrease of $0.2 million, and (4) increased net
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
interest expenses of $0.1 million. Total interest cost
increased approximately $0.8 million due to higher
borrowings in 1996 under the Company's revolving and term
loan facility than in 1995. Capitalized interest costs
increased $0.7 million principally due to capitalized
interest costs associated with the Greens Creek
development, the Rosebud project, the Lucky Friday
expansion project, and development at the American Girl's
Oro Cruz ore body.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1995
The Company had net income of approximately $2.8 million,
or $0.05 per share, in the second quarter of 1996
compared to net income of approximately $2.2 million, or
$0.05 per share, in the same period of 1995. After $2.0
million in dividends to shareholders of the Company's
Series B Cumulative Convertible Preferred Stock, the
Company's net income applicable to common shareholders
for the second quarter of 1996 was $0.8 million, or $0.02
per common share, compared to $0.2 million, or $0.01 per
common share, in the comparable 1995 period. The change
in net income in the second quarter of 1996 was
attributable to a variety of factors, the most
significant of which are discussed below in descending
order of magnitude.
Sales of the Company's products decreased by
approximately $1.7 million, or 4.1%, in the second
quarter of 1996 as compared to the same period in 1995,
principally the result of (1) decreased product sales of
$7.7 million, most notably from the Grouse Creek gold
mine where production was suspended for approximately two
months during the second quarter of 1996, (2) the Apex
facility which was sold in September 1995, and (3) the
Cactus mine which completed operations in September 1995.
These decreases were partially offset by increased sales
at other operations, the impact of which is approximately
$6.0 million, attributable to (1) increased gold
production at the La Choya mine, (2) increased sales from
the K-T Kaolin division as a result of the acquisition of
the Langley kaolin plant in June 1995, (3) increased gold
production at the American Girl mine, and (4) increased
sales from K-T Mexico, K-T Feldspar, Colorado aggregate,
and the Lucky Friday mine.
Comparing the average metals prices for the second
quarter of 1996 with the comparable 1995 period, gold
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
increased by 0.5% to $390 per ounce from $388 per ounce,
silver decreased by 3.3% to $5.30 per ounce from $5.48
per ounce, lead increased by 34.5% to $0.370 per pound
from $0.275 per pound, and zinc decreased by 0.6% to
$0.467 per pound from $0.470 per pound.
Cost of sales and other direct production costs decreased
$2.2 million, or 6.3%, from the second quarter of 1995 to
the comparable 1996 period primarily due to (1) decreased
production costs at the Grouse Creek mine due to the
temporary suspension of operations during the second
quarter of 1996 totaling approximately $3.3 million, (2)
decreased production costs at the Apex facility of
approximately $1.5 million due to the sale of the Apex
facility in September 1995, (3) decreased production
costs at Mountain West Products totaling $0.9 million,
(4) and decreased production cost at the Cactus mine
($0.3 million), the La Choya mine ($0.2 million), and K-T
Ball Clay division ($0.1 million). These decreases in
cost of sales and other direct production costs were
partially offset by increases in operating costs at other
operations totaling $4.1 million. These increases are
primarily attributable to (1) increased production costs
at the Lucky Friday mine of $1.4 million, principally due
to the nonrecurring receipt, in 1995, of $1.1 million in
insurance proceeds related to the ore-conveyance accident
in December 1994, (2) increased production costs at the
American Girl mine totaling approximately $1.1 million
associated with the increased underground mining activity
at the Oro Cruz ore body, (3) increased production costs
at the K-T Kaolin division of approximately $1.1 million
due principally to the acquisition of the Langley kaolin
plant in June 1995, and (4) increased production costs at
K-T Mexico ($0.3 million), Colorado Aggregate ($0.2
million), and K-T Feldspar ($0.1 million).
Cost of sales and other direct production costs as a
percentage of sales from products decreased from 83.6% in
the second quarter of 1995 to 81.6% in the comparable
1996 period, primarily due to decreases in this
percentage at the La Choya mine and K-T kaolin division.
Cash operating, total cash and total production cost per
gold ounce decreased from $340, $342 and $467 for the
second quarter of 1995 to $281, $286 and $385 for the
second quarter of 1996, respectively. The decrease in
the cash operating, total cash and total production cost
per gold ounce is mainly attributed to the lower unit
costs at the La Choya mine.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Cash operating, total cash and total production cost per
silver ounce decreased from $4.94, $4.94 and $6.20 in the
second quarter of 1995 to $4.48, $4.48 and $5.79 in the
second quarter of 1996, respectively. The decreases in
the cost per silver ounce are due primarily to increased
lead by-product credits in the 1996 period at the Lucky
Friday mine.
Depreciation, depletion and amortization decreased by
approximately $1.5 million, or 25.3%, from the 1995
period to the 1996 period, primarily the result of the
write-down of the Grouse Creek property, plant and
equipment during the third quarter of 1995, the impact of
which is approximately $2.8 million, partially offset by
increased depreciation, depletion and amortization of
$1.0 million at the La Choya mine related to increased
production and increases at the American Girl mine
totaling approximately $0.3 million.
Other operating expenses decreased by $2.7 million, or
75%, from the 1995 period to the 1996 period, due
principally to a decrease in the provision for closed
operations and environmental matters totaling
approximately $2.8 million. The decrease in the
provision for closed operation and environmental matters
is principally due to net insurance proceeds in excess of
the estimated liability for remediation activity at the
Bunker Hill superfund site totaling approximately $1.9
million in 1996, and proceeds from the sale of timber
rights at the closed Star Unit area of $0.9 million in
1996.
Net other income was $0.6 million in the 1996 period
compared to $4.9 million in the 1995 period. The $4.3
million decrease was primarily due to (1) decrease in
gain on sale of investments totaling approximately $3.7
million, (2) foreign exchange loss in 1996 compared a
gain in 1995, the impact of which is a decrease of $0.4
million, (3) decreased interest and other income of $0.1
million, and (4) increased net interest expense of $0.1
million. Total interest cost increased $0.3 million due
to higher borrowing in 1996 under the Company's revolving
and term loan facility than in 1995. Capitalized
interest costs increased $0.2 million principally due to
capitalized interest costs associated with the Greens
Creek development, the Rosebud project, the Lucky Friday
expansion, and development at the American Girl's Oro
Cruz ore body.
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22
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
FINANCIAL CONDITION AND LIQUIDITY
A substantial portion of the Company's revenue is derived
from the sale of products, the prices of which are
affected by numerous factors beyond the Company's
control. Prices may change dramatically in short periods
of time and such changes have a significant effect on
revenues, profits and liquidity of the Company. The
Company is subject to many of the same inflationary
pressures as the U.S. economy in general. The Company
continues to implement cost-cutting measures in an effort
to reduce per unit production costs. Management
believes, however, that the Company 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 the Company have a much
greater impact than inflation on the Company'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 June 30, 1996, assets totaled approximately $280
million and shareholders' equity totaled approximately
$186 million. Cash and cash equivalents increased by
$1.7 million to $5.7 million at June 30, 1996 from $4.0
million at the end of 1995.
During the first half of 1996, approximately $16.0
million of cash was provided from financing activities.
The major source of cash was proceeds from borrowings on
long-term debt of $30.5 million, proceeds totaling
approximately $22.0 million from the issuance of 2.875
million common shares in an underwritten offering
completed in January 1996, partially offset by repayments
on long-term debt of $32.9 million and payment of the
preferred stock dividend of $4.0 million.
Operating activities provided approximately $6.4 million
of cash during the first half of 1996. The primary
sources of cash were from the La Choya mine, the
industrial minerals operations, the Grouse Creek mine,
and the Lucky Friday mine. Additionally, (1) increases
in accounts payable and accrued expenses provided cash of
$2.1 million, principally at the Greens Creek mine and
Mountain West Products and (2) decreases in inventories
provided $1.0 million in cash, primarily due to decreased
industrial minerals inventories offset by increased metal
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23
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
segment product inventories. Partially offsetting these
sources was a $11.1 million increase in accounts
receivable due to (1) buildup of accounts receivable at
Mountain West Products of $5.1 million and Colorado
Aggregate of $1.4 million due principally to the seasonal
nature of sales at these properties, (2) increased
accounts receivable at the K-T Kaolin division of $1.1
million, the result of increased sales, and (3) K-T Ball
Clay division accounts receivable increased $0.8 million
principally due to timing of cash receipts.
Additionally, non-current liabilities used cash of
approximately $1.0 million. Principal non-cash charges
included depreciation, depletion, and amortization of
approximately $10.0 million and provision for reclamation
and closure costs of $1.5 million.
The Company's investing activities used $20.7 million of
cash during the first half of 1996. The most significant
use of cash was $18.9 million of property, plant and
equipment additions. During the first half of 1996,
significant additions occurred at the Greens Creek mine,
the Grouse Creek mine, the American Girl mine, the Lucky
Friday mine, and the Rosebud project totaling $10.3
million, $3.1 million, $1.8 million, $1.6 million, and
$1.5 million, respectively.
The Company estimates that remaining capital expenditures
to be incurred over the balance of 1996 will be
approximately $22.8 million including capitalized
interest costs of $1.3 million. These capital
expenditures consist primarily of (1) the Company's share
of development expenditures at the Greens Creek project
expected to total approximately $9.5 million, (2)
development expenditures at the Rosebud project totaling
approximately $8.5 million, (3) additional development
expenditures at the Grouse Creek mine totaling
approximately $1.5 million, and (4) development
expenditures at the Company's Lucky Friday expansion
project totaling approximately $1.5 million. The Company
intends to finance these capital expenditures through a
combination of (1) existing cash and cash equivalents,
(2) cash flow from operating activities, and (3) proceeds
from anticipated asset sales. In addition, the Company
may borrow funds from its revolving and term facility
which, subject to certain conditions, provides for
borrowings up to a maximum of $55.0 million. The Company
had $33.0 million outstanding at June 30, 1996 under the
facility.
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24
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
The Company's estimate of its capital expenditure
requirements assumes, with respect to the Greens Creek
and American Girl properties, that the Company's joint
venture partners will not default with respect to its
portion of development costs and capital expenditures.
However, with respect to the Grouse Creek mine, the
Company has been advised that its joint venture partner
Great Lakes Minerals Inc. will elect to dilute its joint
venture interest rather than pay its share of any future
capital expenditure requirements. Accordingly,
projections for Grouse Creek are based on the assumption
that the Company will be funding 100% of those
requirements.
Pursuant to a Registration Statement filed with the
Securities and Exchange Commission and declared effective
in the third quarter of 1995, the Company 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. In January 1996, the Company
issued 2.875 million common shares to facilitate the
funding of the Company's capital expenditures in 1996.
The Company used $21.0 million of the net proceeds of
approximately $22.0 million from the sale of its common
shares to pay down debt under its existing revolving and
term loan credit facility thus increasing its borrowing
capacity under the facility. As of June 30, 1996, a
total of $22.0 million remained available under the bank
facility.
The Company's planned environmental and reclamation
expenditures for the balance of 1996 are expected to be
approximately $4.5 to $5.5 million, principally for
environmental and reclamation activities at the Bunker
Hill Superfund site, Republic mine, the Coeur d'Alene
River Basin, and the Cactus mine.
Exploration expenditures for the balance of 1996 are
estimated to be approximately $2.5 to $3.0 million. The
Company's exploration strategy is to focus further
exploration at or in the vicinity of its currently owned
properties. Accordingly, these exploration expenditures
will be incurred principally at Rosebud, Greens Creek, La
Choya, Lucky Friday, and Mexican exploration targets.
In the normal course of its business, the Company uses
forward sales commitments and commodity put and call
option contracts to manage its exposure to fluctuations
in the prices of certain metals which it produces.
Contract positions are designed to ensure that the
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25
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Company will receive a defined minimum price for certain
quantities of its production. Gains and losses, and the
related costs paid or premium received, for contracts
which hedge the sales prices of commodities are deferred
and included in income as part of the hedged transaction.
Revenues from the aforementioned contracts are recognized
at the time contracts are closed out by delivery of the
underlying commodity or settlement of the net position in
cash. The Company 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.
At June 30, 1996, the Company had forward sales
commitments through January 31, 1997 for 7,000 ounces of
gold at an average price of $412 per ounce. The
estimated fair value of these forward sales commitments
was $185,300 as of June 30, 1996. The Company has also
purchased options to put 54,780 ounces of gold to
counterparties to such options at an average price of
$396 per ounce. Concurrently, the Company sold options
to allow counterparties to such options to call 54,780
ounces of gold from the Company at an average price of
$461 per ounce. There was no net cost associated with
the purchase and sale of these options which expire on a
monthly basis through December 1997. The London Final
gold price at June 30, 1996, was $382.00. At June 30,
1996, the estimated fair value of the Company's purchased
gold put options was approximately $733,000. If the
Company had chosen to close its offsetting short call
option position, it would have incurred a liability of
approximately $45,000. Additionally, the Company has
entered into spot deferred sales commitments for 3,000
ounces of gold at $404 per ounce. The nature and purpose
of the forward sales and option contracts, however, do
not presently expose the Company to any significant net
loss. All of the aforementioned contracts were
designated as hedges as of June 30, 1996.
Prior declines in the Mexican peso did not significantly
impact results at the La Choya mine or K-T Clay de
Mexico, S.A. de C.V. as both funding for operations and
sales are denominated in dollars. In the first six
months of 1996, a net foreign exchange loss totaling
$28,000 was recorded relating to both of the Company's
Mexican operations. Further declines in the Mexican peso
could adversely impact the Company's Mexican operations.
As described in Note 5 of Notes to Consolidated Financial
Statements, the Company is a defendant in a legal action
filed in November 1990 by Star Phoenix and certain
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26
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
principals of Star Phoenix, asserting that the Company
breached the terms of Star Phoenix's lease agreement for
the Company's Star Morning Mine and that the Company
interfered with certain contractual relationships of Star
Phoenix relating to the Company's 1990 termination of
such lease agreement. In June 1994, a judgment was
entered by the Idaho State District Court against the
Company in the legal proceeding in the amount of $10.0
million in compensatory damages and $10.0 million in
punitive damages based on a jury verdict rendered in the
case in late May 1994. The Company's post-trial motions
were denied by the District Court, and the Company
appealed the judgment to the Idaho State Supreme Court.
Briefing on the appeal has been completed and oral
argument was presented to the Idaho State Supreme Court
on April 10, 1996. A decision from the Idaho State
Supreme Court is expected in late 1996. Post-judgment
interest will accrue during the appeal period; the
current interest rate is 10.875%. In order to stay the
ability of Star Phoenix to collect on the judgment during
the pendency of the appeal, the Company posted an appeal
bond in the amount of $27.2 million representing 136% of
the District Court judgment. The Company pledged U.S.
Treasury Securities totaling $10.0 million as collateral
for the $27.2 million bond. Although the ultimate
outcome of the appeal of the judgment is subject to the
inherent uncertainties of any legal proceeding, based on
the Company's analysis of the factual and legal issues
associated with the proceeding before the District Court
and based upon the opinions of outside counsel, as of the
date hereof, it is management's belief that the Company
should ultimately prevail in this matter, although there
can be no assurance in this regard. In the event of an
unfavorable outcome in this proceeding, the judgment
would be paid from the pledged collateral totaling $10.0
million with the remaining balance to be paid from bank
borrowings, other potential financing arrangements or
proceeds from certain asset sales.
Although the ultimate disposition of this matter and
various other pending legal actions and claims is not
presently determinable, it is the opinion of the
Company's management, based upon the information
available at this time, that the outcome of these suits
and proceedings will not have a material adverse effect
on the results of operations and financial condition of
the Company and its subsidiaries.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
123, "Accounting for Stock-Based Compensation" (SFAS No.
123). SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation
plans. SFAS No. 123 encourages all entities to adopt a
fair value based method of accounting, but allows an
entity to continue to measure compensation cost for those
plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company will comply with the
provisions of SFAS No. 123 on January 1, 1996, by
presenting the pro-forma disclosure requirements of SFAS
No. 123 in its 1996 annual financial statements.
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28
PART II - OTHER INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
In July 1991, the Coeur d'Alene Indian Tribe (the Tribe)
brought a lawsuit, under the Comprehensive Environmental
Response Liability Act of 1980, as amended (CERCLA), in
Idaho Federal District Court against the Company and a
number of other mining companies asserting claims for
damages to natural resources located downstream from the
Bunker Hill Superfund Site located at Kellogg, Idaho,
over which the Tribe alleges some ownership or control.
The Company has answered the Tribe's complaint denying
liability for natural resource damages and asserted a
number of defenses to the Tribe's claims, including a
defense that the Tribe has no ownership or control over
the natural resources they assert have been damaged. In
July 1992, in a separate action between the Tribe and the
State of Idaho, the Idaho Federal District Court
determined that the Tribe does not own the beds, banks
and waters of Lake Coeur d'Alene and the lower portion of
its tributaries, the ownership of which is the primary
basis for the natural resource damage claims asserted by
the Tribe against the Company. Based upon the Tribe's
appeal of the July 1992 District Court ownership decision
to the 9th Circuit U.S. Court of Appeals, the Court in
the natural resource damage litigation issued an order on
October 30, 1992, staying the court proceedings in the
natural resource damage litigation until a final decision
is handed down on the question of the Tribe's title. On
December 9, 1994, the 9th Circuit Court reversed the
decision of the Idaho Federal District Court and remanded
the case of the Tribe's ownership for trial before the
Idaho Federal District Court. In April 1996, the U.S.
Supreme Court accepted the appeal from the 9th Circuit
Court decision to the U.S. Supreme Court. The case is
currently being briefed by the parties. In July 1994,
the United States, as Trustee for the Coeur d'Alene
Tribe, initiated a separate suit in Idaho Federal
District Court seeking a determination that the Coeur
d'Alene Tribe owns approximately the lower one-third of
Lake Coeur d'Alene. The State has denied the Tribe's
ownership of any portion of Lake Coeur d'Alene and its
tributaries. The legal proceedings related to the
Tribe's natural resource damages claim against the
Company and other mining companies continue to be stayed.
On March 22, 1996, the United States brought a lawsuit in
Idaho Federal District Court against the Company and
other mining companies who were involved in historic
mining activity in Northern Idaho. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks
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PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
recovery for alleged damages to or loss of natural
resources located in the Coeur d'Alene River Basin in
North Idaho over 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 the Company and other defendants are jointly and
severally liable for response costs under CERCLA for
historic mining impacts in the Coeur d'Alene River Basin
outside the Bunker Hill Superfund Site. The Company
answered the complaint on May 17, 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 activity
in the Coeur d'Alene River Basin which contributed to the
releases and damages alleged by the United States. The
Company believes it also has a number of defenses to the
United States' claims.
On March 22, 1996, the Company entered into an agreement
(the Agreement) with the State of Idaho pursuant to which
the Company agreed to continue certain financial
contributions to environmental cleanup work in the Coeur
d'Alene River Basin being undertaken by a State Trustees
group. In return, the State agreed not to sue the
Company for damage to natural resources for which the
State is a trustee for a period of five years, to pursue
settlement with the Company of the State's natural
resource damage claims and to grant the Company credit
against any such State claims for all expenditures made
under the Agreement and certain other Company
contributions and expenditures for environmental cleanup
in the Coeur d'Alene Basin. In connection with the
Agreement, the Company increased its accrual for closed
operations and environmental matters by $0.5 million
during the first quarter of 1996.
In 1991, the Company 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 the
Company and its predecessors. The Company believes that
the insurance companies have a duty to defend and
indemnify the Company under their policies of insurance
for all liabilities and claims asserted against the
Company by the Environmental Protection Agency (EPA) and
the Tribe under CERCLA related to the Bunker Hill
Superfund Site and Coeur d'Alene River Basin in northern
Idaho. In 1992, the Court ruled that the primary
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PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
insurance companies had a duty to defend the Company in
the Tribe's lawsuit. During 1995 and 1996, the Company
entered into settlement agreements with a number of the
insurance carriers named in the litigation. The Company
has received a total of $7.195 million under the terms of
the settlement agreements. Thirty percent of these
settlements is payable to the EPA to reimburse the U.S.
Government for past costs under the Bunker Hill Superfund
Site Consent Decree previously entered into by the
Company. Litigation is still pending against one insurer
with trial scheduled for October 1996. The remaining
insurance carrier is providing the Company with a partial
defense in all Coeur d'Alene River Basin environmental
litigation. As of June 30, 1996, the Company had not
reduced its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance
proceeds.
In June 1994, a judgment was entered against the Company
in Idaho State District Court in the amount of $10.0
million in compensatory damages and $10.0 million in
punitive damages based on a jury verdict rendered in late
May 1994 with respect to a lawsuit previously filed
against the Company by Star Phoenix Mining Company (Star
Phoenix), a former lessee of the Star Morning Mine, over
a dispute between the Company and Star Phoenix concerning
the Company's November 1990 termination of the Star
Phoenix lease of the Star Morning Mine property. A
number of other claims by Star Phoenix and certain
principals of Star Phoenix against the Company in the
lawsuit were dismissed by the State District Court. On
May 3, 1995, the District Court issued its final opinion
and order on a number of post-trial issues pending before
the Court. The opinion and order included the Court's
denial of the post-trial motions filed by Star Phoenix
and certain of its principals regarding claims which had
been previously dismissed by the Court during trial. The
Court also awarded Star Phoenix approximately $300,000 in
attorneys' fees and costs. The Company's post-trial
motions with respect to the judgment and motions were
denied by the State District Court, and the Company has
appealed the District Court judgment to the Idaho State
Supreme Court. Star Phoenix has cross-appealed certain
trial court discovery determinations. Briefing on the
appeal has been completed and oral argument was presented
to the Idaho State Supreme Court on April 10, 1996. A
decision from the Idaho Supreme Court is expected in late
1996. Post-judgment interest will accrue during the
appeal period; the current interest rate is 10.875%. In
order to stay the ability of Star Phoenix to collect on
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PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
the judgment during the pendency of the appeal, the
Company has posted an appeal bond in the amount of $27.2
million representing 136% of the District Court judgment.
The Company pledged U.S. Treasury Securities totaling
$10.0 million as collateral for the appeal bond. This
collateral amount is included in restricted investments
at June 30, 1996 and December 31, 1995. The Company has
vigorously pursued its appeal to the Idaho Supreme Court
and it has been the Company's position, and at the
current time it remains the Company's position, that it
will not enter into a settlement with Star Phoenix for
any material amount. Although the ultimate outcome of
the appeal of the Idaho District Court judgment is
subject to the inherent uncertainties of any legal
proceeding, based upon the Company's analysis of the
factual and legal issues associated with the proceeding
before the Idaho District Court and based on the opinions
of outside counsel, as of the date hereof, it is
management's belief that the Company should ultimately
prevail in this matter, although there can be no
assurance in this regard. Accordingly, the Company has
not accrued any liability associated with this
litigation.
The Company 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 the Company's management, based upon
the information available at this time, that the expected
outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the
results of operations and financial condition of the
Company and its subsidiaries.
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PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 4. ANNUAL MEETING OF SHAREHOLDERS
At the annual meeting of shareholders held on May 10,
1996, the following matters were voted on by the
Company's shareholders:
Election of Two Directors:
Votes Votes
For Withheld
----- --------
Leland O. Erdahl 42,334,857 662,860
---------- ----------
Thomas J. O'Neil 42,330,672 667,045
---------- ----------
Approval of selection of
Coopers & Lybrand L.L.P. as
the Company's Auditors for 1996:
Votes Votes
For Against Abstentions
----- ------- -----------
42,295,495 489,277 212,944
---------- ---------- -----------
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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
13 - Second Quarter Report to Shareholders for
the quarter ending June 30, 1996, for
release dated July 31, 1996.
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated May 10, 1996, related to
the Company's issuance of its Share Purchase Rights
Agreement.
Report on Form 8-K dated May 28, 1996, related to
the agreement between the Company and Santa Fe
Pacific Gold to jointly develop the Rosebud Project.
Items 2, 3 and 5 of Part II are omitted from this report as
inapplicable.
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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: August 6, 1996 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: August 6, 1996 By /s/ Stanley E. Hilbert
--------------------------------
S. E. Hilbert,
Corporate Controller
(Chief Accounting Officer)
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EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------------------
12 Fixed Charge Coverage Ratio Calculation
13 Second Quarter Report to Shareholders for the
quarter ending June 30, 1996, for release dated
July 31 1996
27 Financial Data Schedule
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