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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 1-8491
------------------------------------------
HECLA MINING COMPANY
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0126240
- ----------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83814-8788
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
208-769-4100
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for at least
the past 90 days. Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding October 31, 1996
- --------------------------------------- ----------------------------
Common stock, par value $0.25 per share 51,137,241 shares
2
HECLA MINING COMPANY and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
I N D E X*
PAGE
PART I. - Financial Information
Item 1 - Consolidated Balance Sheets - September 30,
1996 and December 31, 1995 3
- Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1996 and 1995 4
- Consolidated Statements of Cash Flows -
Nine Months Ended September 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 13
PART II. - Other Information
Item 1 - Legal Proceedings 28
Item 6 - Exhibits and Reports on Form 8-K 32
*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)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,139 $ 4,024
Accounts and notes receivable 27,055 25,571
Income tax refund receivable 765 737
Inventories 19,339 20,915
Other current assets 1,473 2,038
---------- ---------
Total current assets 59,771 53,285
Investments 1,950 2,200
Restricted investments 16,468 16,254
Properties, plants and equipment, net 175,437 177,374
Other noncurrent assets 10,674 9,077
---------- ---------
Total assets $ 264,300 $ 258,190
========== =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 14,872 $ 14,145
Accrued payroll and related benefits 2,986 3,217
Preferred stock dividends payable 2,012 2,012
Accrued taxes 1,323 1,042
Accrued reclamation costs 7,392 5,549
---------- ---------
Total current liabilities 28,585 25,965
Deferred income taxes 359 359
Long-term debt 33,082 36,104
Accrued reclamation costs 48,160 26,782
Other noncurrent liabilities 6,585 4,864
---------- ---------
Total liabilities 116,771 94,074
---------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value,
authorized 5,000,000 shares, issued
and outstanding - 2,300,000
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 (211,733) (173,206)
Net unrealized gain on investments 12 100
Foreign currency translation adjustment (4,898) (4,898)
Less common stock reacquired at cost;
1996 - 62,076 shares, 1995 - 62,072 shares (886) (886)
---------- ---------
Total shareholders' equity 147,529 164,116
---------- ---------
Total liabilities and shareholders' equity $ 264,300 $ 258,190
========== =========
The accompanying notes are an integral part of the 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 Nine Months Ended
----------------------------------- ----------------------------------
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
Sales of products $ 37,662 $ 40,088 $ 121,132 $ 115,412
Cost of sales and other direct
production costs 29,998 31,298 96,623 94,211
Depreciation, depletion and amortization 5,304 7,015 15,186 18,580
--------- ---------- --------- ---------
35,302 38,313 111,809 112,791
--------- ---------- --------- ---------
Gross profit 2,360 1,775 9,323 2,621
--------- ---------- --------- ---------
Other operating expenses:
General and administrative 2,331 3,106 6,836 7,570
Exploration 1,410 2,671 3,400 4,879
Depreciation and amortization 82 97 256 265
Reduction in carrying value of
mining properties 12,902 97,387 12,902 97,387
Provision for closed operations
and environmental matters 25,492 4,069 22,691 4,296
--------- ---------- --------- ---------
42,217 107,330 46,085 114,397
--------- ---------- --------- ---------
Loss from operations (39,857) (105,555) (36,762) (111,776)
--------- ---------- --------- ---------
Other income (expense):
Interest and other income 3,346 4,185 4,754 6,476
Gain (loss) on investments (158) (1,051) (28) 2,842
Foreign exchange gain (loss) 9 (12) (19) 150
Interest expense:
Total interest cost (875) (650) (2,224) (1,236)
Less amount capitalized 671 474 1,714 850
--------- ---------- --------- ---------
2,993 2,946 4,197 9,082
--------- ---------- --------- ---------
Loss before income taxes (36,864) (102,609) (32,565) (102,694)
Income tax (provision) benefit 99 (114) 76 (251)
--------- ---------- --------- ---------
Net loss (36,765) (102,723) (32,489) (102,945)
Preferred stock dividends (2,013) (2,013) (6,038) (6,038)
--------- ---------- --------- ---------
Loss applicable to common shareholders $ (38,778) $ (104,736) $ (38,527) $(108,983)
========= ========== ========= =========
Loss per common share $ (0.76) $ (2.17) $ (0.75) $ (2.26)
========= ========== ========= =========
Cash dividends per common share $ - - $ - - $ - - $ - -
========= ========== ========= =========
Weighted average number of common
shares outstanding 51,137 48,237 51,133 48,178
========= ========== ========= =========
The accompanying notes are an integral part of the 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
---------------------------------
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
Operating activities:
Net loss $ (32,489) $ (102,945)
Noncash elements included in net loss:
Depreciation, depletion and amortization 15,442 18,845
Gain on disposition of properties, plants and equipment (731) (3,484)
Loss (gain) on investments 28 (2,842)
Reduction in carrying value of mining properties 12,902 97,387
Provision for reclamation and closure costs 27,429 4,651
Change in:
Accounts and notes receivable (2,695) (7,224)
Income tax refund receivable (28) (3)
Inventories (699) 571
Other current assets 332 (732)
Accounts payable and accrued expenses 727 388
Accrued payroll and related benefits (231) (163)
Accrued taxes 281 661
Accrued reclamation and other noncurrent liabilities (2,488) (888)
---------- ----------
Net cash provided by operating activities 17,780 4,222
---------- ----------
Investing activities:
Additions to properties, plants and equipment (25,596) (33,083)
Proceeds from disposition of properties,
plants and equipment 3,158 3,069
Proceeds from the sales of investments 130 4,685
Purchase of investments and increase in cash
surrender value of life insurance (607) (822)
Increase in restricted investments (214) (1,439)
Other, net (1,715) (1,249)
---------- ----------
Net cash used by investing activities (24,844) (28,839)
---------- ----------
Financing activities:
Proceeds from exercise of stock warrants - - 1,239
Common stock issued under stock option plans - - 91
Dividends on preferred stock (6,038) (6,038)
Issuance of common stock, net of offering costs 22,028 - -
Borrowings against cash surrender value of life insurance 602 - -
Borrowing on long-term debt 40,500 41,000
Repayment on long-term debt (42,913) (11,796)
---------- ----------
Net cash provided by financing activities 14,179 24,496
---------- ----------
Change in cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents 7,115 (121)
Cash and cash equivalents at beginning of period 4,024 7,278
---------- ----------
Cash and cash equivalents at end of period $ 11,139 $ 7,157
========== ==========
The accompanying notes are an integral part of the 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 loss or accumulated deficit as previously
reported.
Note 3. The components of the income tax (provision) benefit for
the nine months ended September 30, 1996 and 1995 are as
follows (in thousands):
1996 1995
------ ------
Current:
State income taxes $ (236) $ (251)
Federal income tax benefit 312 - -
------ ------
Total current (provision) benefit $ 76 $ (251)
======= ======
The Company's income tax (provision) benefit for the nine
months of 1996 and 1995 varies from the amount that would
have been provided by applying the statutory rate to the
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):
Sept. 30, Dec. 31,
1996 1995
--------- --------
Concentrates, bullion, metals
in transit and other products $ 3,798 $ 2,519
Industrial mineral products 7,096 8,671
Materials and supplies 8,445 9,725
-------- --------
$ 19,339 $ 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
fully briefed and oral argument was presented to the
court on October 16, 1996. 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. In October
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
1996, the legal proceeding related to the Tribe's natural
resource damage claims was consolidated with the United
States Natural Resources Damage litigation described
below.
On March 22, 1996, the United States filed a lawsuit in
Idaho Federal District Court against the Company and
other mining companies who conducted historic mining
operations in the Silver Valley of Northern Idaho. The
lawsuit asserts claims under CERCLA and the Clean Water
Act and seeks recovery for alleged damages to or loss of
natural resources located in the Coeur d'Alene River
Basin 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. In October
1996, the court consolidated the Coeur d'Alene Tribe
Natural Resource Damage litigation with this lawsuit for
discovery and other limited pretrial purposes.
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.
With respect to the Coeur d'Alene River Basin, the
Company increased its accrual for closed operations and
environmental matters by $0.5 million and $2.3 million
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
during the first and third quarters of 1996,
respectively.
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
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 continued until the underlying environmental
claims against the Company are resolved or settled. The
remaining insurance carrier is providing the Company with
a partial defense in all Coeur d'Alene River Basin
environmental litigation. As of September 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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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
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 September 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 I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Note 6. On October 31, 1996, the Company entered into a third
amendment to the Company's $55.0 million revolving and
term loan facility. Under the terms of the amendment,
the net tangible worth covenant is amended to permanently
reduce the required net tangible worth by the amount of
noncash charges associated with the American Girl mine
and the Grouse Creek mine from June 30, 1996 through
March 31, 1997. It also provides for temporary relief of
the net tangible worth covenant for a period of 180 days
for certain other items. All other terms of the credit
agreement remain consistent with those disclosed in Note
6 of Notes to Consolidated Financial Statements in the
Company's 1995 Annual Report on Form 10-K.
At September 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. As
amended, the Company was in compliance with all
restrictive covenants of the facility as of September 30,
1996.
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.
Note 8. Following the completion of the third quarter, the
Company determined that the ore contained in the Grouse
ore body at the Grouse Creek mine is not economical to
mine at current metals prices and the Company has decided
to suspend operations at the Grouse Creek mine. The mine
will be placed on a care-and-maintenance status upon
completion of mining at the Sunbeam pit which is
currently estimated to occur during the second quarter of
1997. In connection with the decision to suspend
operations at the Grouse Creek mine, the Company
determined that certain adjustments were required to
properly reflect the Company's interest in the net
realizable value of the property and the Company's share
of future severance, holding, reclamation, and closure
efforts. Included in the third quarter results, are
adjustments for the Company's estimate of its share of
future severance, holding, reclamation, and closure costs
at the Grouse Creek mine totaling approximately $22.5
million, and an adjustment to the carrying value of the
Company's interest in the Grouse Creek mine assets
totaling approximately $5.3 million, which reflects the
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
net realizable value of property, plant, and equipment
and certain other assets.
Due to lower than expected ore reserves and lower ore
grade associated with the Oro Cruz ore body, American
Girl gold mine operations were suspended effective
November 4, 1996. In connection with the suspension of
operations, the Company determined that certain
adjustments were required to properly reflect the
estimated net realizable value of the American Girl gold
mine. These adjustments consisted of write-downs of
property, plant and equipment, inventories, and
production notes payable totaling approximately $7.6
million for the Company's interest in the American Girl
gold mine, and a provision for closed operations of
approximately $0.3 million.
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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
the Rosebud project) and future projects, 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). As a
result, actual results may differ materially from those
projected or implied. 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 the remainder of 1996, the Company is
anticipating a loss applicable to common shareholders in
the range of $37.5 million to $40.5 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 have on the
Company's operations, there can be no assurance that the
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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.
At the Grouse Creek mine, following completion of the
third quarter of 1996, the Company completed metallurgical
testing and economic analysis of the Grouse deposit which
has been ongoing throughout 1996. Based on the
information gathered and on current metal prices, the
Company determined that the ore contained in the Grouse
deposit is not economical at current metals prices and the
Company has decided to suspend operations at the Grouse
Creek mine. The mine will be placed on a care-and-
maintenance status upon completion of mining at the
Sunbeam pit which is estimated to occur during the second
quarter of 1997. In connection with the decision to
suspend operations at the Grouse Creek mine, the Company
determined that certain third quarter 1996 adjustments
were required to properly reflect the Company's interest
in the net realizable value of the property and the
Company's share of future severance, holding, reclamation,
and closure efforts. Included in the third quarter
results are adjustments for the Company's estimate of its
share of future severance, holding, reclamation, and
closure costs at the Grouse Creek mine totaling
approximately $22.5 million and an adjustment to the
carrying value of the Company's interest in the Grouse
Creek mine totaling approximately $5.3 million, which
reflects the net realizable value of property, plant, and
equipment and certain other assets.
The Company announced that operations at the American Girl
mine would be suspended effective November 4, 1996.
During the first six months of 1996 and continuing into
the third quarter of 1996, the American Girl gold mine, in
which the Company has a 47% interest, experienced
significantly higher than expected per gold ounce
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
operating costs and lower than expected operating margins
resulting from higher than anticipated operating costs and
lower than expected gold ore grade. Based on its periodic
review of the carrying values of the Company's mining
properties, the Company determined that a 1996 third
quarter carrying value adjustment totaling $7.6 million
was required to properly reflect the estimated net
realizable value of its interest in the American Girl
Joint Venture. The amount of the adjustment was based on
the Company's carrying value of its interest in the
American Girl mine in excess of estimated discounted
future cash flows. In addition to the carrying value
adjustment, the Company also recorded a $0.3 million
provision for closed operations to increase the Company's
recorded liability for reclamation and closure costs to
its estimate of its interest in future closure and
reclamation costs.
On September 10, 1996, Hecla and Santa Fe Pacific Gold
Corporation (Santa Fe) announced that a final agreement
for the Rosebud project had been signed. Pursuant to the
agreement, a limited liability corporation was established
with each party owning a 50% interest to develop the
Rosebud gold property, which is an underground, oxide gold
deposit located in Pershing County, Nevada. Under the
terms of the agreement, Hecla will manage the mining
activities and ore will be trucked approximately 100 miles
to Santa Fe's Twin Creeks Pinon mill for processing.
Total mine-site capital expenditures to bring the project
into production are expected to be approximately $20-$25
million. Under the terms of the joint venture, Santa Fe
will fund the first $12.5 million of mine-site development
costs plus road and mill facility improvements. Santa Fe
also contributed exploration property adjacent to the
Rosebud property, and will fund the first $1 million in
exploration expenditures, and two-thirds of future
exploration expenditures beyond the initial $1 million.
In connection with the signing of the Rosebud agreement, a
separate Joint Venture agreement concerning the Golden
Eagle property in Ferry County, Washington, was entered
into between Hecla and Santa Fe. Santa Fe paid Hecla $2.5
million for an immediate 75% interest in the Golden Eagle
joint venture. In addition, Santa Fe is obligated to fund
all expenditures required at the Golden Eagle through the
feasibility stage.
In July 1996, operations recommenced at the Greens Creek
mine. Grinding and flotation circuits in the mill
commenced ahead of schedule. The Company holds a 29.73%
interest in the mine through a joint venture with
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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.
In 1996, the Company expects to produce between 155,000
and 165,000 ounces of gold compared to actual 1995 gold
production of 170,000 ounces of gold. The 1996 estimated
production includes 75,000 to 78,000 ounces from the La
Choya mine, 55,000 to 60,000 ounces from the Company's
81.05% interest in the Grouse Creek mine, 20,000 to 22,000
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 2.4 and 2.6 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
approximately 1,081,000 tons. Additionally, the Company
expects to ship approximately 1,014,000 cubic yards of
landscape material from Mountain West Products in 1996
compared to 867,000 cubic yards in 1995.
RESULTS OF OPERATIONS
FIRST NINE MONTHS 1996 COMPARED TO FIRST NINE MONTHS 1995
The Company reported a net loss of approximately $32.5
million ($0.64 per common share) in the first nine months
of 1996 compared to a net loss of approximately $102.9
million ($2.14 per common share) in the same period of
1995. After $6.0 million in dividends to shareholders of
the Company's Series B Cumulative Preferred Stock, the
Company's loss applicable to common shareholders for the
first nine months of 1996 was approximately $38.6 million,
or $0.75 per common share, compared to $109.0 million, or
$2.26 per common share in the comparable 1995 period. The
decreased loss in 1996 compared to the same period in 1995
was due to a variety of factors, the most significant of
which was the write-down of the Company's interest in the
Grouse Creek mine in the third quarter of 1995 totaling
approximately $97.0 million, compared to 1996 adjustments
totaling $35.7 million for severance, holding,
reclamation, closure costs, and carrying value adjustments
at the Grouse Creek mine and the American Girl mine.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Comparing the average metal prices for the nine months of
1996 with the comparable period for 1995, gold increased
2.1% to $392 per ounce from $384 per ounce, silver
increased 2.3% to $5.29 per ounce from $5.17 per ounce,
lead increased by 30.4% to $0.360 per pound from $0.276
per pound, and zinc decreased 1.5% to $0.464 per pound
from $0.471 per pound. The Company's average realized
gold price during the first nine months of 1996 was $397
per ounce.
Sales of the Company's products increased by approximately
$5.7 million, or 5.0%, in the first nine months of 1996 as
compared to the same period in 1995, principally the
result of increased product sales totaling $17.8 million,
most notably from (1) the La Choya mine where gold
production increased approximately 14,000 ounces, (2) K-T
Clay's kaolin division attributable to the June 1995
acquisition of the Langley kaolin plant, (3) Mountain West
Products, and (4) Lucky Friday mine due to increased
production and improved lead prices. K-T Mexico, K-T
Feldspar, American Girl mine, and Colorado Aggregate also
experienced increased sales. These factors were partially
offset by decreased sales of approximately $12.1 million
principally at (1) Grouse Creek due to the approximate two
month shutdown of milling operations necessary to raise
the tailings impoundment, (2) the Apex processing facility
which was sold in September 1995, (3) the Cactus mine
which completed operations in September 1995, (4) the
Republic mine which completed operations in February 1995,
and (5) K-T Clay's ball clay division.
Cost of sales and other direct production costs increased
approximately $2.4 million, or 2.6%, from the first nine
months of 1995 to the comparable 1996 period primarily due
to (1) increased production costs of $3.1 million at the
Lucky Friday mine due to increased ore processing and the
nonrecurring 1995 receipt of $1.1 million in insurance
proceeds related to the ore-conveyance accident in August
1994, (2) increased production costs at K-T Kaolin of $2.5
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 $1.9 million due to increased
production levels and difficulties associated with mining
in the Oro Cruz ore body, (4) production costs increases
of $1.8 million at Mountain West Products due to increased
product sales, (5) La Choya mine production costs
increased $1.1 million due to increased production levels,
and (6) increased production costs at K-T Mexico of $0.7
million, K-T Feldspar of $0.2 million and other increases
totaling $0.2 million. These increases in cost of sales
and other direct production costs were partially offset by
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
decreases in operating costs at other operations totaling
approximately $8.9 million, principally due to (1)
decreased costs associated with the Apex processing
facility of nearly $4.1 million which was sold in
September 1995, (2) decreased production costs at the
Grouse Creek mine totaling approximately $3.2 million
which is associated with the second quarter 1996 temporary
shutdown as well as higher costs in 1995 due to the start
up of the Grouse Creek mine in December 1994, (3)
decreased production costs at the Cactus mine of
approximately $1.0 million associated with the completion
of operations in September 1995, and (4) decreased costs
at the Republic mine of nearly $0.6 million due to the
completion of operations at Republic in February 1995.
Cost of sales and other direct production costs as a
percentage of sales decreased to 79.8% in the first nine
months of 1996 from 81.6% in the comparable 1995 period,
primarily due to the 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 $300, $303, and $424
for the first nine months of 1995 to $273, $277, and $375
for the comparable 1996 period, respectively. The
decreases in these costs per gold ounce are 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 $4.73, $4.73, and
$5.95 in the first nine months of 1995 to $4.07, $4.07,
and $5.30 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 $3.4 million, or 18.3%, from the first nine
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 $6.7 million, and (2) decreased depreciation,
depletion and amortization at K-T Clay's ball clay
division of $0.1 million. These decreases were offset by
increases in depreciation, depletion, and amortization at
(1) the La Choya mine of $2.4 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, (3) K-T Clay's
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
kaolin division of $0.2 million due to the acquisition of
the Langley kaolin plant in June 1995, and (4) other
increases totaling $0.1 million.
Other operating expenses decreased by $68.3 million, or
59.7%, in the 1996 period from the 1995 period, due
principally to the (1) decreased reduction in carrying
value of mining properties of $84.5 million, consisting of
the Company's 1995 reduction of carrying value of the
Company's interest in the Grouse Creek mine ($97.0
million) and the Company's interest in the Consolidated
Silver Corporation's Silver Summit mine ($0.4 million),
offset by the 1996 reduction in carrying value of mining
properties at the American Girl mine totaling
approximately $7.6 million and the Grouse Creek mine
totaling approximately $5.3 million, (2) decreased
exploration expenditures of approximately $1.5 million,
and (3) decreased general and administrative expenses of
$0.7 million. These decreases were partially offset by a
$18.4 million increase in provision for closed operations
and environmental matters, consisting of (1) the 1996
provision for the Grouse Creek mine totaling approximately
$22.5 million, (2) the increased 1996 provision over the
1995 provision for remediation and future costs associated
with the Coeur d'Alene River Basin of $2.4 million, (3)
the American Girl closure cost accrual of $0.3 million in
1996, and (4) provision for environmental matters at the
Company's former Yellow Pine mine of $0.1 million,
partially offset by (1) 1995 provision totaling $3.4
million for the Bunker Hill superfund site, (2) receipt of
$2.6 million in insurance proceeds in 1996 related to the
remediation liability at Bunker Hill, and (3) timber
proceeds from the closed Star Unit area of $0.9 million.
Other income was $4.2 million in the first nine months of
1996 compared to $9.1 million in the comparable 1995
period. The $4.9 million decrease was primarily due to
(1) decrease in gain on sale of investments of $2.9
million, (2) decreased interest and other income of $1.7
million, (3) foreign exchange loss in 1996 compared to a
gain in 1995, the impact of which is $0.2 million, and (4)
decreased net interest costs of $0.1 million. Total
interest cost increased approximately $1.0 million due to
higher borrowings in 1996 than in 1995 under the Company's
revolving and term loan facility. Capitalized interest
costs increased $0.9 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.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1995
The Company reported a net loss of approximately $36.8
million ($0.72 per common share) in the third quarter of
1996 compared to a net loss of approximately $102.7
million ($2.13 per common share) in the same period of
1995. After $2.0 million in dividends to shareholders of
the Company's Series B Cumulative Preferred Stock, the
Company's loss applicable to common shareholders was
approximately $38.8 million ($0.76 per common share) and
$104.7 million ($2.17 per common share) for the third
quarter of 1996 and 1995, respectively. The decreased
loss in 1996 compared to the same period in 1995 was due
to a variety of factors, the most significant of which was
the write-down of the Company's interest in the Grouse
Creek mine in the third quarter of 1995 totaling
approximately $97.0 million, compared to the 1996
adjustments totaling $35.7 million for reclamation and
closure costs and carrying value adjustments at the Grouse
Creek mine and the American Girl mine.
Sales of the Company's products decreased by approximately
$2.4 million, or 6.1%, in the third quarter of 1996 as
compared to the same period in 1995, principally the
result of decreased product sales totaling $3.8 million,
most notably from (1) the Apex processing facility which
was sold in September 1995, (2) the La Choya mine where
gold production decreased approximately 1,800 ounces, (3)
the Cactus mine where operations were completed in
September 1995, and (4) Grouse Creek, as well as K-T
Clay's kaolin division, American Girl mine, and Mountain
West Products. These factors were partially offset by
increased sales of approximately $1.3 million at K-T
Feldspar, K-T Mexico, Colorado Aggregate, and K-T Clay's
ball clay division.
Comparing the average metal prices for the third quarter
of 1996 with the comparable period for 1995, gold
increased slightly to $385 per ounce from $384 per ounce,
silver decreased by 5.3% to $5.05 per ounce from $5.33 per
ounce, lead increased by 30.2% to $0.362 per pound from
$0.278 per pound, and zinc decreased slightly to $0.455
per pound from $0.458 per pound. The Company's average
realized gold price during the third quarter of 1996 was
$391 per ounce.
Cost of sales and other direct production costs decreased
approximately $1.3 million, or 4.2%, from the third
quarter of 1995 to the comparable 1996 period primarily
due to (1) decreased production costs of $1.7 million at
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
the Apex processing facility which was sold in September
1995, (2) a $0.4 million decrease in production costs at
the Cactus mine where operations were completed in
September 1995, and (3) additional production costs
decreases totaling approximately $0.6 million at K-T
Clay's kaolin division, American Girl, La Choya, Mountain
West Products, and K-T Ball Clay. These production costs
decreases were partially offset by production costs
increases at (1) the Grouse Creek mine totaling
approximately $0.8 million, (2) K-T Feldspar, where
production costs increased approximately $0.3 million, and
(3) other production costs increases totaling $0.3 million
at other Industrial Minerals locations.
Cost of sales and other direct production costs as a
percentage of sales increased to 79.7% in the third
quarter of 1996 from 78.1% in the comparable 1995 period,
primarily due to the increased production costs and
decreased sales at the Grouse Creek mine.
Cash operating cost and total cash cost per gold ounce
increased from $261 and $264 in the third quarter of 1995
to $284 and $288 for the comparable 1996 period,
respectively. The increase in the cash operating cost and
total cash cost per gold ounce is primarily attributable
to increased unit production costs at the La Choya and
Grouse Creek mines in the 1996 period. Total production
costs decreased from $393 per gold ounce in the 1995
period to $389 in the 1996 period principally due to
decreased depreciation expense, the result of the write-
down of the Grouse Creek mining property in the third
quarter of 1995.
Cash operating cost, total cash cost, and total production
cost per silver ounce decreased from $4.57, $4.57, and
$5.71 in the third quarter of 1995 to $3.37, $3.37, and
$4.55 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 24.4%, from the third
quarter of 1995 to the comparable 1996 period primarily
due to the write-down of Grouse Creek property, plant, and
equipment in the third quarter of 1995, the impact of
which was $1.7 million.
Other operating expenses decreased by $65.1 million, or
60.7%, in the 1996 period from the 1995 period, due
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
principally to the (1) decreased reduction in carrying
value of mining properties of $84.5 million, consisting of
the Company's 1995 reduction of carrying value of the
Company's interest in the Grouse Creek mine ($97.0
million) and the Company's interest in the Consolidated
Silver Corporation's Silver Summit mine ($0.4 million),
offset partly by the 1996 reduction in carrying value of
mining properties at the American Girl mine totaling
approximately $7.6 million and the Grouse Creek mine of
approximately $5.3 million, (2) decreased exploration
expenditures of approximately $1.3 million, and (3)
decreased general and administrative expenses of $0.8
million. These decreases were partially offset by a $21.4
million increase in provision for closed operations and
environmental matters, consisting of (1) the 1996 third
quarter provision for the Grouse Creek mine totaling
approximately $22.5 million, (2) increased 1996 provision
over 1995 provision for remediation and future costs
associated with the Coeur d'Alene River Basin of $1.9
million, (3) the American Girl closure cost accrual of
$0.3 million, and (4) provision for environmental matters
at the Company's former Yellow Pine mine of $0.1 million,
partially offset by the 1995 provision totaling
approximately $3.4 million for the Bunker Hill superfund
site.
Other income was $3.0 million in the third quarter of 1996
compared to $2.9 million in the comparable 1995 period.
The increase was primarily due to a decrease in write-down
of certain common stock investments of $0.9 million,
offset by decreased interest and other income of $0.8
million. Total interest cost increased approximately $0.2
million due to higher borrowings in 1996 under the
Company's revolving and term loan facility than in 1995,
and increased fees associated with the loan facility.
Capitalized interest costs increased $0.2 million
principally due to capitalized interest costs associated
with the Greens Creek development, the Rosebud project,
and the Lucky Friday expansion project.
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 also
subject to many of the same inflationary pressures as the
U.S. economy in general. The Company continues to
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 September 30, 1996, assets totaled approximately $264.3
million and shareholders' equity totaled approximately
$147.5 million. Cash and cash equivalents increased by
$7.1 million to $11.1 million at September 30, 1996 from
$4.0 million at the end of 1995.
Operating activities provided approximately $17.8 million
of cash during the first nine months of 1996. The primary
sources of cash provided by operating activities were from
the La Choya mine and the Industrial Minerals segment.
Partially offsetting these primary sources was a $2.7
million dollar increase in accounts and notes receivable
due to (1) increased product receivables at Mountain West
Products related to its seasonal nature of sales, (2)
other increases at K-T Feldspar and K-T Clay's ball clay
division, (3) and increased product receivables at the
Lucky Friday mine due principally to the increase in lead
prices. These increases were partially offset by a
decrease in product receivables at Colorado Aggregate.
Additionally, accrued reclamation and other noncurrent
liabilities used cash of $2.5 million. Principal noncash
charges included in operating activities include (1)
provision for reclamation, holding, severance, and closure
costs of approximately $27.4 million, (2) depreciation,
depletion, and amortization of approximately $15.4
million, and (3) adjustments for reduction in carrying
value of mining properties totaling approximately $12.9
million.
During the first nine months of 1996, approximately $14.2
million of cash was provided from financing activities.
The major sources of cash provided by financing activities
were proceeds from borrowings on the long-term debt of
$40.5 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 $42.9
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
million and payment of the preferred stock dividend of
$6.0 million.
The Company's investing activities used $24.8 million of
cash during the first nine months of 1996. The most
significant use of cash was $25.6 million of property,
plant, and equipment additions. During the first nine
months of 1996, significant additions occurred at the
Greens Creek mine, the Grouse Creek mine, the Lucky Friday
mine, the American Girl mine, and the Rosebud project
totaling $15.2 million, $3.8 million, $1.9 million, $1.8
million, and $1.4 million, respectively. This use of cash
was offset partly by proceeds on dispositions of fixed
assets totaling approximately $3.2 million.
The Company estimates that remaining capital expenditures
to be incurred over the balance of 1996 will be
approximately $9.7 million including capitalized interest
costs of $0.5 million. These capital expenditures consist
primarily of (1) the Company's share of development
expenditures and capitalized start-up costs at the Greens
Creek project expected to total approximately $4.1
million, (2) development expenditures at the Rosebud
project totaling approximately $2.5 million, (3) capital
expenditures at K-T Clay's kaolin division of $1.2 million
principally for equipment purchases and plant improvements
at the Langley kaolin plant, and (4) development
expenditures at the Company's Lucky Friday expansion
project totaling approximately $1.0 million. The Company
intends to finance these capital expenditures through a
combination of existing cash and cash equivalents and cash
flow from operating activities. In addition, the Company
may borrow funds from its revolving and term loan credit
facility which, subject to certain conditions, provides
for borrowings up to a maximum of $55.0 million. The
Company had $33.0 million outstanding under the facility
at September 30, 1996.
The Company's estimate of its capital expenditure
requirements assumes the Company's joint venture partners
will not default with respect to their portion of
development costs and capital expenditures.
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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 September 30, 1996, a
total of $22.0 million remained available under the bank
facility.
On October 31, 1996, the Company entered into a third
amendment to the Company's $55.0 million revolving and
term loan credit facility. Under the terms of the
amendment, the net tangible worth covenant is amended to
permanently reduce the required net tangible worth by the
amount of noncash charges associated with the American
Girl mine and the Grouse Creek mine from June 30, 1996
through March 31, 1997. It also provides for temporary
relief of the net tangible worth covenant for a period of
180 days for certain other items. All other terms of the
credit agreement remain consistent with those disclosed in
Note 6 of Notes to Consolidated Financial Statements in
the Company's 1995 Annual Report on Form 10-K.
The Company's planned environmental and reclamation
expenditures for the balance of 1996 are estimated to be
approximately $2.1 million, principally for activities at
the Bunker Hill Superfund Site, the Coeur d'Alene River
Basin, and the Republic mine.
Exploration expenditures for the balance of 1996 are
expected to be approximately $1.0 million. The Company's
exploration strategy is to focus further exploration at or
in the vicinity of its currently owned properties.
Accordingly, these expenditures will be incurred
principally at exploration targets including La Choya,
Lucky Friday and Greens Creek. Additionally, expenditures
will be made on industrial minerals exploration projects.
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 Company will
receive a defined minimum price for certain quantities of
its production. Gains and losses, and the related costs
paid or premiums 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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
counterparties to these agreements. At September 30,
1996, the Company had forward sales commitments through
January 1997 for 4,000 ounces of gold at an average price
of $412 per ounce. The estimated fair value of these
forward sales commitments was $123,000 at September 30,
1996. The Company has also purchased options to put
44,610 ounces of gold to counterparties to such options at
an average price of $396 per ounce. Concurrently, the
Company sold options to allow the counterparties to such
options to call 44,610 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 September 30, 1996 was
$381. At September 30, 1996, the estimated fair value of
the Company's purchased gold put options was approximately
$635,000. If the Company had chosen to close its
offsetting short call option position, it would have
incurred a liability of approximately $13,500. The nature
and purpose of these forward sales contracts, however, do
not presently expose the Company to any significant net
loss. All of the aforementioned contracts are designated
as hedges at September 30, 1996.
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
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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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.
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.
In October 1996, the American Institute of Certified
Public Accountants issued Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP 96-01). SOP
96-1 provides authoritative guidance with respect to
specific accounting issues that are present in the
recognition, measurement, display, and disclosure of
environmental remediation liabilities. The provisions of
SOP 96-1 are effective for fiscal years beginning after
December 15, 1996. The Company has adopted the provisions
of the SOP 96-1 at September 30, 1996. The adoption of
the provisions of SOP 96-1 had no material affect on the
results of operations or financial condition and liquidity
of the Company that would not have been experienced
otherwise regardless of its adoption.
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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
fully briefed and oral argument was presented to the court
on October 16, 1996. 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. In October
1996, the legal proceeding related to the Tribe's natural
resource damage claims was consolidated with the United
States Natural Resources Damage litigation described
below.
On March 22, 1996, the United States filed a lawsuit in
Idaho Federal District Court against the Company and other
mining companies who conducted historic mining operations
in the Silver Valley of Northern Idaho. The lawsuit
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29
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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. In October 1996, the court
consolidated the Coeur d'Alene Tribe Natural Resource
Damage litigation with this lawsuit for discovery and
other limited pretrial purposes.
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.
With respect to the Coeur d'Alene River Basin, the Company
increased its accrual for closed operations and
environmental matters by $0.5 million during the first
quarter of 1996 and again by $2.3 million in the third
quarter.
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
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30
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 continued until the underlying
environmental claims against the Company are resolved or
settled. The remaining insurance carrier is providing the
Company with a partial defense in all Coeur d'Alene River
Basin environmental litigation. As of September 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
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31
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 September 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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32
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1(d) - Third Amendment to Credit Agreement dated
October 31, 1996, among Registrant and
Certain Subsidiaries and NationsBank of
Texas, N.A., as Agent, and Certain Banks
as Lenders.
10.11(a) - Amended and Restated Golden Eagle Earn-In
Agreement between Santa Fe Pacific Gold
Corporation and Hecla Mining Company dated
as of September 6, 1996.
10.11(b) - Golden Eagle Operating Agreement between
Santa Fe Pacific Gold Corporation and
Hecla Mining Company dated as of September
6, 1996.
10.12 - Limited Liability Company Agreement of the
Rosebud Mining Company, L.L.C. among Santa
Fe Pacific Gold Corporation and Hecla
Mining Company dated as of September 6,
1996.
12 - Fixed Charge Coverage Ratio Calculation
13 - Third Quarter Report to Shareholders for
the quarter ending September 30, 1996, for
release dated November 11, 1996.
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
Items 2, 3, 4 and 5 of Part II are omitted from this report as
inapplicable.
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33
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 12, 1996 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: November 12, 1996 By /s/ S. E. Hilbert
---------------------------------
S. E. Hilbert
Corporate Controller
(Chief Accounting Officer)
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34
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------------------
10.1(d) Third Amendment to Credit Agreement dated
October 31, 1996, among Registrant and Certain
Subsidiaries and NationsBank of Texas, N.A., as
Agent, and Certain Banks as Lenders.
10.11(a) Amended and Restated Golden Eagle Earn-In
Agreement between Santa Fe Pacific Gold
Corporation and Hecla Mining Company dated as of
September 6, 1996.
10.11(b) Golden Eagle Operating Agreement between Santa Fe
Pacific Gold Corporation and Hecla Mining Company
dated as of September 6, 1996.
10.12 Limited Liability Company Agreement of the Rosebud
Mining Company, L.L.C. among Santa Fe Pacific Gold
Corporation and Hecla Mining Company dated as of
September 6, 1996.
12 Fixed Charge Coverage Ratio Calculation for the
nine months ended September 30, 1995 and 1996
13 Third Quarter Report to Shareholders for the
quarter ending September 30, 1996, for release
dated November 11, 1996
27 Financial Data Schedule
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