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, 1997
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
- --------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83815-8788
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
208-769-4100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for at least the
past 90 days. Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding July 31, 1997
- --------------------------------------- -------------------------
Common stock, par value $0.25 per share 55,095,235 shares
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HECLA MINING COMPANY and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
I N D E X*
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Page
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PART I. - Financial Information
Item l - Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 3
- Consolidated Statements of Operations -
Three Months and Six Months Ended
June 30, 1997 and 1996 4
- Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1997 and 1996 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 29
Item 4 - Annual Meeting of Shareholders 33
Item 6 - Exhibits and Reports on Form 8-K 34
*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,
1997 1996
----------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 8,626 $ 8,256
Accounts and notes receivable 31,575 24,168
Income tax refund receivable 1,083 1,262
Inventories 19,775 22,879
Other current assets 1,590 2,284
---------- ---------
Total current assets 62,649 58,849
Investments 2,388 1,723
Restricted investments 6,861 20,674
Properties, plants and equipment, net 178,452 177,755
Other noncurrent assets 8,292 9,392
---------- ---------
Total assets $ 258,642 $ 268,393
========== =========
LIABILITIES
-----------
Current liabilities:
Accounts payable and accrued expenses $ 12,047 $ 17,377
Accrued payroll and related benefits 3,047 3,232
Preferred stock dividends payable 2,012 2,012
Accrued taxes 1,198 1,427
Accrued reclamation and closure costs 8,568 8,664
---------- ---------
Total current liabilities 26,872 32,712
Deferred income taxes 359 359
Long-term debt 15,141 38,208
Accrued reclamation and closure costs 41,031 45,953
Other noncurrent liabilities 6,856 5,653
---------- ---------
Total liabilities 90,259 122,885
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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 1997 - 55,157,324;
issued 1996 - 51,199,324 13,789 12,800
Capital surplus 374,016 351,559
Accumulated deficit (214,063) (213,610)
Net unrealized loss on investments (150) (32)
Foreign currency translation adjustment (4,898) (4,898)
Less treasury stock, at cost;
1997 - 62,085 shares, 1996 - 62,085 shares (886) (886)
---------- ---------
Total shareholders' equity 168,383 145,508
---------- ---------
Total liabilities and shareholders' equity $ 258,642 $ 268,393
========== =========
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, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
Sales of products $ 46,069 $ 40,523 $ 88,525 $ 83,470
--------- ---------- ---------- ---------
Cost of sales and other direct production costs 34,234 33,072 68,160 66,625
Depreciation, depletion and amortization 5,051 4,423 9,403 9,882
--------- ---------- ---------- ---------
39,285 37,495 77,563 76,507
--------- ---------- ---------- ---------
Gross profit 6,784 3,028 10,962 6,963
--------- ---------- ---------- ---------
Other operating expenses:
General and administrative 1,912 1,873 4,033 3,824
Exploration 2,438 1,187 3,792 1,990
Depreciation and amortization 78 85 157 174
Provision for (benefit from) closed
operations and environmental matters (41) (2,618) 148 (2,801)
--------- ---------- ---------- ---------
4,387 527 8,130 3,187
--------- ---------- ---------- ---------
Income from operations 2,397 2,501 2,832 3,776
--------- ---------- ---------- ---------
Other income (expense):
Interest and other income 2,070 714 3,221 1,408
Miscellaneous expense (308) (375) (777) (709)
Gain on sale of investments - - 110 - - 130
Interest expense:
Total interest cost (585) (728) (1,420) (1,349)
Less amount capitalized 116 566 477 1,043
--------- ---------- ---------- ---------
1,293 287 1,501 523
--------- ---------- ---------- ---------
Income before income taxes 3,690 2,788 4,333 4,299
Income tax benefit (provision) (636) 13 (761) (23)
--------- ---------- ---------- ---------
Net income 3,054 2,801 3,572 4,276
Preferred stock dividends (2,013) (2,013) (4,025) (4,025)
--------- ---------- ---------- ---------
Income (loss) applicable to
common shareholders $ 1,041 $ 788 $ (453) $ 251
========= ========== ========== =========
Income (loss) per common share $ 0.02 $ 0.02 $ (0.01) $ 0.01
========= ========== ========== =========
Cash dividends per common share $ - - $ - - $ - - $ - -
========= ========== ========== =========
Weighted average number of common
shares outstanding 55,091 51,134 53,960 51,131
========= ========== ========== =========
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, 1997 June 30, 1996
------------- -------------
Operating activities:
Net income $ 3,572 $ 4,276
Noncash elements included in net income:
Depreciation, depletion and amortization 9,560 10,056
Loss (gain) on disposition of properties, plants and equipment (1,089) 149
Gain on sale of investments - - (130)
Provision for reclamation and closure costs 474 1,508
Change in:
Accounts and notes receivable (7,407) (11,086)
Income tax refund receivable 179 169
Inventories 3,104 1,019
Other current assets 694 (251)
Accounts payable and accrued expenses (5,330) 2,111
Accrued payroll and related benefits (185) (483)
Accrued taxes (229) 113
Accrued reclamation and other noncurrent liabilities (4,288) (1,029)
---------- ----------
Net cash provided (used) by operating activities (945) 6,422
---------- ----------
Investing activities:
Additions to properties, plants and equipment (10,322) (18,909)
Proceeds from disposition of properties, plants and equipment 1,242 91
Proceeds from the sale of investments - - 130
Decrease (increase) in restricted investments 13,813 (155)
Purchase of investments and increase in cash surrender value of
life insurance (983) (383)
Other, net 1,011 (1,504)
---------- ----------
Net cash provided (used) by investing activities 4,761 (20,730)
---------- ----------
Financing activities:
Issuance of common stock, net of offering costs 23,446 22,028
Dividends on preferred stock (4,025) (4,025)
Borrowings against cash surrender value of
life insurance 200 401
Borrowing on long-term debt 27,000 30,500
Repayment of long-term debt (50,067) (32,909)
---------- ----------
Net cash provided (used) by financing activities (3,446) 15,995
---------- ----------
Net increase in cash and cash equivalents 370 1,687
Cash and cash equivalents at beginning of period 8,256 4,024
---------- ----------
Cash and cash equivalents at end of period $ 8,626 $ 5,711
========== ==========
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, 1996, as set forth in the Company's 1996
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, 1996, 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 1997
presentation. These reclassifications had no effect on
the net income or accumulated deficit as previously
reported.
Note 3. The components of the income tax provision for the six
months ended June 30, 1997 and 1996 are as follows (in
thousands):
1997 1996
------ ------
Current:
State $ 133 $ 158
Federal 9 (135)
Foreign 619 - -
------ ------
Total $ 761 $ 23
====== ======
The Company's income tax provision for the first half of
1997 and 1996 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.
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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,
1997 1996
-------- --------
Concentrates, bullion, metals
in transit and other products $ 4,896 $ 4,839
Industrial mineral products 6,684 8,902
Materials and supplies 8,195 9,138
-------- --------
$ 19,775 $ 22,879
======== ========
Note 5. Contingencies
Coeur d'Alene River Basin Natural Resource Damage Claims
- Coeur d'Alene Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe (the Tribe)
brought a lawsuit, under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as
amended, (CERCLA or Superfund), in Idaho Federal District
Court against the Company and a number of other mining
companies asserting claims for damages to natural
resources downstream from the Bunker Hill Superfund Site
located at Kellogg, Idaho (Bunker Hill Site) over which
the Tribe alleges some ownership or control. The Company
has answered the Tribe's complaint denying liability for
natural resource damages. 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
this decision, the Court in the natural resource damage
litigation stayed the court proceedings in the natural
resource damage litigation until a final decision is made
on the question of the Tribe's ownership. 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. The State of Idaho appealed this
decision to the U.S. Supreme Court. On June 23, 1997,
the U.S. Supreme Court issued a ruling dismissing the
Tribe's claim to ownership based upon lack of federal
court jurisdiction over the Tribe's claim against the
State.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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. This litigation was not
affected by the U.S. Supreme Court's decision referenced
above. 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.
- U.S. Government Claims
On March 22, 1996, the United States filed a lawsuit in
Idaho Federal District Court against certain mining
companies who conducted historic mining operations in the
Silver Valley of northern Idaho, including the Company.
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 (the Basin) in northern 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
Basin outside the Bunker Hill 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 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.
- State of Idaho 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 Basin
being undertaken by a State Trustees group. In return,
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 Basin.
With respect to the above claims, the Company increased
its accrual for closed operations and environmental
matters by approximately $2.7 million in 1996. At
June 30, 1997, the Company's accrual for remediation
activity in the Basin totaled $1.6 million. These
expenditures are anticipated to be made over the next
four years. Depending on the results of the
aforementioned lawsuits, it is reasonably possible that
the Company's estimate of its obligation may change in
the near term.
Insurance Coverage Litigation
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 EPA and the Tribe under CERCLA related to
the Bunker Hill Site and the 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 approximately $7.2 million under the
terms of the settlement agreements. Thirty percent of
these settlements were paid to the EPA to reimburse the
U.S. Government for past costs under the Bunker Hill Site
Consent Decree. Litigation is still pending against one
insurer with trial continued until the underlying
environmental claims against the Company are resolved or
settled. The remaining insurer is providing the Company
with a partial defense in all Basin environmental
litigation. As of June 30, 1997, the Company had not
reduced its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance
proceeds.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Star Phoenix
On July 14, 1997, the Idaho Supreme Court denied Star
Phoenix's request for a rehearing on certain portions of
the Court's April 2, 1997 opinion that reversed the June
1994 district court judgment against the Company. The
April 1997 ruling in the Company's favor is now a final
determination in this matter as Star Phoenix has no
further right of appeal. Earlier this year, the Idaho
Supreme Court and the trial court issued orders releasing
the Company's $27.2 million appeal bond, and the Company
received its $10 million in collateral from the bonding
company on May 6, 1997. The Company used the $10 million
in collateral to pay down outstanding Bank debt under the
Company's credit facility.
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.
Note 6. At June 30, 1997, there was $15.0 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, 1997.
On July 30, 1997, the Company issued $9.8 million
aggregate principal amount of tax-exempt, solid waste
disposal revenue bonds. The proceeds from the issuance
were initially used to pay down debt under the Company's
existing revolving and term loan credit facility.
Note 7. In February 1997, the Company issued 3,950,000 shares of
its common stock realizing proceeds of approximately
$23.4 million, net of issuance costs of approximately
$1.3 million. The Company used $23.0 million of the net
proceeds to pay down debt under its existing revolving
and term loan credit facility.
Note 8. In the normal course of its business, the Company uses
derivative commodity instruments to manage its exposure
to fluctuations in the prices of certain metals which it
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
produces. The Company does not hold or issue derivative
instruments for trading purposes.
The Company uses forward sales and commodity put and call
options to hedge anticipated sales of certain metal
products it produces. The Company also utilizes forward
contracts to sell its unhedged production of metal
products.
The Company accounts for commodity put and call options
by deferring any gains and losses, and the related costs
paid or premium received, for contracts which hedge the
sales prices of commodities until the hedged position is
settled. Gains and losses, and the related costs paid or
premiums received are included in sales at the time of
settlement. Specific criteria required for applying this
accounting method include the Company's ability to
produce the underlying commodity prior to the contract
settlement date, the existence of price risk associated
with the underlying commodity, the designation of the
transaction at the time the contract is entered into as a
hedge against price volatility, and whether this type of
transaction effectively reduces the price risk associated
with the underlying commodity.
The Company recognizes revenue on forward sales contracts
designated as hedges at the time the Company matches
specific production to a forward contract, or upon
settlement of the net position in cash. In the case of
matching specific production to a contract, the revenue
may be recognized in a period prior to the receipt of
cash, in which case a receivable is established for the
expected receipt, although this time period is typically
less than two months. Specific criteria required for
applying this accounting method include the Company's
ability to produce the underlying commodity prior to the
contract settlement date, the existence of price risk
associated with the underlying commodity, the designation
of the transaction at the time the contract is entered
into as a hedge against price volatility, and whether
this type of transaction effectively reduces the price
risk associated with the underlying commodity.
The Company also uses forward contracts as a means to
sell available production. Revenue from these contracts
are recognized at the time the contracts are entered
into, with a corresponding receivable, as the commodity
has already been produced and is available for delivery.
Upon delivery of the underlying commodity on the
settlement date, cash is received from the sale. The
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
only criteria for utilizing this method is the
availability of produced metal at the time the contract
is entered into.
Note 9. In February 1997, Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share" was
issued. SFAS 128 established standards for computing and
presenting earnings per share (EPS) and simplifies the
existing standards. This standard replaced the
presentation of primary EPS with a presentation of basic
EPS. It also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of
the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after
December 15, 1997, including interim periods and requires
restatement of all prior-period EPS data presented. The
Company does not believe the application of this standard
will have a material effect on the presentation of its
earning per share disclosures.
In June 1997, Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Comprehensive Income," was issued.
SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15,
1997, and requires restatement of earlier periods
presented. The Company does not believe the application
of this standard will have a material effect on the
results of operations or financial condition of the
Company.
In June 1997, Statement of Financial Accounting Standards
No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information" was issued. SFAS 131
establishes standards for the way that a public
enterprise reports information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to
shareholders. SFAS is effective for fiscal years
beginning after December 15, 1997, and requires
restatement of earlier periods presented. The Company
does not believe the application of this standard will
have a material effect on the results of operations or
financial condition of the Company.
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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 for precious and base metals. 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 in this
Management's Discussion and Analysis of Financial
Condition and Results of Operations, the matters
discussed below are forward-looking statements that
involve risks and uncertainties, including the timely
development of existing properties and reserves and
future projects, the impact of metals prices and metal
production volatility, changing market conditions and the
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 (see
also "Investment Considerations" of Part I, Item 1 of the
Company's 1996 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 as
circumstances change or develop.
The Company incurred losses applicable to common
shareholders for each of the past three years in the
period ended December 31, 1996. If the Company's
estimates of market prices of gold, silver, lead, and
zinc are realized in 1997, the Company expects to record
income or (loss) in the range of a $(3.0) million loss to
$0.5 million income after the expected dividends to
preferred shareholders totaling approximately $8.1
million for the year ending December 31, 1997. The
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
average per ounce prices of gold and silver for July 1997
were $324 and $4.36, respectively. If these prices
remain at present levels or decline further, the
Company's estimated range of income or loss may not be
realized. 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
actual results of operations for 1997 will be as
projected.
The variability of metals prices requires that the
Company, in assessing the impact of prices on
recoverability of its metals segment 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. This evaluation includes a review of
estimated future net cash flows against the carrying
value of the Company's 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 production and market conditions.
On July 14, 1997, the Idaho Supreme Court denied Star
Phoenix's request for a rehearing on certain portions of
the Court's April 2, 1997 opinion that reversed the June
1994 district court judgment against the Company. The
April 1997 ruling in the Company's favor is now a final
determination in this matter as Star Phoenix has no
further right of appeal. Earlier this year, the Idaho
Supreme Court and the trial court issued orders releasing
the Company's $27.2 million appeal bond, and the Company
received its $10 million in collateral from the bonding
company on May 6, 1997. The Company used the $10 million
in collateral to pay down Bank debt under the Company's
credit facility.
In early July, the Company's wholly-owned subsidiary,
Kentucky-Tennessee Clay Company, voluntarily suspended
shipments of ball clay to all animal feed manufacturers.
A small amount of K-T Clay's ball clay is used by animal
feed producers to prevent animal feed from clumping. K-T
Clay ships about 1% of its annual production for this
use. The action was taken as a result of discovery by
the Food and Drug Administration of trace levels of
dioxin of approximately three parts per trillion, found
in a limited sampling of chickens. The source of the
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
dioxin was traced to ball clay in feed. The FDA
determined that there is no health risk but as a
precaution halted shipments to poultry producers and egg
producers until they certify the products were
essentially dioxin-free. The Mine Safety Health
Administration has also cleared the Company from any
issues associated with exposure to its employees at its
plants. The Company's initial investigation indicates
that dioxin may be an inherent characteristic of ball
clays in general. The Company is cooperating fully with
the federal agencies in this matter, and the Company does
not believe there will be any long-term material impact
on the Company or to K-T Clay's business from this
matter.
On May 12, 1997, the Company announced that the Board of
Directors approved the expenditures necessary to develop
the Lucky Friday expansion project, located approximately
5,000 feet northwest of the Lucky Friday vein. The
Company anticipates spending approximately $16.0 million
in 1997 and 1998 to develop the expansion area, which is
expected to increase the Lucky Friday mine silver
production to approximately 4.0 million ounces per year
by 1998.
During the first six months of 1997, the Company produced
approximately 89,000 ounces of gold compared to
approximately 78,000 ounces of gold production in the
first six months of 1996. The Company's gold production
in the first six months of 1997 was from the following
sources: the La Choya mine - approximately 39,000
ounces; the Grouse Creek mine - approximately 27,000
ounces; the Rosebud mine - approximately 12,000 ounces;
the Greens Creek mine - approximately 8,000 ounces; and
an additional 3,000 ounces from other sources. For the
year ending December 31, 1997, the Company expects to
produce between 155,000 and 164,000 ounces of gold
compared to actual 1996 gold production of approximately
169,000 ounces of gold. The 1997 estimated gold
production includes 68,000 to 72,000 ounces from the
Company's La Choya mine, 38,000 to 41,000 ounces from the
Company's interest in the Rosebud mine, 27,000 ounces
from the Company's Grouse Creek mine, and 22,000 to
24,000 ounces from the Company's interest in the Greens
Creek mine and other sources.
In the first six months of 1997, the Company produced
approximately 2.5 million ounces of silver compared to
the first six months of 1996 silver production of 1.0
million ounces. The Company's silver production in the
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
first six months of 1997 was principally from the Greens
Creek mine - approximately 1.4 million ounces, the Lucky
Friday mine - approximately 0.9 million ounces, the
Grouse Creek mine - approximately 0.1 million ounces, and
approximately 0.1 million ounces from other sources. The
Company's share of silver production for 1997 is expected
to be between 5.6 and 6.0 million ounces compared to 1996
production of approximately 3.0 million ounces. The 1997
estimated silver production includes 2.1 to 2.3 million
ounces from the Lucky Friday mine, 3.2 to 3.4 million
ounces from the Company's interest in the Greens Creek
mine and an additional 0.3 million ounces from other
sources.
In 1996, the Company shipped approximately 1,072,000 tons
of industrial minerals, including ball clay, kaolin,
feldspar, and specialty aggregates. The Company's
shipments of industrial minerals are expected to decrease
slightly in 1997 to approximately 1,034,000 tons.
Additionally, the Company expects to ship approximately
844,000 cubic yards of landscape material from its
Mountain West Products operation in 1997 compared to
996,000 cubic yards in 1996.
RESULTS OF OPERATIONS
FIRST SIX MONTHS 1997 COMPARED TO FIRST SIX MONTHS 1996
The Company reported net income of approximately $3.6
million, or $0.07 per share, in the first six months of
1997 compared to a net income of approximately $4.3
million, or $0.08 per share, in the same period of 1996.
After $4.0 million in dividends to shareholders of the
Company's Series B Cumulative Convertible Preferred
Stock, the Company's loss applicable to common
shareholders for the first six months of 1997 was $0.5
million, or $0.01 per common share, compared to income of
$0.3 million, or $0.01 per common share, in the
comparable 1996 period. The change in income in the
first six months of 1997 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
1997 with the comparable 1996 period, gold decreased by
12% to $347 per ounce from $395 per ounce, silver
decreased by 10% to $4.89 per ounce from $5.42 per ounce,
lead decreased by 18% to $0.296 per pound from $0.359 per
pound, and zinc increased by 20% to $0.561 per pound from
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
$0.469 per pound. During the first six months of 1997,
the Company's realized gold price per ounce decreased 7%
from $400 per ounce in the first six months of 1996 to
$373 per ounce in 1997.
Sales of the Company's products increased by
approximately $5.1 million, or 6.1%, in the first six
months of 1997 as compared to the same period in 1996,
principally the result of increased product sales
totaling approximately $15.0 million, most notably from
the Greens Creek mine, where operations recommenced in
July 1996, and the Rosebud mine where operations
commenced in April 1997. These factors were partially
offset by decreased sales of $9.9 million principally at
the American Girl mine where operations were suspended in
the fourth quarter of 1996, decreased sales at MWCA-
Mountain West Products Division primarily due to
unfavorable weather conditions and resulting competitive
pricing pressures in the 1997 period, decreased sales at
the Grouse Creek mine due to decreased gold and silver
prices and the completion of operations at Grouse Creek
in April 1997, decreased sales at the Lucky Friday mine
principally due to decreased silver and lead prices,
decreased sales at the K-T Clay Kaolin division due to a
decrease in volume shipped, decreased sales at the La
Choya mine due to the decreased gold price, and decreased
sales from K-T Feldspar.
Cost of sales and other direct production costs increased
approximately $1.5 million, or 2.3%, from the first six
months of 1996 to the comparable 1997 period primarily
due to (1) increased production costs of $6.8 million at
the Greens Creek mine where operations recommenced in
July 1996, (2) increased production costs at the Rosebud
mine, where operations commenced in April 1997, of $1.9
million, (3) production cost increases of $0.5 million at
K-T Clay de Mexico due to increased sales, (4) production
cost increases at the Lucky Friday mine totaling
approximately $0.3 million due to increased production
levels, (5) increased production costs at other K-T Clay
operations of $0.3 million, and (6) increased production
costs at La Choya of $0.2 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 $8.5 million. These
decreases are primarily due to (1) decreased production
costs at the American Girl mine totaling approximately
$5.5 million due to the suspension of operations in the
fourth quarter of 1996, (2) decreased production costs at
the Grouse Creek mine of $1.4 million due to the
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
completion of operations in April 1997, (3) decreased
production costs at the K-T Clay Kaolin Division of $1.0
million resulting from decreased sales, and a decrease in
costs associated with sales of product in Italy, and (4)
decreased costs at MWCA-Mountain West Products division
of $0.6 million associated with the decrease in sales.
Cost of sales and other direct production costs as a
percentage of sales decreased from 79.8% in the first
half of 1996 to 77.0% in the comparable 1997 period. The
decrease is primarily due to the shutdown of the higher
cost American Girl mine in 1996, the suspension of
operations at the higher cost Grouse Creek mine in April
1997, as well as the addition of the lower cost Rosebud
and Greens Creek mines.
Depreciation, depletion and amortization decreased
approximately $0.5 million, or 4.8%, from the first six
months of 1996 to the comparable 1997 period primarily
due to (1) decreased depreciation at the La Choya mine
($3.0 million) the result of a lower depreciation rate in
1997 attributable to the 1996 increase in total
recoverable ounces from the mine; (2) decreased
depreciation at the Grouse Creek mine ($1.1 million) due
to the third quarter 1996 write-down of the remaining
property, plant, and equipment carrying value balance;
(3) decrease depreciation at the American Girl mine ($1.0
million), due to third quarter 1996 write-down of the
remaining property, plant, and equipment carrying value
balance; and (4) other decreases at other operations
($0.1 million). These decreases were partly offset by
increased depreciation, depletion, and amortization at
(1) the Greens Creek mine of $3.0 million where
operations recommenced in July 1996; (2) the Rosebud mine
of $1.4 million where operations commenced in April 1997,
and (3)other increases at other operations of $0.3
million.
Cash operating cost, total cash cost and total production
cost per gold ounce decreased from $267, $271 and $366
for the first six months of 1996 to $169, $175 and $233
for the comparable 1997 period, respectively. The
decrease in the cash operating cost, total cash cost, and
total production cost per gold ounce is primarily
attributable to the shutdown of the American Girl mine in
the fourth quarter of 1996, the shutdown of the Grouse
Creek mine in April of 1997, as well as the commencement
of production at the Rosebud mine in April 1997. The
total production cost per ounce was also favorably
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
impacted by the decreased depreciation rate per ounce at
the La Choya mine in 1997 compared to 1996.
Cash operating cost, total cash cost and total production
cost per silver ounce decreased from $4.58, $4.58 and
$5.84 in the first six months of 1996 to $3.40, $3.40 and
$5.27 in the comparable 1997 period, respectively. The
decreases in the cost per silver ounce are due primarily
to the recommencement of operations at the Greens Creek
mine, partly offset by increased cost per ounce amounts
at the Lucky Friday mine resulting from decreased lead
by-product credits in the first six months of 1997.
Gold, lead, and zinc are by-products of the Company's
silver production, the revenues from which are netted
against production costs in the calculation of production
cost per ounce of silver.
Other operating expenses increased $4.9 million, or
155.1%, from the 1996 period to the 1997 period, due
principally to (1) an increased provision for closed
plants and environmental matters of approximately $2.9
million primarily the result of net insurance proceeds of
$2.6 million in excess of the then current estimated
liability for remediation efforts at the Bunker Hill
superfund site in 1996, 1996 timber sales proceeds from
the closed Star Unit area of $0.9 million, partly offset
by the 1996 provision for environmental matters
associated with the Coeur d'Alene River Basin of $0.5
million and other increases of $0.1 million; (2)
increased exploration expenditures of $1.8 million, most
notably at the La Jojoba gold property in Mexico ($1.4
million), the El Porvenir gold property in Mexico ($0.5
million), and other net decreases of $0.1 million; and
(3) increased general and administrative expenses of $0.2
million.
Other income was $1.5 million in the first six months of
1997 compared to $0.5 million in the comparable 1996
period. The $1.0 million increase was primarily due to a
$1.8 million increase in interest and other income,
resulting primarily from a gain on sale of an 8% interest
in the Buckhorn Joint Venture, in Nevada, of $1.1
million, increased royalty income of $0.3 million, and
other net increases of $0.4 million. This increase was
partly offset by increased net interest cost of $0.6
million, decreased gain on sale of investments of $0.1
million, and increased miscellaneous expense of $0.1
million. Total interest cost increased approximately
$0.1 million due to higher interest and fees associated
with the Company's revolving and term loan facility.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Capitalized interest costs decreased $0.6 million
principally due to decreased capitalized interest costs
associated with the Greens Creek mine, the American Girl
mine, and at the Rosebud project which was completed in
March 1997, partly offset by increased capitalized
interest at the Lucky Friday expansion project.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1996
The Company had net income of approximately $3.0 million,
or $0.06 per share, in the second quarter of 1997
compared to net income of approximately $2.8 million, or
$0.05 per share, in the same period of 1996. 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 1997 was $1.0 million, or $0.02
per common share, compared to $0.8 million, or $0.02 per
common share, in the comparable 1996 period. The change
in net income in the second quarter of 1997 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 increased by
approximately $5.5 million, or 13.7%, in the second
quarter of 1997 as compared to the same period in 1996,
principally the result of increased product sales of
$10.2 million, most notably from (1) the Greens Creek
mine where operations recommenced in July 1996, (2) the
Rosebud mine where operations commenced in April 1997,
and (3) increased sales at MWCA-Colorado Aggregate
Division, K-T Clay de Mexico, and K-T Clay Ball Clay
Division. These increases were partially offset by
decreased sales at other operations, the impact of which
is approximately $4.7 million, attributable to (1)
suspension of operations at the American Girl mine in the
fourth quarter of 1996, (2) decreased sales at MWCA-
Mountain West Products division due to unfavorable
weather conditions and resulting competitive pricing
pressures in the 1997 period, (3) decreased sales volume
at K-T Clay Kaolin division, and (4) decreased sales at
the Lucky Friday mine due to decreased silver and lead
prices.
Comparing the average metals prices for the second
quarter of 1997 with the comparable 1996 period, gold
decreased by 12% to $343 per ounce from $390 per ounce,
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
silver decreased by 10% to $4.76 per ounce from $5.30 per
ounce, lead decreased by 23% to $0.284 per pound from
$0.370 per pound, and zinc increased by 26% to $0.590 per
pound from $0.467 per pound. During the second quarter
of 1997, the Company's realized gold price per ounce
decreased 7% from $399 per ounce in the second quarter of
1996 to $371 per ounce in 1997.
Cost of sales and other direct production costs increased
$1.2 million, or 3.5%, from the second quarter of 1996 to
the comparable 1997 period primarily due to (1) increased
production costs at the Greens Creek mine due to the
recommencement of operations in July 1996 ($3.6 million),
(2) increased costs at the Rosebud mine where operations
commenced in April 1997 ($1.9 million), (3) increased
costs at the Lucky Friday mine due to increased
production levels ($0.4 million), (4) and increased costs
at the K-T Ball Clay Division ($0.4 million), and K-T
Clay de Mexico ($0.3 million). These increases in cost
of sales and other direct production costs were partially
offset by decreases in operating costs at other
operations totaling $5.6 million. These decreases are
primarily attributable to (1) decreased production costs
at the American Girl mine of $3.4 million due to
suspension of operations in the fourth quarter of 1996,
(2) decreased production costs at the Grouse Creek mine
totaling approximately $1.7 million due to the completion
of operations in April of 1997, (3) decreased production
costs at the K-T Kaolin division of approximately $0.4
million due to lower sales volumes and decreased sales of
higher cost product in Italy, and (4) decreases at other
operations of $0.1 million.
Cost of sales and other direct production costs as a
percentage of sales from products decreased from 81.6% in
the second quarter of 1996 to 74.3% in the comparable
1997 period, primarily due to the shutdown of the
American Girl and Grouse Creek mines, and the opening of
the Rosebud and Greens Creek mines.
Depreciation, depletion and amortization increased by
approximately $0.6 million, or 14.2%, from the 1996
period to the 1997 period, primarily the result of
increased depreciation, depletion, and amortization at
(1) the Rosebud mine ($1.3 million) due to the
commencement of operations in April 1997, (2) the Greens
Creek mine ($1.3 million) due to the recommencement of
operations in July 1996, and (3) increased depreciation
at the Lucky Friday mine ($0.1 million) due to increased
production. These increases were partially offset by
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
decreases in depreciation, depletion, and amortization at
(1) the La Choya mine of $1.4 million the result of a
lower depreciation rate in 1997 attributable to the 1996
increase in total recoverable ounces from the mine, (2)
decreased depreciation at the American Girl mine of $0.5
million due to the suspension of operations in the fourth
quarter of 1996, and (3) decreased depreciation at the
Grouse Creek mine of $0.2 million due to the write-down
of the property, plant and equipment carrying value
during the third quarter of 1996.
Cash operating cost, total cash cost and total production
cost per gold ounce decreased from $281, $286 and $385
for the second quarter of 1996 to $146, $155 and $225 for
the second quarter of 1997, respectively. The decrease
in the cash operating, total cash and total production
cost per gold ounce is mainly attributed to the
suspension of operations at the American Girl mine and
the Grouse Creek mine, as well as the commencement of
production at the Rosebud mine. The total production
cost per ounce was also favorably impacted by the
decreased depreciation rate per ounce at the La Choya
mine in 1997 compared to 1996.
Cash operating, total cash and total production cost per
silver ounce decreased from $4.48, $4.48 and $5.79 in the
second quarter of 1996 to $3.61, $3.61 and $5.23 in the
second quarter of 1997, respectively. The decreases in
the cost per silver ounce are due primarily to
recommencement of operations at the Greens Creek mine in
July 1996, partially offset by increased per ounce costs
at the Lucky Friday mine resulting from decreased lead
by-product credits in the 1997 period. Gold, lead, and
zinc are by-products of the Company's silver production,
the revenues from which are netted against production
costs in the calculation of production cost per ounce of
silver.
Other operating expenses increased by $3.9 million, or
732.4%, from the 1996 period to the 1997 period, due
principally to an increase in the provision for closed
operations and environmental matters totaling
approximately $2.6 million. The increase in the
provision for closed operations and environmental matters
is principally due to net insurance proceeds in excess of
the then 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, partially offset by other increases of
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
$0.2 million. Exploration expenditures also contributed
to the increase in other operating expenses. Exploration
expenditures increased $1.3 million mainly due to
expenditures at the La Jojoba gold property in Mexico of
$0.9 million, and the El Porvenir gold property in Mexico
of $0.4 million.
Other income was $1.3 million in the 1997 period compared
to $0.3 million in the 1996 period. The $1.0 million
increase was primarily due to (1) increase in interest
and other income of approximately $1.4 million, most
notably from the gain on sale of an 8% interest in the
Buckhorn Joint Venture in Nevada of $1.1 million, and
increased royalty income, and (2) decreased miscellaneous
expense of $0.1 million. These increases were partly
offset by (3) increased net interest costs of $0.3
million, and (4) decreased gain on sale of investments of
$0.1 million. Total interest cost decreased $0.1 million
due to lower borrowing in 1997 under the Company's
revolving and term loan facility than in 1996.
Capitalized interest costs decreased $0.5 million
principally due to decreased capitalized interest costs
associated with the Greens Creek development, the Rosebud
project, and development at the American Girl's Oro Cruz
ore body, partially offset by increased capitalized
interest at 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 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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
regulatory requirements, and other property transactions
can have a significant impact on the need for capital.
At June 30, 1997, assets totaled approximately $258.6
million and shareholders' equity totaled approximately
$168.4 million. Cash and cash equivalents increased by
$0.3 million to $8.6 million at June 30, 1997 from $8.3
million at the end of 1996.
The Company's investing activities provided $4.8 million
of cash during the first half of 1997. The most
significant source of cash was $13.8 million of
restricted investments that were released during the
first six months of 1997, including the $10.0 million
surety collateral on the Star Phoenix judgement which was
reversed in 1997, and the release of restricted
investments at Grouse Creek resulting from the
termination of the Grouse Creek joint venture.
Additional cash was provided from proceeds on disposition
of properties, plants, and equipment totaling
approximately $1.2 million, principally due to the sale
of an 8% interest in the Buckhorn Joint Venture. These
sources of cash were partially offset by cash used for
additions to properties, plants, and equipment totaling
$10.3 million, including significant additions at the
Rosebud project totaling $4.3 million, the Lucky Friday
mine of $2.7 million, the Greens Creek mine of $0.8
million, industrial minerals capitalized expenditures of
$1.7 million, and other additions, including capitalized
interest of $0.8 million. Additionally, the purchase of
investments and increase in cash surrender value of life
insurance required cash of approximately $1.0 million.
During the first half of 1997, approximately $3.4 million
of cash was used by financing activities. The major uses
of cash were repayments of long-term debt of $50.1
million and payment of the preferred stock dividend of
$4.0 million. These uses were partially offset by
sources of cash, including proceeds from borrowings on
long-term debt of $27.0 million, proceeds totaling
approximately $23.4 million from the issuance of 3.950
million common shares in an underwritten offering
completed in February 1997, and proceeds of $0.2 million
on borrowings against the cash surrender value of life
insurance.
Operating activities used approximately $0.9 million of
cash during the first half of 1997. The primary sources
of cash were from the La Choya mine, Greens Creek, and
the K-T Clay operations. Additionally, (1) decreases in
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
inventories provided cash of $3.1 million, principally at
MWCA - Mountain West Products division, MWCA - Colorado
Aggregate Division, and the American Girl Mine, and (2) a
decrease in other current assets provided $0.7 million in
cash. More than offsetting these sources was (1) a $7.4
million increase in accounts receivable most notably at
MWCA - Mountain West Products division of $3.2 million
and MWCA - Colorado Aggregate division of $1.8 million
due principally to the seasonal nature of sales at these
properties, the Rosebud mine ($1.9 million) due to the
commencement of operations in April 1997, and other net
accounts receivable increases of $0.5 million, (2) a
decrease in accounts payable and accrued liabilities used
$5.3 million in cash, most notably at Grouse Creek and
MWCA-Mountain West Products division, and (3) cash
payments for reclamation and other noncurrent liabilities
required $4.3 million in cash. Principal non-cash
charges included depreciation, depletion, and
amortization of approximately $9.6 million and provision
for reclamation and closure costs of $0.5 million.
The Company estimates that remaining capital expenditures
to be incurred over the balance of 1997 will be
approximately $18.9 million including capitalized
interest costs of $0.5 million. These capital
expenditures, excluding capitalized interest, consist
primarily of (1) development expenditures at the Lucky
Friday expansion project expected to total approximately
$11.8 million, (2) the Company's share of development
expenditures at the Rosebud project totaling
approximately $3.0 million, (3) capitalized expenditures
at the Greens Creek mine totaling approximately $1.8
million, and (4) capitalized expenditures at the
Company's Industrial Mineral operations totaling
approximately $1.3 million. These planned capital
expenditures are anticipated to be funded from operating
activities, and amounts available under the revolving
term loan credit facility.
The Company's estimate of its capital expenditure
requirements assumes, with respect to the Greens Creek
and Rosebud properties, that 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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
million in the aggregate. In February 1997, the Company
issued 3.95 million common shares to facilitate the
funding of the Company's capital expenditures in 1997.
To date, the Company has issued $48.4 million of the
Company's common shares under the Registration Statement.
The Company used $23.0 million of the February 1997 net
proceeds of approximately $23.4 million from the sale of
its common shares to initially pay down debt under its
existing revolving and term loan credit facility thus
increasing its borrowing capacity under the facility. As
of June 30, 1997, a total of $40.0 million remained
available under the bank facility.
On July 30, 1997, the Company issued $9.8 million
aggregate principal amount of tax-exempt, solid waste
disposal revenue bonds. The proceeds from the issuance
were initially used to pay down debt under the Company's
existing revolving and term loan credit facility.
The Company's planned environmental and reclamation
expenditures for the balance of 1997 are expected to be
approximately $9.0 to $12.0 million, principally for
environmental and reclamation activities at the Bunker
Hill Superfund site, the Republic mine, the Grouse Creek
mine, the Coeur d'Alene River Basin, the American Girl
mine, the Durita property, and the Cactus mine.
Exploration expenditures for the balance of 1997 are
estimated to be approximately $3.0 to $3.5 million. The
Company's exploration strategy is to focus further
exploration at or in the vicinity of its currently owned
domestic and foreign properties. Accordingly, these
exploration expenditures will be incurred principally at
Greens Creek, Rosebud, 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
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, when the Company matches specific
production to a contract, or upon settlement of the net
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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, 1997, the Company had forward sales
commitments through June 30, 1999 for 23,600 ounces of
gold at an average price of $354 per ounce. The
estimated fair value of these forward sales commitments
was $325,000 as of June 30, 1997. The Company has also
purchased options to put 17,220 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 17,220
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, 1997, was $335. At June 30, 1997,
the estimated fair value of the Company's purchased gold
put options was approximately $989,000. If the Company
had chosen to close its offsetting short call option
position, it would have incurred a liability of
approximately $1,000. Additionally, the Company has
entered into spot deferred sales commitments for 10,000
ounces of gold at $349 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, 1997.
On July 14, 1997, the Idaho Supreme Court denied Star
Phoenix's request for a rehearing on certain portions of
the Court's April 2, 1997 opinion that reversed the June,
1994 district court judgment against the Company. The
April, 1997 ruling in the Company's favor is now a final
determination in this matter as Star Phoenix has no
further right of appeal. Earlier this year, the Idaho
Supreme Court and the trial court issued orders releasing
the Company's $27.2 million appeal bond, and the Company
received its $10 million in collateral from the bonding
company on May 6, 1997. The Company used the $10 million
in collateral to pay down outstanding Bank debt under the
Company's credit facility.
The Company is subject to legal proceedings and claims
which have arisen in the ordinary course of its business
and have not been finally adjudicated (see Item 1. Legal
Proceedings). Although the ultimate disposition of these
matters and various other pending legal actions and
claims is not presently determinable, it is the opinion
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
of the Company's management, based upon the information
available at this time, that the expected 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 February 1997, Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share" was
issued. SFAS 128 established standards for computing and
presenting earnings per share (EPS) and simplifies the
existing standards. This standard replaced the
presentation of primary EPS with a presentation of basic
EPS. It also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of
the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after
December 15, 1997, including interim periods and requires
restatement of all prior-period EPS data presented. The
Company does not believe the application of this standard
will have a material effect on the presentation of its
earning per share disclosures.
In June 1997, Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Comprehensive Income," was issued.
SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15,
1997, and requires restatement of earlier periods
presented. The Company does not believe the application
of this standard will have a material effect on the
results of operations or financial condition of the
Company.
In June 1997, Statement of Financial Accounting Standards
No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information" was issued. SFAS 131
establishes standards for the way that a public
enterprise reports information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports issued to
shareholders. SFAS is effective for fiscal years
beginning after December 15, 1997, and requires
restatement of earlier periods presented. The Company
does not believe the application of this standard will
have a material effect on the results of operations or
financial condition of the Company.
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29
PART II - OTHER INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Coeur d'Alene River Basin Natural Resource Damage Claims
- Coeur d'Alene Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe (the Tribe)
brought a lawsuit, under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as
amended, (CERCLA or Superfund), in Idaho Federal District
Court against the Company and a number of other mining
companies asserting claims for damages to natural
resources downstream from the Bunker Hill Superfund Site
located at Kellogg, Idaho (Bunker Hill Site) over which
the Tribe alleges some ownership or control. The Company
has answered the Tribe's complaint denying liability for
natural resource damages. 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
this decision, the Court in the natural resource damage
litigation stayed the court proceedings in the natural
resource damage litigation until a final decision is made
on the question of the Tribe's ownership. 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. The State of Idaho appealed this
decision to the U.S. Supreme Court. On June 23, 1997,
the U.S. Supreme Court issued a ruling dismissing the
Tribe's claim to ownership based upon lack of federal
court jurisdiction over the Tribe's claim against the
State.
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. This litigation was not
affected by the U.S. Supreme Court's decision referenced
above. 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.
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30
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
- U.S. Government Claims
On March 22, 1996, the United States filed a lawsuit in
Idaho Federal District Court against certain mining
companies who conducted historic mining operations in the
Silver Valley of northern Idaho, including the Company.
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 (the Basin) in northern 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
Basin outside the Bunker Hill 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 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.
- State of Idaho 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 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 Basin.
With respect to the above claims, the Company increased
its accrual for closed operations and environmental
matters by approximately $2.7 million in 1996. At
June 30, 1997, the Company's accrual for remediation
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31
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
activity in the Basin totaled $1.6 million. These
expenditures are anticipated to be made over the next
four years. Depending on the results of the
aforementioned lawsuits, it is reasonably possible that
the Company's estimate of its obligation may change in
the near term.
Insurance Coverage Litigation
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 EPA and the Tribe under CERCLA related to
the Bunker Hill Site and the 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 approximately $7.2 million under the
terms of the settlement agreements. Thirty percent of
these settlements were paid to the EPA to reimburse the
U.S. Government for past costs under the Bunker Hill Site
Consent Decree. Litigation is still pending against one
insurer with trial continued until the underlying
environmental claims against the Company are resolved or
settled. The remaining insurer is providing the Company
with a partial defense in all Basin environmental
litigation. As of June 30, 1997, the Company had not
reduced its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance
proceeds.
Star Phoenix
On July 14, 1997, the Idaho Supreme Court denied Star
Phoenix's request for a rehearing on certain portions of
the Court's April 2, 1997 opinion that reversed the June
1994 district court judgment against the Company. The
April 1997 ruling in the Company's favor is now a final
determination in this matter as Star Phoenix has no
further right of appeal. Earlier this year, the Idaho
Supreme Court and the trial court issued orders releasing
the Company's $27.2 million appeal bond, and the Company
received its $10 million in collateral from the bonding
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32
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
company on May 6, 1997. The Company used the $10 million
in collateral to pay down Bank debt under the Company's
credit facility.
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.
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33
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 9,
1997, the following matters were voted on by the
Company's shareholders:
Election of Three Directors:
Votes Votes
For Withheld
----- --------
Arthur Brown 44,291,776 693,470
---------- ----------
John E. Clute 44,335,491 649,755
---------- ----------
Joe Coors Jr. 44,348,452 636,794
---------- ----------
Approval of selection of
Coopers & Lybrand L.L.P. as
the Company's Auditors for 1997:
Votes Votes
For Against Abstentions
----- ------- -----------
44,522,173 271,259 191,814
---------- ---------- -----------
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34
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 ended June 30, 1997, for release
dated July 31, 1997.
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated April 2, 1997, related to
the Idaho State Supreme Court ruling in the Star
Phoenix Mining Company lawsuit.
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 8, 1997 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: August 8, 1997 By /s/ Stanley E. Hilbert
--------------------------------
S. E. Hilbert,
Corporate Controller
(Chief Accounting Officer)
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36
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------------------
12 Fixed Charge Coverage Ratio Calculation
13 Second Quarter Report to Shareholders for the
quarter ended June 30, 1997, for release dated July
31, 1997
27 Financial Data Schedule
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