1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 1-8491
------------------------------------------
HECLA MINING COMPANY
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0126240
- --------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83815-8788
- ---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
208-769-4100
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for at least
the past 90 days. Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding April 30, 1998
- ---------------------------- --------------------------
Common stock, par value 55,096,639 shares
$0.25 per share
2
HECLA MINING COMPANY and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
I N D E X*
PAGE
PART I. - Financial Information
Item l - Consolidated Balance Sheets - March 31,
1998 and December 31, 1997 3
- Consolidated Statements of Operations
and Comprehensive Income- Three Months
Ended March 31, 1998 and 1997 4
- Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1998 and 1997 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 24
Item 6 - Exhibits and Reports on Form 8-K 28
*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)
March 31, December 31,
1998 1997
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,377 $ 3,794
Accounts and notes receivable 36,773 24,445
Income tax refund receivable 570 793
Inventories 23,236 22,116
Other current assets 1,973 1,416
--------- ---------
Total current assets 67,929 52,564
Investments 2,822 2,521
Restricted investments 8,634 7,926
Properties, plants and equipment, net 178,009 180,037
Other noncurrent assets 9,728 7,620
--------- ---------
Total assets $ 267,122 $ 250,668
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 13,054 $ 12,590
Accrued payroll and related benefits 3,110 2,436
Preferred stock dividends payable 2,012 2,012
Accrued taxes 1,397 1,016
Accrued reclamation and closure costs 6,914 6,914
--------- ---------
Total current liabilities 26,487 24,968
Deferred income taxes 300 300
Long-term debt 36,014 22,136
Accrued reclamation and closure costs 33,274 34,406
Other noncurrent liabilities 9,889 8,518
--------- ---------
Total liabilities 105,964 90,328
--------- ---------
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 1998 - 55,156,728;
issued 1997 - 55,156,324 13,789 13,789
Capital surplus 373,968 373,966
Accumulated deficit (221,308) (222,143)
Accumulated other comprehensive loss (4,980) (4,961)
Less treasury stock, at cost;
1998 and 1997 - 62,089 shares (886) (886)
--------- ---------
Total shareholders' equity 161,158 160,340
--------- ---------
Total liabilities and shareholders' equity $ 267,122 $ 250,668
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended
--------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
Sales of products $ 40,129 $ 42,456
-------- --------
Cost of sales and other direct production costs 30,527 33,926
Depreciation, depletion and amortization 5,126 4,352
-------- --------
35,653 38,278
-------- --------
Gross profit 4,476 4,178
-------- --------
Other operating expenses:
General and administrative 2,141 2,121
Exploration 816 1,354
Depreciation and amortization 94 79
Provision for closed operations and
environmental matters 59 189
-------- --------
3,110 3,743
-------- --------
Income from operations 1,366 435
-------- --------
Other income (expense):
Interest and other income 2,534 1,151
Miscellaneous expense (557) (469)
Gain on investments 86 - -
Interest expense:
Interest costs (740) (835)
Less amount capitalized 271 361
-------- --------
1,594 208
-------- --------
Income before income taxes 2,960 643
Income tax provision (113) (125)
-------- --------
Net income 2,847 518
Preferred stock dividends (2,012) (2,012)
-------- --------
Income (loss) applicable to common shareholders 835 (1,494)
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities (19) 169
-------- --------
Other comprehensive income (loss) (19) 169
-------- --------
Comprehensive income (loss) $ 816 $ (1,325)
======== ========
Basic and diluted income (loss) per common share $ 0.02 $ (0.03)
======== ========
Cash dividends per common share $ - - $ - -
======== ========
Weighted average number of common
shares outstanding 55,095 53,112
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
---------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
Operating activities:
Net income $ 2,847 $ 518
Noncash elements included in net income:
Depreciation, depletion and amortization 5,220 4,431
Gain on disposition of properties,
plants and equipment (1,737) (70)
Gain on sale of investments (86) - -
Provision for reclamation and closure costs 133 220
Change in:
Accounts and notes receivable (12,328) (8,366)
Income tax refund receivable 223 10
Inventories (1,120) (349)
Other current assets (557) 718
Accounts payable and accrued expenses 344 (3,952)
Accrued payroll and related benefits 674 (106)
Accrued taxes 381 256
Accrued reclamation and closure costs and
other noncurrent liabilities 106 (1,032)
------- -------
Net cash used by operating activities (5,900) (7,722)
------- -------
Investing activities:
Additions to properties, plants and equipment (4,080) (4,542)
Proceeds from disposition of properties,
plants and equipment 2,676 178
Proceeds from sale of investments 86 - -
Decrease (increase) in restricted investments (708) 3,094
Purchase of investments and change in cash
surrender value of life insurance, net (221) (827)
Other, net (2,159) (847)
------- -------
Net cash used by investing activities (4,406) (2,944)
------- -------
Financing activities:
Common stock issuance, net of offering costs 2 23,401
Preferred stock dividends (2,012) (2,012)
Borrowings (repayments) on cash surrender
value of life insurance (99) 100
Borrowings on long-term debt 19,500 20,500
Payments on long-term debt (5,502) (31,562)
------- -------
Net cash provided by financing activities 11,889 10,427
------- -------
Net increase (decrease) in cash and cash equivalents 1,583 (239)
Cash and cash equivalents at beginning of period 3,794 7,159
------- -------
Cash and cash equivalents at end of period $ 5,377 $ 6,920
======= =======
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, 1997, as set forth in the Company's
1997 Annual Report on Form 10-K, substantially apply to
these interim consolidated financial statements and are
not repeated here. For additional information, please
refer to such notes.
Note 2. The financial information given in the accompanying
unaudited interim consolidated financial statements
reflects all adjustments which, in the opinion of
management, are necessary to a fair statement of the
results for the interim periods reported. All such
adjustments are of a normal recurring nature. All
financial statements presented herein are unaudited.
However, the balance sheet as of December 31, 1997, was
derived from the audited consolidated balance sheet
referenced in Note 1 above. Certain consolidated
financial statement amounts have been reclassified to
conform to the 1998 presentation. These
reclassifications had no effect on the net income
(loss) or accumulated deficit as previously reported.
Note 3. The components of the income tax provision for the
three months ended March 31, 1998 and 1997 are as
follows (in thousands):
1998 1997
------ -----
Current:
State income taxes $ 113 $ 81
Foreign income taxes - - 44
----- -----
Total $ 113 $ 125
===== =====
The Company's income tax provision for the first
three months of 1998 and 1997 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 availability 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):
March 31, Dec. 31,
1998 1997
------- -------
Concentrates, bullion, metals
in transit and other products $ 5,162 $ 4,773
Industrial mineral products 9,426 9,230
Materials and supplies 8,648 8,113
------- -------
$23,236 $ 22,116
======= =======
Note 5. Contingencies
- Bunker Hill
In 1994, the Company, as a potentially responsible
party under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended
(CERCLA or Superfund), entered into a Consent Decree
with the Environmental Protection Agency (EPA) and the
State of Idaho, concerning environmental remediation
obligations at the Bunker Hill Superfund Site (Bunker
Hill Site) located at Kellogg, Idaho. The Consent
Decree settles the Company's response-cost liability
under Superfund at the Bunker Hill Site. As of
March 31, 1998, the Company has estimated and accrued
an allowance for liability for remedial activity costs
at the Bunker Hill Site of $7.3 million. These
estimated expenditures are anticipated to be made over
the next three to five years. As with any estimate of
this nature, it is reasonably possible that the
Company's estimate of this obligation may change in the
near or longer term.
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 CERCLA, 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
Site over which the Tribe alleges some ownership or
control. The Company has answered the Tribe's
complaint denying liability for natural resource
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
damages. In October 1996, following a court
imposed four-year stay of the proceeding, the Tribe's
natural resource damage litigation 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 that 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. The
case is proceeding through discovery and the defendant
mining companies have filed a number of summary
judgment motions which are currently pending before the
Court. On March 31, 1998, the Court in its first
substantial ruling in this case, denied the United
States' request for "record review" of its natural
resource damage claims, which could have limited the
Company's rights to pretrial discovery and the use of
witnesses and other evidence to be presented at trial
in the Company's defense.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
- State of Idaho Claims
On March 22, 1996, the Company entered into an
agreement (the Idaho Agreement) with the State of Idaho
(State) 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 Idaho
Agreement and certain other Company contributions and
expenditures for environmental cleanup in the Basin.
At March 31, 1998, the Company's accrual for
remediation activity in the Basin, not including the
Bunker Hill Site, totaled approximately $0.8 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 or longer 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
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 March 31, 1998, the Company had not reduced its
accrual for reclamation and closure costs to reflect
the receipt of any anticipated insurance proceeds.
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 currently expected outcome of these
matters, individually or in the aggregate, will not
have a material adverse effect on the results of
operations, financial condition or cash flows of the
Company.
Note 6. At March 31, 1998, there was $26.0 million outstanding
under the Company's $55.0 million revolving and term
loan credit facility (Loan Facility) classified as long-
term debt. The Company was in compliance with all
restrictive covenants of the Loan Facility as of
March 31, 1998. In addition to the borrowings under
the Loan Facility, the Company also has outstanding
$9.8 million aggregate principal amount of tax-exempt,
solid waste disposal revenue bonds as of March 31,
1998. The amount available to borrow under the Loan
Facility is reduced by the $9.8 million amount of tax-
exempt, solid waste bonds. At March 31, 1998, the
Company had the ability to borrow an additional $19.2
million under the Loan Facility.
Note 7. The following table presents a reconciliation of the
numerators (net income or [loss]) and denominators
(shares) used in the basic and diluted income (loss)
per common share computations. Also shown is the
effect that has been given to preferred dividends in
arriving at income (loss) applicable to common
shareholders for the three months ended March 31, 1998
and 1997 in computing basic and diluted income (loss)
per common share.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
1998 1997
----------------------------- ----------------------------------
Net Per-Share Net Per-Share
Income Shares Amount Income (loss) Shares Amount
------- ------ ------ ------------- ------ ------
Income before preferred
stock dividends $ 2,847 $ 518
Less: Preferred
stock dividends (2,012) (2,012)
------- -------
Basic income (loss) applicable
to common shareholders 835 55,095 $ 0.02 (1,494) 53,112 $ (0.03)
Effect of dilutive
securities - - - - - - - -
------- ------ ------- ------
Diluted income (loss) applicable
to common shareholders $ 835 55,095 $ 0.02 $(1,494) 53,112 $ (0.03)
======= ====== ======= ======= ====== =======
The above calculations of diluted earnings per
share for each of the three months then ended March 31,
1998 and 1997 exclude the effects of $115,000,000 of
convertible preferred stock as such conversion would be
antidilutive. These calculations also excluded the
effects of 970,500 and 543,577 shares of common stock
issuable upon exercise of stock options as of March 31,
1998 and 1997, respectively, as their exercise would be
antidilutive.
Note 8. 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
has applied this standard effective January 1, 1998.
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 131 is
effective for fiscal years beginning after December 15,
1997, and requires restatement of earlier periods
presented. The Company has applied this standard
effective January 1, 1998.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
In February 1998, Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures
about Pensions and Other Postretirement Benefits," was
issued. SFAS 132 provides additional information to
facilitate financial analysis and eliminates certain
disclosures which are no longer useful. The statement
also standardizes disclosure for retiree benefits. SFAS
132 is effective for fiscal years beginning after
December 15, 1997. The Company has applied this
standard effective January 1, 1998.
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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 1997 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, 1997. If the Company's
estimates of market prices of gold, silver, lead, and
zinc are realized in 1998, the Company expects to
record income or (loss) in the range of $2.0 million to
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
$(3.0) million after the expected dividends to
preferred shareholders totaling approximately $8.1
million for the year ending December 31, 1998. 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 1998 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, exercises
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.
During the first quarter of 1998, the Company
produced approximately 36,000 ounces of gold compared
to approximately 44,000 ounces of gold production in
the first quarter of 1997. The Company's gold
production in the first quarter of 1998 was from the
following sources: the Rosebud mine - approximately
17,000 ounces; the La Choya mine - approximately 13,000
ounces; the Greens Creek mine - approximately 4,000
ounces; and an additional 2,000 ounces from other
sources. For the year ending December 31, 1998, the
Company expects to produce between 112,000 and 120,000
ounces of gold compared to actual 1997 gold production
of approximately 174,000 ounces of gold. The 1998
estimated gold production includes 57,000 to 60,000
ounces from the Company's interest in the Rosebud mine,
38,000 to 41,000 ounces from the Company's La Choya
mine, 15,000 to 16,000 ounces from the Company's
interest in the Greens Creek mine, and 2,000 to 3,000
ounces from other sources.
In the first quarter of 1998, the Company produced
approximately 1,530,000 ounces of silver compared to
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
1997 first quarter silver production of 1,244,000
ounces. The Company's silver production in the first
quarter of 1998 was principally from the Lucky Friday
mine - approximately 836,000 ounces, the Greens Creek
mine - approximately 631,000 ounces, and approximately
63,000 ounces from other sources. The Company's silver
production for 1998 is expected to be between 6.9 and
7.3 million ounces compared to 1997 production of
approximately 5.1 million ounces. The 1998 estimated
silver production includes 3.9 to 4.1 million ounces
from the Lucky Friday mine, 2.8 to 3.0 million ounces
from the Company's interest in the Greens Creek mine
and an additional 0.2 million ounces from other
sources.
In 1997, the Company shipped approximately
1,026,000 tons of industrial minerals, including ball
clay, kaolin, feldspar, and specialty aggregates. The
Company's shipments of industrial minerals are expected
to increase slightly in 1998 to approximately 1,065,000
tons. Additionally, the Company expects to ship
approximately 1,044,000 cubic yards of landscape
material from its Mountain West Products operation in
1998 compared to 891,000 cubic yards in 1997.
RESULTS OF OPERATIONS
The Company recorded net income of approximately
$2.8 million, or $0.05 per common share, in the first
three months of 1998 compared to net income of
approximately $0.5 million, or $0.01 per common share,
in the same period of 1997. After $2.0 million in
dividends to holders of the Company's Series B
Cumulative Convertible Preferred Stock, the Company's
income applicable to common shareholders for the first
quarter of 1998 was approximately $0.8 million, or
$0.02 per common share, compared to a loss of $1.5
million, or $0.03 per common share, in the comparable
1997 period.
Sales of the Company's products decreased by
approximately $2.3 million, or 5.5%, in the first three
months of 1998 as compared to the same period in 1997,
principally the result of decreased product sales
totaling approximately $11.6 million, most notably from
the Grouse Creek mine where operations were suspended
in the second quarter of 1997, and the La Choya mine
principally due to decreased gold production and a
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
lower gold price. These factors were partially
offset by increased sales of $9.3 million most notably
at the Rosebud mine where operations commenced in April
1997, the Greens Creek mine due to increased product
shipments, the Lucky Friday mine due to increased
production from the Lucky Friday expansion area, and
increased shipments of products from the Company's
industrial minerals segment.
Comparing the average metal prices for the first
quarter of 1998 with the comparable 1997 period, gold
decreased 16% to $294 per ounce from $351 per ounce,
silver increased 24% to $6.24 per ounce from $5.02 per
ounce, lead decreased 21% to $0.243 per pound from
$0.309 per pound, and zinc decreased 9% to $0.482 per
pound from $0.532 per pound. During the first quarter
of 1998, the Company's realized gold price per ounce
decreased 20% from $375 per ounce in the first quarter
of 1997 to $299 per ounce in 1998.
Cost of sales and other direct production costs
decreased approximately $3.4 million, or 10%, from the
first three months of 1997 to the comparable 1998
period primarily due to (1) decreased production costs
at the Grouse Creek mine totaling approximately $6.9
million due to the suspension of operations during the
second quarter of 1997; (2) decreased production costs
of $1.6 million at the La Choya mine due to production
of 34% fewer gold ounces; and (3) decreased costs at
various other operations totaling approximately $0.4
million. These cost decreases were partly offset by
increased production costs from (1) the Rosebud mine
totaling approximately $2.7 million due to the
commencement of operations in April 1997; (2) the MWCA-
Mountain West Products division of $0.7 million due to
higher sales and changes in the product mix sold; (3)
the MWCA-Colorado Aggregate division of $0.7 million
primarily due to a increase in sales; (4) the Greens
Creek mine of $0.6 million associated with higher
shipments during the 1998 period; (5) the K-T Clay
group of $0.6 million due to increased sales; and (6)
the Lucky Friday mine of $0.2 million due to increases
in production and sales.
Cost of sales and other direct production costs as
a percentage of sales from products decreased from 80%
in the first quarter of 1997 to 76% in the comparable
1998
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
period, primarily due to the closure of the Grouse
Creek mine during the second quarter of 1997 and
improved margins at the Lucky Friday and Greens Creek
mines.
Depreciation, depletion, and amortization increased
$0.8 million, or 18%, from the first quarter of 1997
to the first quarter of 1998 principally due to
(1) increased depreciation at the Rosebud mine ($1.6
million), the result of operations commencing in April
1997; (2) increased depreciation at the Lucky Friday
mine ($0.2 million) due to increased production; and
(3) other increases at other operations ($0.1 million).
These increases were partly offset by decreased
depreciation, depletion, and amortization at (1) the La
Choya mine ($0.7 million) due to fully depreciating the
property, plant, and equipment as of December 31, 1997;
and (2) the Greens Creek mine ($0.4 million).
Cash operating, total cash, and total production
cost per gold ounce decreased from $204, $205, and $246
for the first quarter of 1997 to $160, $171, and $225
for the first quarter of 1998, respectively. The
decreases in the cash operating and total cash cost per
gold ounce were primarily attributable to the addition
of the lower cost Rosebud mine in April 1997. The
decrease in the total production cost per gold ounce
was attributable to the addition of the Rosebud mine as
well as decreased depreciation expense at the La Choya
mine in 1998 compared to 1997.
Cash operating, total cash, and total production
cost per silver ounce increased from $3.33, $3.33 and
$5.47 in the first quarter of 1997 to $4.47, $4.47, and
$5.98 in the first quarter of 1998, respectively. The
increases in the cost per silver ounce are due
primarily to negative impacts of decreased by-product
metal prices. 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 decreased by $0.6
million, or 17%, from the 1997 period to the 1998
period, due principally to (1) decreased exploration
costs totaling approximately $0.5 million relating
principally to decreased expenditures at various
Mexican exploration
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
properties; and (2) decreased provision for closed
operations and environmental matters of approximately
$0.1 million.
Other income was approximately $1.6 million in the
1998 period compared to $0.2 million in the 1997
period. The $1.4 million increase was principally due
to increased interest and other income of approximately
$1.4 million, the result of a 1998 gain on sale of land
located near the Company's corporate headquarters of
$1.8 million, partially offset by decreased royalty
income of $0.3 million and lower interest income of
$0.1 million. Total interest cost decreased
approximately $0.1 million due to decreased average
borrowings on the Company's revolving and term loan
facility. Interest cost capitalized decreased
approximately $0.1 million principally due to decreased
capitalized interest costs associated with the
Company's Rosebud mine where mine development was
completed in March 1997, partly offset by increased
capitalized interest costs associated with 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 regulatory
requirements, and other property transactions can have
a significant impact on the need for capital.
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19
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
At March 31, 1998, assets totaled approximately
$267.1 million and shareholders' equity totaled
approximately $161.2 million. Cash and cash
equivalents increased by $1.6 million to $5.4 million
at March 31, 1998 from $3.8 million at the end of 1997.
During the first three months of 1998, approximately
$11.9 million of cash was provided by financing
activities. The major source of cash was borrowings
of long-term debt of $19.5 million. This source
was partially offset by uses of cash, including
repayments of long-term debt of $5.5 million, payment
of preferred dividends of $2.0 million, and repayments
of $0.1 million on borrowings against the cash
surrender value of life insurance.
The Company's investing activities used $4.4
million of cash during the first three months of 1998.
The most significant uses of cash were (1) additions to
properties, plants, and equipment totaling $4.1
million, including significant additions at the Lucky
Friday mine of $2.4 million, the Greens Creek mine of
$0.6 million, industrial minerals capitalized
expenditures of $0.5 million, and other additions,
including capitalized interest of $0.6 million; (2)
other net increases of $2.2 million; (3) increases in
surety collateral requirements of $0.7 million; and (4)
the purchase of investments and increase in cash
surrender value of life insurance required cash of
approximately $0.2 million. These uses of cash were
partly offset by (1) proceeds from disposition of
properties, plants, and equipment during the first
three months of 1998 totaling approximately $2.7
million, principally from sale of land located near the
Company's corporate headquarters; and (2) proceeds from
the sale of investments of $0.1 million.
Operating activities required approximately $5.9
million of cash during the first three months of 1998.
The primary uses of cash were (1) increases, totaling
$12.3 million, in accounts and notes receivable
principally due to seasonal sales at MWCA and increased
sales at Greens Creek, Lucky Friday, and the K-T Clay
group; and (2) a $1.1 million increase in inventories
primarily at MWCA due to seasonal build-up and at the
Lucky Friday due to increased production. Partially
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20
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
offsetting these uses were sources of cash from
the Rosebud mine, La Choya mine, Greens Creek mine, and
the K-T Clay operations. Principal noncash charges
included depreciation, depletion, and amortization of
approximately $5.2 million and provision for
reclamation and closure costs of $0.1 million.
The Company estimates that capital expenditures to
be incurred during the remainder of 1998 will be
approximately $11.2 million including capitalized
interest costs of $0.3 million. These capital
expenditures, excluding capitalized interest, consist
primarily of (1) development expenditures at the Lucky
Friday expansion project expected to total
approximately $4.2 million; (2) capitalized
expenditures at the Company's Industrial Mineral
operations totaling approximately $3.6 million; (3)
capitalized expenditures at the Greens Creek mine
totaling approximately $3.0 million; and (4) the
Company's share of capitalized expenditures at the
Rosebud mine totaling approximately $0.1 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 million in the aggregate. To date,
the Company has issued $48.4 million of the Company's
common shares under the Registration Statement.
At March 31, 1998, there was $26.0 million
outstanding under the Company's $55.0 million revolving
and term loan credit facility classified as long-term
debt. The Company was in compliance with all
restrictive covenants of the facility as of March 31,
1998. In addition to the borrowings under the Loan
Facility, the Company also has outstanding $9.8 million
aggregate
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21
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
principal amount of tax-exempt, solid waste
disposal revenue bonds as of March 31, 1998. The
amount available to borrow under the Loan Facility was
reduced by the $9.8 million amount of tax-exempt, solid
waste disposal bonds. At March 31, 1998, the Company
had the ability to borrow an additional $19.2 million
under the Loan Facility.
The Company's planned environmental and reclamation
expenditures for 1998 are expected to be approximately
$10.0 to $11.0 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 1998 are estimated to
be approximately $3.5 to $4.0 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, domestic
exploration expenditures will be incurred principally
at Greens Creek, Rosebud, and Lucky Friday. Foreign
exploration efforts in 1998 will center primarily on
targets in Mexico and South America.
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 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.
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22
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
At March 31, 1998, the Company had forward sales
commitments through June 30, 1999 for 15,000 ounces of
gold at an average price of $354 per ounce. The
estimated fair value of these forward sales commitments
was $663,000 as of March 31, 1998. The London Final
gold price at March 31, 1998, was $301. Additionally,
at March 31, 1998, the Company had forward sales
commitments through June 30, 1999 for 2,005,000 ounces
of silver at an average price of $6.01. If the
Company's forward silver sales commitments were closed
on March 31, 1998, the Company's estimated cost to
terminate these commitments was approximately $870,000.
The Handy & Harman silver price at March 31, 1998 was
$6.30. The nature and purpose of the forward sales
contracts, however, do not presently expose the Company
to any significant net loss. All of the aforementioned
contracts were designated as hedges as of March 31,
1998.
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
Part II. 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 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 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
has applied this standard effective January 1, 1998.
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
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23
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 131 is
effective for fiscal years beginning after December 15,
1997, and requires restatement of earlier periods
presented. The Company has applied this standard
effective January 1, 1998.
In February 1998, Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures
about Pensions and Other Postretirement Benefits,"
was issued. SFAS 132 provides additional information
to facilitate financial analysis and eliminates
certain disclosures which are no longer useful.
The statement also standardizes disclosure for retiree
benefits. SFAS 132 is effective for fiscal years
beginning after December 15, 1997. The Company has
applied this standard effective January 1, 1998.
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24
PART II - OTHER INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
- Bunker Hill
In 1994, the Company, as a potentially responsible
party under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended
(CERCLA or Superfund), entered into a Consent Decree
with the Environmental Protection Agency (EPA) and the
State of Idaho, concerning environmental remediation
obligations at the Bunker Hill Superfund Site (Bunker
Hill Site) located at Kellogg, Idaho. The Consent
Decree settles the Company's response-cost liability
under Superfund at the Bunker Hill Site. As of
March 31, 1998, the Company has estimated and accrued
an allowance for liability for remedial activity costs
at the Bunker Hill Site of $7.3 million. These
estimated expenditures are anticipated to be made over
the next three to five years. As with any estimate of
this nature, it is reasonably possible that the
Company's estimate of this obligation may change in the
near or longer term.
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 CERCLA, 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
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 October 1996, following a court imposed
four-year stay of the proceeding, the Tribe's natural
resource damage litigation 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 that conducted historic mining operations in
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PART II - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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. The case is
proceeding through discovery and the defendant mining
companies have filed a number of summary judgment
motions which are currently pending before the Court.
On March 31, 1998, the Court in its first substantial
ruling in this case, denied the United States' request
for "record review" of its natural resource damage
claims, which could have limited the Company's rights
to pretrial discovery and the use of witnesses and
other evidence to be presented at trial in the
Company's defense.
- State of Idaho Claims
On March 22, 1996, the Company entered into an
agreement (the Idaho Agreement) with the State of Idaho
(State) 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
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PART II - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 Idaho
Agreement and certain other Company contributions and
expenditures for environmental cleanup in the Basin.
At March 31, 1998, the Company's accrual for
remediation activity in the Basin, not including the
Bunker Hill Site, totaled approximately $0.8 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 or longer 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 March 31, 1998, 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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27
PART II - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 currently expected outcome of these
matters, individually or in the aggregate, will not
have a material adverse effect on the results of
operations, financial condition or cash flows of the
Company.
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28
PART II - FINANCIAL 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 - First Quarter Report to Shareholders for
the quarter ended March 31, 1998, for
release dated April 30, 1998.
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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29
HECLA MINING COMPANY and SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HECLA MINING COMPANY
----------------------------------
(Registrant)
Date: May 7, 1998 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: May 7, 1998 By /s/ Stanley E. Hilbert
---------------------------------
S. E. Hilbert,
Corporate Controller
(Chief Accounting Officer)
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30
EXHIBIT INDEX
Exhibit
No. Description
- -------- ----------------------
12 Fixed Charge Coverage Ratio Calculation
13 First Quarter Report to Shareholders for the
quarter ended March 31, 1998, for release dated
April 30, 1998
27 Financial Data Schedule
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