1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 30, 1998
- ---------------------------- ----------------------------
Common stock, par value 55,104,639 shares
$0.25 per share
2
HECLA MINING COMPANY and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
I N D E X*
PAGE
PART I. - Financial Information
Item l - Consolidated Balance Sheets - September 30,
1998 and December 31, 1997 3
- Consolidated Statements of Operations and
Comprehensive Loss - Three Months and Nine
Months Ended September 30, 1998 and 1997 4
- Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. - Other Information
Item 1 - Legal Proceedings 32
Item 6 - Exhibits and Reports on Form 8-K 36
*Items omitted are not applicable.
-2-
3
PART I - FINANCIAL INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,085 $ 3,794
Accounts and notes receivable, net 30,664 24,445
Income tax refund receivable 1,087 793
Inventories 23,734 22,116
Other current assets 2,148 1,416
--------- ---------
Total current assets 61,718 52,564
Investments 3,130 2,521
Restricted investments 7,061 7,926
Properties, plants and equipment, net 176,847 180,037
Other noncurrent assets 8,660 7,620
--------- ---------
Total assets $ 257,416 $ 250,668
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 12,405 $12,590
Accrued payroll and related benefits 3,308 2,436
Preferred stock dividends payable 2,012 2,012
Accrued taxes 1,031 1,016
Accrued reclamation and closure costs 9,160 6,914
--------- ---------
Total current liabilities 27,916 24,968
Deferred income taxes 300 300
Long-term debt 35,958 22,136
Accrued reclamation and closure costs 25,140 34,406
Other noncurrent liabilities 8,703 8,518
--------- ---------
Total liabilities 98,017 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 - 55,166,728;
issued 1997 - 55,156,324 13,792 13,789
Capital surplus 374,017 373,966
Accumulated deficit (222,979) (222,143)
Accumulated other comprehensive loss (5,120) (4,961)
Less treasury stock, at cost;
1998 and 1997 - 62,089 shares (886) (886)
--------- ---------
Total shareholders' equity 159,399 160,340
--------- ---------
Total liabilities and shareholders' equity $ 257,416 $ 250,668
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
4
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1997
-------------- ------------- ------------- -------------
Sales of products $ 38,611 $ 41,204 $ 124,395 $ 129,729
--------- --------- --------- ---------
Cost of sales and other direct production costs 29,904 30,032 96,918 98,192
Depreciation, depletion and amortization 5,678 5,734 15,852 15,137
--------- --------- --------- ---------
35,582 35,766 112,770 113,329
--------- --------- --------- ---------
Gross profit 3,029 5,438 11,625 16,400
--------- --------- --------- ---------
Other operating expenses:
General and administrative 1,669 1,951 5,946 5,984
Exploration 1,396 1,738 3,348 5,530
Depreciation and amortization 100 76 293 233
Provision for closed operations
and environmental matters 332 91 463 239
--------- --------- --------- ---------
3,497 3,856 10,050 11,986
--------- --------- --------- ---------
Income (loss) from operations (468) 1,582 1,575 4,414
--------- --------- --------- ---------
Other income (expense):
Interest and other income 744 739 4,681 3,960
Miscellaneous expense (536) (383) (1,187) (1,160)
Gain on investments 53 - - 1,294 - -
Interest expense:
Total interest cost (802) (510) (2,407) (1,930)
Less amount capitalized 362 132 950 609
--------- --------- --------- ---------
(179) (22) 3,331 1,479
--------- --------- --------- ---------
Income (loss) before income taxes (647) 1,560 4,906 5,893
Income tax benefit (provision) 6 (625) 296 (1,386)
--------- --------- --------- ---------
Net income (loss) (641) 935 5,202 4,507
Preferred stock dividends (2,013) (2,013) (6,038) (6,038)
--------- --------- --------- ---------
Loss applicable to common shareholders (2,654) (1,078) (836) (1,531)
--------- --------- --------- ---------
Other comprehensive loss, net of tax:
Unrealized holding losses on securities (139) (147) (97) (265)
Reclassification adjustment for gain included
in net loss (62) - - (62) - -
--------- --------- --------- ---------
Other comprehensive loss (201) (147) (159) (265)
--------- --------- --------- ---------
Comprehensive loss $ (2,855) $ (1,225) $ (995) $ (1,796)
========= ========= ========= =========
Basic and diluted loss per common share $ (0.05) $ (0.02) $ (0.02) $ (0.03)
========= ========= ========= =========
Cash dividends per common share $ - - $ - - $ - - $ - -
========= ========= ========= =========
Weighted average number of common
shares outstanding 55,105 55,095 55,100 54,300
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
5
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
-------------------------------
Sept 30, 1998 Sept 30, 1997
------------- -------------
Operating activities:
Net income $ 5,202 $ 4,507
Noncash elements included in net income:
Depreciation, depletion and amortization 16,145 15,370
Gain on disposition of properties, plants and equipment (2,259) (1,125)
Gain on investments (1,294) - -
Provision for reclamation and closure costs 436 776
Change in:
Accounts and notes receivable (6,219) (2,968)
Income tax refund receivable (294) 405
Inventories (1,618) 2,560
Other current assets (732) 538
Accounts payable and accrued expenses (360) (4,639)
Accrued payroll and related benefits 872 (212)
Accrued taxes 15 219
Accrued reclamation and other noncurrent liabilities (7,271) (9,629)
---------- ----------
Net cash provided by operating activities 2,623 5,802
---------- ----------
Investing activities:
Additions to properties, plants and equipment (14,073) (16,792)
Proceeds from disposition of properties, plants and equipment 3,548 1,865
Proceeds from the sale of investments 1,294 - -
Decrease in restricted investments 865 13,792
Purchase of investments and increase in cash surrender value
of life insurance, net (768) (1,211)
Other, net (1,211) 1,588
---------- ----------
Net cash used by investing activities (10,345) (758)
---------- ----------
Financing activities:
Common stock issued under stock and stock option plans 54 46
Issuance of common stock, net of offering costs - - 23,370
Dividends on preferred stock (6,038) (6,038)
Borrowing on long-term debt 33,000 46,300
Repayment of long-term debt (19,003) (70,571)
---------- ----------
Net cash provided (used) by financing activities 8,013 (6,893)
---------- ----------
Net increase (decrease) in cash and cash equivalents 291 (1,849)
Cash and cash equivalents at beginning of period 3,794 7,159
---------- ----------
Cash and cash equivalents at end of period $ 4,085 $ 5,310
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
6
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.
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 are unaudited. However,
the balance sheet as of December 31, 1997, 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 1998 presentation. These reclassifications had no
effect on the net loss or accumulated deficit as
previously reported.
Note 3. The components of the income tax provision (benefit)
for the nine months ended September 30, 1998 and 1997
are as follows (in thousands):
1998 1997
------ ------
Current:
State $ 184 $ 229
Federal (529) (4)
Foreign 49 1,161
------ ------
Total $ (296) $1,386
====== ======
The Company's income tax provision (benefit) for the
first nine months of 1998 and 1997 varies from the
amount that would have been provided by applying the
statutory rate to the income before income taxes
primarily due to the availability of net operating
losses.
-6-
7
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Note 4. Inventories consist of the following (in thousands):
Sept. 30, Dec. 31,
1998 1997
-------- --------
Concentrates, bullion, metals
in transit and other products $ 7,890 $ 4,773
Industrial mineral products 7,443 9,230
Materials and supplies 8,401 8,113
-------- --------
$ 23,734 $ 22,116
======== ========
Note 5. Contingencies
- Bunker Hill Superfund Sites
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 settled the Company's response-cost liability
under Superfund at the Bunker Hill Site. As of
September 30, 1998, the Company has estimated and
accrued an allowance for liability for remedial
activity costs at the Bunker Hill Site of $5.6 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 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 answered the Tribe's complaint
denying liability for natural resource damages. In
October 1996, following a court imposed four-year stay
-7-
8
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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
In March 1996, the United States filed a lawsuit in
Idaho Federal District Court against certain mining
companies that conducted historic mining operations in
the Silver Valley of northern Idaho, including 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 in May 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 (NRD) litigation with this lawsuit for discovery
and other limited pretrial purposes.
On September 30, 1998, the Federal District Court
granted the Company's summary judgment motion with
respect to the applicable statute of limitations and
dismissed the United States' NRD claim due to the
failure of EPA to comply with federal law and EPA
regulations in expanding the Natural Priority List site
boundaries to include the entire Coeur d'Alene
River/Lake Coeur d'Alene Basin which would have the
effect of extending the statute of limitations. The
United States is seeking permission to appeal the
Federal District Court's decision to the Ninth Circuit
Court of Appeals. The case is proceeding through
discovery. Summary judgment motions related to i) the
-8-
9
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
extent of Federal Trusteeship over Natural Resources in
the Coeur d'Alene Basin, ii) a constitutional challenge
to the retroactive application of Superfund liability
at the site, and iii) case management are pending
before the Court.
In May 1998, the EPA announced that it had commenced a
remedial investigation/feasibility study under CERCLA
for the entire Basin, including Lake Coeur d'Alene, in
support of its response cost claims asserted in its
March 1996 lawsuit.
- State of Idaho Claims
In March 1996, the Company entered into an agreement
(the Idaho Agreement) with the State of Idaho
(the 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 September 30, 1998, the Company's accrual for
remediation activity in the Basin, not including the
Bunker Hill Site, totaled approximately $0.6 million.
These expenditures are anticipated to be made over the
next three 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
-9-
10
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 September 30, 1998, the
Company had not reduced its accrual for reclamation and
closure costs to reflect the receipt of any anticipated
insurance proceeds.
Other Claims
- George Creque, Jr. et. al. vs. Cactus Gold Mines Co.,
et. al. (including The Company)
On October 22, 1998, Hecla Mining Company and
certain affiliates were served with a lawsuit filed in
Superior Court of Kern County, California. The
Complaint pertains to the Cactus Gold mine located near
Mojave, California. Seventy-four plaintiffs allege
that during the period from 1960 through the present,
the named defendants' operations and activities caused
personal injury and property damage to the plaintiffs.
The plaintiffs seek monetary damages of $29,600,000,000
for general negligence, nuisance, trespass, statutory
violations, ultra-hazardous activities, strict
liability, and other torts. The Company has provided
notice and demand for defense/indemnity to its
insurance carriers providing coverage for the Cactus
Gold mine operation. To date, the Company has not
received any response from the carriers. The Company
has retained outside counsel to defend the Company in
advance of any response from the insurance companies.
Based on our preliminary review of the allegations in
the Complaint as it relates to the historical
-10-
11
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
operations at the Cactus Gold mine, the Company
believes the allegations are without merit.
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. On September 30, 1998, the Company amended its
revolving and term loan credit facility (the Bank
Agreement). Under the terms of Bank Agreement, the
Company may borrow up to $55.0 million on a revolving
basis through December 31, 2001, repayable in eight
quarterly installments beginning October 31, 2001. At
September 30, 1998, there was $26.0 million outstanding
under the Bank Agreement classified as long-term debt.
The Company was in compliance with all restrictive
covenants of the Bank Agreement as of September 30,
1998. In addition to the borrowings under the Bank
Agreement, the Company also has outstanding $9.8
million aggregate principal amount of tax-exempt, solid
waste disposal revenue bonds as of September 30, 1998.
The amount available to borrow under the Bank Agreement
is reduced by the $9.8 million amount of tax-exempt,
solid waste bonds. At September 30, 1998, the Company
had the ability to borrow approximately an additional
$19.0 million under the Bank Agreement.
-11-
12
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 stock dividends
in arriving at income (loss) applicable to common
shareholders for the three- and nine-month periods
ended September 30, 1998 and 1997 in computing basic
and diluted income (loss) per common share (in
thousands).
Three Months Ended September 30,
-------------------------------------------------------------
1998 1997
----------------------------- -------------------------------
Net Per-Share Net Per-Share
Loss Shares Amount Income (loss) Shares Amount
-------- ------ --------- ------------ ------ ---------
Net income (loss) $ (641) $ 935
Less: Preferred
stock dividends (2,013) (2,013)
-------- --------
Basic loss applicable to
common shareholders (2,654) 55,105 $ (0.05) (1,078) 55,095 $ (0.02)
Effect of dilutive
securities - - - - - - - - - - - -
-------- ------ ------- -------- ------ -------
Diluted loss applicable
to common shareholders $ (2,654) 55,105 $ (0.05) $ (1,078) 55,095 $ (0.02)
======== ====== ======= ======== ====== =======
Nine Months Ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Net Per-Share Net Per-Share
Income (loss) Shares Amount Income (loss) Shares Amount
------------- ------ --------- ------------- ------ ----------
Net income $ 5,202 $ 4,507
Less: Preferred
stock dividends (6,038) (6,038)
-------- --------
Basic loss applicable
to common shareholders (836) 55,100 $ (0.02) (1,531) 54,300 $ (0.03)
Effect of dilutive
securities - - - - - - - - - - - -
-------- ------ ------- -------- ------ -------
Diluted loss applicable
to common shareholders $ (836) 55,100 $ (0.02) $ (1,531) 54,300 $ (0.03)
======== ====== ======= ======== ====== =======
The foregoing calculations of diluted earnings per
share for each of the three- and nine-month periods
ended September 30, 1998 and 1997, exclude the effects
of $115,000,000 of convertible preferred stock as such
conversion would be antidilutive. For the three- and
-12-
13
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
nine-month periods ended September 30, 1998 and 1997,
these calculations also exclude the effects of
1,656,000 and 1,024,077 shares of common stock,
respectively, issuable upon exercise of stock options
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. Although the Company has not yet applied
this standard, the Company does not expect the adoption
of this standard to have a material impact on the
financial condition or results of operations of the
Company.
In June 1998, Statement of Financial Accounting
Standards No. 133 (SFAS 133). "Accounting for
Derivative Instruments and Hedging Activities" was
issued. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for
hedging activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 is
effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, however, earlier
application of all of the provisions of this Statement
is encouraged as of the beginning of any fiscal
-13-
14
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
quarter. The Company is presently evaluating the
effect the adoption of this standard will have on the
financial condition and results of operations of the
Company.
In April 1998, Statement of Position 98-5 (SOP 98-5)
"Reporting on the Costs of Start-up Activities," was
issued. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organizational costs.
It requires costs of start-up activities and
organizational costs to be expensed as incurred, as
well as the recognition of a cumulative effect of
change in accounting principle for retroactive
application of the standard. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998,
although earlier application is encouraged. The
Company is presently evaluating the effect the adoption
of SOP 98-5 will have on the financial condition and
results of operations of the Company.
-14-
15
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, the impact of the Year 2000
computer issue, 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 the fourth quarter of 1998, the
-15-
16
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Company expects to record a loss in the range of
$4.0 million to $6.0 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, 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.
During the first nine months of 1998, the Company
produced approximately 95,000 ounces of gold compared
to approximately 130,000 ounces of gold production in
the first nine months of 1997. The decrease in gold
production in 1998 is the result of the suspension of
operations at the Grouse Creek mine in April 1997 and
decreased gold production at the La Choya mine in 1998,
partly offset by increased gold production at the
Rosebud mine where operations commenced in April 1997.
The Company's gold production in the first nine months
of 1998 was from the following sources: the Rosebud
mine - approximately 51,000 ounces; the La Choya mine -
approximately 29,000 ounces; the Greens Creek mine -
approximately 13,000 ounces; and an additional 2,000
ounces from other sources. For the year ending
December 31, 1998, the Company expects to produce
between 125,000 and 130,000 ounces of gold compared to
actual 1997 gold production of approximately 174,000
ounces of gold. The 1998 estimated gold production
includes 63,000 to 65,000 ounces from the Company's
interest in the Rosebud mine, 42,000 to 44,000 ounces
from the Company's La Choya mine, 16,000 to 17,000
-16-
17
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
ounces from the Company's interest in the Greens Creek
mine, and 4,000 ounces from other sources.
In the first nine months of 1998, the Company
produced approximately 5.4 million ounces of silver
compared to approximately 3.9 million ounces in the
first nine months of 1997. The increase in silver
production in 1998 is principally the result of
increased silver production at the Lucky Friday mine
due to mining in the higher silver grade expansion area
in the 1998 period. The Company's silver production in
the first nine months of 1998 was principally from the
Lucky Friday mine - approximately 3.0 million ounces,
the Greens Creek mine - approximately 2.2 million
ounces, and the Rosebud mine - approximately 0.2
million ounces. The Company's share of silver
production for 1998 is expected to be between 7.2
million and 7.4 million ounces compared to 1997
production of approximately 5.1 million ounces. The
1998 estimated silver production includes 4.1 to 4.2
million ounces from the Lucky Friday mine, 2.8 to 2.9
million ounces from the Company's interest in the
Greens Creek mine and an additional 0.3 million ounces
from other sources.
The Company's shipments of industrial minerals,
including ball clay, kaolin, feldspar, and specialty
aggregates, are expected to increase in 1998 to
approximately 1,112,000 tons compared to 1,026,000 tons
in 1997. Additionally, the Company expects to ship
approximately 1,049,000 cubic yards of landscape
material from its Mountain West Products operation in
1998 compared to 891,000 cubic yards in 1997.
RESULTS OF OPERATIONS
FIRST NINE MONTHS 1998 COMPARED TO FIRST NINE MONTHS
1997
The Company reported net income of approximately
$5.2 million, or $0.09 per share, in the first nine
months of 1998 compared to net income of approximately
$4.5 million, or $0.08 per share, in the same period of
1997. After $6.0 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 nine months of 1998
was $0.8 million, or $0.02 per common share, compared
-17-
18
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
to a loss of $1.5 million, or $0.03 per common
share, in the comparable 1997 period. The change in
income in the first nine months of 1998 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 nine
months of 1998 with the comparable 1997 period, gold
decreased by 13% to $294 per ounce from $339 per ounce,
silver increased by 20% to $5.73 per ounce from $4.77
per ounce, lead decreased by 16% to $0.245 per pound
from $0.292 per pound, and zinc decreased by 23% to
$0.475 per pound from $0.617 per pound. During the
first nine months of 1998, the Company's realized gold
price per ounce decreased 18% from $366 per ounce in
the first nine months of 1997 to $301 per ounce in
1998.
Sales of the Company's products decreased by
approximately $5.3 million, or 4%, in the first nine
months of 1998 as compared to the same period in 1997.
The decreased product sales resulted from lower sales
totaling approximately $19.1 million from gold
operations due to decreased production at the Grouse
Creek and La Choya mines, and a lower gold price. The
decrease in sales from gold operations was partly
offset by increased sales from the industrial minerals
segment of $8.7 million where sales improved at both
Kentucky-Tennessee (K-T) clay and MWCA, and increased
sales from silver operations of $5.1 million due to
increased production and a higher silver price, partly
offset by lower zinc, gold, and lead prices.
Cost of sales and other direct production costs
decreased approximately $1.3 million, or 1%, from the
first nine months of 1997 to the comparable 1998 period
primarily due to (1) decreased production costs of
$10.2 million at the Grouse Creek mine where operations
were suspended in April 1997; (2) decreased production
costs at the La Choya mine of $5.1 million, due to
decreased production; and (3) decreased costs at other
operations totaling approximately $1.1 million. These
decreases in costs were partially offset by increases
in operating costs at other operations including (1)
increased production costs of $7.8 million at the
industrial minerals segment resulting from increased
sales of products, a litigation settlement at K-T Clay,
and organizational restructuring costs at MWCA; (2)
increased production costs at the Rosebud mine totaling
-18-
19
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
$4.7 million due to the commencement of operations
in April 1997; and (3) increased production costs at
the Lucky Friday mine of $2.6 million resulting from
increased production and sales from the newly developed
expansion area.
Cost of sales and other direct production costs as
a percentage of sales increased from 75.7% in the first
nine months of 1997 to 77.9% in the comparable 1998
period. The increase is primarily due to decreased
production and sales in 1998 at the low cost La Choya
mine, combined with the lower gold price in the 1998
period.
Depreciation, depletion and amortization increased
$0.7 million, or 5%, from the first nine months of 1997
to the comparable 1998 period primarily due to (1)
increased depreciation at the Rosebud mine ($1.9
million) the result of operating nine months in 1998
versus six months in 1997; (2) increased depreciation
at the Lucky Friday mine ($0.7 million) due to
increased production in the 1998 period; and (3)
increased depreciation at the industrial minerals
segment ($0.2 million). These increases were partly
offset by decreased depreciation, depletion, and
amortization at (1) the La Choya mine ($1.9 million),
as a result of the majority the current property,
plant, and equipment being fully depreciated as of
December 31, 1997, and (2) the Greens Creek mine ($0.2
million).
Cash operating cost, total cash cost and total
production cost per gold ounce increased from $167,
$175 and $237 for the first nine months of 1997 to
$173, $185 and $249 for the comparable 1998 period,
respectively. The increase in the cash operating cost,
total cash cost, and total production cost per gold
ounce is primarily attributable to increased per ounce
costs at both the La Choya mine, the result of
decreased production, and the Rosebud mine, the result
of higher milling costs and mining of lower grade gold
ore.
Cash operating cost, total cash cost and total
production cost per silver ounce increased from $3.36,
$3.36 and $5.23 in the first nine months of 1997 to
$3.88, $3.88 and $5.30 in the comparable 1998 period,
respectively. The increases in the cost per silver
-19-
20
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
ounce are due primarily to increased cost per
ounce amounts at the Greens Creek mine due to the
impact of lower gold, zinc, and lead prices on by-
product credits, partly offset by decreased cost per
ounce amounts at the Lucky Friday mine resulting from
increased silver production, which offset was also
impacted by lower 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 $1.9 million,
or 16%, from the 1997 period to the 1998 period, due
principally to decreased exploration expenditures of
$2.2 million, most notably at Mexican exploration
properties. This decrease was partly offset by an
increase in provision for closed plants and
environmental matters of $0.2 million and decreased
depreciation expense of $0.1 million.
Other income was $3.3 million in the first nine
months of 1998 compared to $1.5 million in the
comparable 1997 period. The $1.8 million increase was
primarily due to (1) a $1.3 million gain on sale of
investments in the 1998 period, and (2) an increase in
interest and other income of $0.7 million resulting
from a gain on sale of land located near the Coeur
d'Alene office of $2.3 million, partly offset by a 1997
gain on sale of an 8% interest in the Buckhorn Joint
Venture, in Nevada, of $1.1 million, and decreased
royalty income of $0.5 million. Total interest cost
increased approximately $0.5 million due to higher
interest and fees associated with the Company's tax-
exempt solid waste disposal bonds and the revolving and
term loan credit facility. Capitalized interest costs
increased $0.3 million principally due to increased
capitalized interest costs associated with the Lucky
Friday expansion project, partly offset by decreased
capitalized interest associated with the Rosebud mine.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1997
The Company incurred a net loss of approximately
$0.6 million, or $0.01 per share, in the third quarter
of 1998 compared to net income of approximately $0.9
million, or $0.02 per share, in the same period of
-20-
21
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
1997. After $2.0 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 third quarter of 1998 was
$2.7 million, or $0.05 per common share, compared to
$1.1 million, or $0.02 per common share, in the
comparable 1997 period. The change in income in the
third quarter of 1998 was attributable to a variety
of factors the most significant of which are discussed
below in descending order of magnitude.
Sales of the Company's products decreased by
approximately $2.6 million, or 6%, in the third quarter
of 1998 as compared to the same period in 1997. The
decreased product sales resulted from lower sales
totaling approximately $6.8 million from gold
operations resulting from decreased production at the
La Choya and Grouse Creek mines, combined with a lower
average gold price. The decreased sales at the gold
operations were partially offset by increased sales
from the industrial minerals segment of $2.2 million
where sales improved at K-T Clay and MWCA, and
increased sales from silver operations of $1.9 million
due to increased production and sales at the Lucky
Friday mine, the favorable impact of a higher silver
price, partly offset by decreased shipments at the
Greens Creek mine, and by lower zinc, lead, and gold
prices.
Comparing the average metals prices for the third
quarter of 1998 with the comparable 1997 period, gold
decreased by 11% to $289 per ounce from $324 per ounce,
silver increased by 15% to $5.22 per ounce from $4.53
per ounce, lead decreased by 15% to $0.242 per pound
from $0.284 per pound, and zinc decreased by 36% to
$0.464 per pound from $0.728 per pound. During the
third quarter of 1998, the Company's realized gold
price per ounce decreased 16% from $352 per ounce in
the third quarter of 1997 to $297 per ounce in the 1998
period.
Cost of sales and other direct production costs
decreased slightly from the third quarter of 1997 to
the comparable 1998 period primarily due to (1)
decreased production costs at the La Choya mine
totaling approximately $2.2 million due to decreased
production; (2) decreased costs at the Greens Creek
mine due to decreased shipments during the third
-21-
22
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
quarter of 1998 ($1.9 million); (3) decreased costs
at the Grouse Creek mine ($1.0 million) due to
the suspension of operations in 1997; and (4) decreased
costs at the American Girl mine ($0.3 million). These
production cost decreases were partially offset by
increased production costs at (1) the Lucky Friday mine
of $2.7 million due to increased production and
shipments from the Lucky Friday expansion area; (2) the
industrial minerals segment of $1.9 million resulting
from increased sales; and (3) the Rosebud mine of $0.7
million due to increased tons mined and milled combined
with an increased milling cost per ton in the third
quarter of 1998.
Cost of sales and other direct production costs as
a percentage of sales from products increased from
72.9% in the third quarter of 1997 to 77.4% in the
comparable 1998 period, primarily due to the decreased
production and sales from the La Choya mine, the impact
of the lower gold price, and increased costs in the
1998 period at the Rosebud mine.
Depreciation, depletion and amortization decreased
by approximately $0.1 million, or 1%, from the 1997
period to the 1998 period, primarily the result of
decreased depreciation, depletion, and amortization at
(1) the La Choya mine ($0.6 million) due to fully
depreciating the majority of the current property,
plant, and equipment at the end of 1997, and (2) the
Greens Creek mine ($0.1 million). These decreases were
partially offset by increases in depreciation,
depletion, and amortization at (1) the Lucky Friday
mine of $0.4 million as a result of increased
production in 1998, and (2) the Rosebud mine of $0.2
million as a result of higher gold production in 1998.
Cash operating cost, total cash cost and total
production cost per gold ounce increased from $160,
$171 and $239 for the third quarter of 1997 to $181,
$195 and $273 for the third quarter of 1998,
respectively. The increase in the cash operating,
total cash and total production cost per gold ounce is
mainly attributed to the decreased production at the La
Choya mine combined with higher unit costs at the
Rosebud mine due to mining of lower grade ore and
higher milling costs.
-22-
23
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Cash operating and total cash cost per silver
ounce increased from $3.21 and $3.21 in the third
quarter of 1997 to $3.59 and $3.59 in the third quarter
of 1998, respectively. The increases in the cash cost
per silver ounce are due primarily to lower by product
metal prices, including gold, lead, and zinc. Total
production cost per silver ounce decreased from $5.06
in the third quarter of 1997 to $4.93 in the third
quarter of 1998 principally due to lower per ounce
depreciation charges at both Lucky Friday and Greens
Creek in the 1998 period, partially offset by the
increased total cash costs per ounce. 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 $0.4
million, or 9%, from the 1997 period to the 1998
period, due principally to (1) a decrease in
exploration expenditures of $0.3 million due to
decreased Mexican exploration expenditures, and (2)
decreased general and administrative costs of $0.3
million. These decreases were partly offset by an
increased provision for closed operations and
environmental matters totaling approximately $0.2
million.
Other expense was $0.2 million in the 1998 period
compared to nil in the 1997 period. The $0.2 million
increase was primarily due to increased miscellaneous
expense of $0.2 million most notably due to increased
foreign exchange losses. Total interest cost increased
$0.3 million due to increased borrowing in 1998 under
the Company's revolving and term loan facility than in
1997. Capitalized interest costs increased $0.2
million principally due to 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
-23-
24
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
inflationary pressures as the U.S. economy in
general. The Company continues to implement cost-
cutting measures in an effort to reduce per unit
production costs. Management believes, however, that
the Company may not be able to continue to offset the
impact of inflation over the long term through cost
reductions alone. However, the market prices for
products produced by the Company have a much greater
impact than inflation on the Company's revenues and
profitability. Moreover, the discovery, development and
acquisition of mineral properties are in many instances
unpredictable events. Future metals prices, the
success of exploration programs, changes in legal and
regulatory requirements, and other property
transactions can have a significant impact on the need
for capital.
At September 30, 1998, assets totaled approximately
$257.4 million and shareholders' equity totaled
approximately $159.4 million. Cash and cash
equivalents increased by $0.3 million to $4.1 million
at September 30, 1998 from $3.8 million at the end of
1997.
During the first nine months of 1998, approximately
$8.0 million of cash was provided by financing
activities. The major source of cash was
borrowings of long-term debt of $33.0 million. This
source was partially offset by uses of cash, including
repayments of long-term debt of $19.0 million, and
payment of preferred stock dividends totaling $6.0
million.
Operating activities provided approximately $2.6 million
of cash during the first nine months of 1998.
The primary sources of cash were from the industrial
minerals segment, the Rosebud mine, the Greens Creek
mine, and the La Choya mine. Partially offsetting these
sources were (1) decreases, totaling $7.3 million, in
accrued reclamation and other noncurrent liabilities
principally for reclamation and closure activities at
Grouse Creek, the Bunker Hill Superfund site, the Coeur
d'Alene River Basin, the Republic mine, the Cactus
mine, the Yellow Pine mine, and the Durita site; (2) a
$6.2 million increase in accounts receivable, most
notably at the Lucky Friday mine due to increased
production and sales, the industrial minerals segment
resulting from increased sales, and the Greens Creek
mine due to the timing of shipments, partly offset by
decreased accounts receivable at La Choya and Rosebud;
-24-
25
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
and (3) a $1.6 million increase in inventories
most notably at the La Choya mine due to deferral of
costs associated with the push back of the pit wall at
La Choya, and the Lucky Friday mine due to increased
production. Principal noncash charges included
depreciation, depletion, and amortization of
approximately $16.1 million and provision for
reclamation and closure costs of $0.4 million.
The Company's investing activities used $10.3
million of cash during the first nine months of 1998.
The most significant uses of cash were (1) additions to
properties, plants, and equipment totaling $14.1
million, including significant additions at the Lucky
Friday mine of $5.7 million, the industrial minerals
segment of $3.5 million, the Greens Creek mine of $2.1
million, capital expenditures at the Noche Buena
project of $1.1 million including the purchase of the
minority interest in the mining concessions, in-fill,
and definition drilling, and other additions, including
capitalized interest of $1.7 million; (2) other net
uses of $1.2 million; and (3) the purchase of
investments and increase in cash surrender value of
life insurance required cash of approximately $0.8
million. These uses of cash were partly offset by (1)
proceeds from disposition of properties, plants, and
equipment during the first nine months of 1998 totaling
approximately $3.5 million, principally from the sale
of land located near the Company's corporate
headquarters; (2) proceeds from the sale of investments
of $1.3 million; and (3) the release of restricted
investments of $0.9 million.
The Company estimates that capital expenditures to
be incurred during the fourth quarter of 1998 will be
approximately $5.2 million. These capital expenditures
consist primarily of (1) approximately $1.8 million at
the Company's Industrial Mineral operations; (2)
approximately $1.7 million at the Noche Buena project;
(3) the Company's share of expenditures at the Greens
Creek mine totaling approximately $1.4 million; (4)
approximately $0.2 million at the Lucky Friday mine;
and (5) other capitalized expenditures of $0.2 million.
These planned capital expenditures are anticipated to
be funded from operating activities, and amounts
available under the Company's revolving term loan
credit facility.
-25-
26
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
The Company's estimate of its capital expenditure
requirements assumes, with respect to the Greens Creek
and 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.
On September 30, 1998, the Company amended its
revolving and term loan credit facility (as amended,
the Bank Agreement). Under the terms of the Bank
Agreement, the Company may borrow up to $55.0 million
on a revolving basis through December 31, 2001,
repayable in eight quarterly installments beginning
October 31, 2001. At September 30, 1998, there was
$26.0 million outstanding under the Bank Agreement
classified as long-term debt. The Company was in
compliance with all restrictive covenants of the Bank
Agreement as of September 30, 1998. In addition to the
borrowings under the Bank Agreement, the Company also
has outstanding $9.8 million aggregate principal amount
of tax-exempt, solid waste disposal revenue bonds as of
June 30, 1998. The amount available to borrow under
the Bank Agreement is reduced by the $9.8 million
amount of tax-exempt, solid waste disposal bonds. At
September 30, 1998, the Company had the ability to
borrow approximately an additional $19.0 million under
the Bank Agreement.
The Company's planned environmental and reclamation
expenditures during the fourth quarter of 1998 are
expected to be approximately $5.0 to $5.7 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 during the fourth quarter
of 1998 are estimated to be approximately $1.9 million.
The Company's exploration strategy is to focus further
-26-
27
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
exploration at or in the vicinity of its currently
owned domestic and foreign properties. Accordingly,
domestic exploration expenditures will be incurred
principally at the Greens Creek, Rosebud, and Lucky
Friday mines. Foreign exploration efforts in 1998
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 or when the Company matches specific
production to a contract. For contracts where the net
position is settled in cash, revenues are recognized on
the original settlement date of the contracts. 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 September 30, 1998, the Company had forward
sales commitments through June 30, 1999 for 6,000
ounces of gold at an average price of $354 per ounce.
The estimated fair value of these forward sales
commitments was $353,000 as of September 30, 1998. The
London Final gold price at September 30, 1998, was
$294. Additionally, at September 30, 1998, the Company
had forward sales commitments through June 30, 1999 for
1,100,000 ounces of silver at an average price of $6.18
per ounce. If the Company's forward silver sales
commitments were closed on September 30, 1998, the
estimated fair value of these commitments was
approximately $857,000. The Handy & Harman silver
price at September 30, 1998 was $5.29. 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 September 30, 1998.
-27-
28
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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, financial condition and cash
flows of the Company and its subsidiaries.
YEAR 2000
The Company utilizes software and related
technologies throughout its business that will be
affected by the "Year 2000 computer problem," which is
common to many corporations and governmental entities,
and concerns the inability of information systems,
primarily computer software programs, to recognize and
process date-sensitive information properly as the Year
2000 approaches. Absent corrective actions, a computer
program that has date sensitive software may recognize
a date using "00" as the year 1900 rather than 2000.
This could result in system failures or miscalculations
causing disruptions to various activities and
operations.
The Company has established thirteen teams to
identify and correct Year 2000 compliance issues. The
Company's primary information systems (IS) with non-
compliant code are expected to be modified or replaced
with systems that are Year 2000 compliant. The Company
is also evaluating its non-IS applications, primarily
systems embedded in processing and other facilities.
Additionally, the teams are responsible for evaluating
the Company's critical suppliers and vendors as to
their state of readiness for the Year 2000.
The Company's primary IS was originally evaluated
in 1996, and out of 2,300 programs, 850 programs were
identified that required modification. All of the 850
programs have been modified, installed and tested by
the Company's information services department. End-
user testing is approximately 25% complete with
expected completion by December 31, 1998. The
-28-
29
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Company's other IS's are currently being
evaluated, and progress is being made in identifying
non-compliant systems. Plans are also being made to
remediate the non-compliant systems. The Company
currently anticipates completing its evaluation of the
other IS's, along with plans for remediating non-
compliant systems by December 31, 1998.
Inventories and assessments of non-IS systems have
been completed by all thirteen teams. Remediation
plans are currently being documented and implemented,
where necessary. Contingency plans will be developed
for all major components in case of system failures
surrounding the year 2000.
The Company is utilizing independent consultants
to oversee the Year 2000 project as well as to perform
certain remediation efforts. In addition, progress on
the Year 2000 project is also monitored by senior
management, and reported to the Company's Audit
Committee and Board of Directors at each respective
meeting.
The Company has identified critical suppliers, as
well as other essential service providers, and has
surveyed their Year 2000 compliancy. Based on expected
compliance dates expressed by some of these critical
suppliers and other service providers, additional
follow-up will be required to fully assess their state
of readiness for the Year 2000. These follow-up
activities will occur during the fourth quarter of 1998
and throughout 1999. For other suppliers and service
providers, risk assessments and contingency plans,
where necessary, will be finalized by mid-year 1999.
The Company has taken the above described steps to
address issues surrounding suppliers and service
providers; however, the Company has no direct ability
to influence their compliance actions. The Company
believes it has taken the necessary actions to mitigate
the effect of Year 2000 risks, although the Company is
not able to eliminate the risks or to estimate the
ultimate effect Year 2000 will have on the Company's
operating results and financial condition.
Contingency plans for Year 2000 related business
interruptions are being developed and will include, but
not limited to, the development of emergency backup and
recovery procedures, replacing automated processes with
-29-
30
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
manual processes, identification of alternate
suppliers, and increasing raw material supplies and
finished goods inventory prior to December 31, 1999.
All plans are expected to be completed by the end of
the second quarter of 1999, but ongoing monitoring will
continue throughout 1999.
The Company's most likely potential risk is a
temporary inability to process and ship its products,
as well as the inability of some customers to order and
pay on a timely basis.
Incremental costs directly related to Year 2000
issues are estimated to be $265,000 from 1998 to 2000,
of which approximately $91,000 has been spent to date.
The Company's current estimate of expected costs is
based upon work performed to date, and depending on the
results of future work, the cost estimate may increase.
This estimate assumes that the Company will not incur
significant Year 2000 costs on behalf of its suppliers
or customers.
The Company's Year 2000 efforts are ongoing and
its overall plan, as well as the consideration of
contingency plans, will continue to evolve as new
information becomes available. While the Company is
taking steps it believes to be necessary to prevent any
major interruption to its business activities, that
will be dependent in part, upon the ability of third
parties to be Year 2000 compliant.
ACCOUNTING PRONOUNCEMENTS
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
-30-
31
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 does not expect the adoption of
this standard to have a material impact on the
financial condition or results of operations of the
Company.
In April 1998, Statement of Position 98-5 (SOP 98-5)
"Reporting on the Costs of Start-up Activities," was
issued. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organizational costs.
It requires costs of start-up activities and
organizational costs to be expensed as incurred, as
well as the recognition of a cumulative effect of
change in accounting principle for retroactive
application of the standard. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998,
although earlier application is encouraged. The
Company is presently evaluating the effect the adoption
of SOP 98-5 will have on the financial condition and
results of operations of the Company.
In June 1998, Statement of Financial Accounting
Standards No. 133 (SFAS 133). "Accounting for
Derivative Instruments and Hedging Activities" was
issued. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for
hedging activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 is
effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, however, earlier
application of all of the provisions of this Statement
is encouraged as of the beginning of any fiscal
quarter. The Company is presently evaluating the
affect the adoption of this standard will have on the
financial condition and results of operations of the
Company.
-31-
32
PART II - OTHER INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
- Bunker Hill Superfund Sites
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 settled the Company's response-cost liability
under Superfund at the Bunker Hill Site. As of
September 30, 1998, the Company has estimated and
accrued an allowance for liability for remedial
activity costs at the Bunker Hill Site of $5.6 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 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 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
In March 1996, the United States filed a lawsuit
in Idaho Federal District Court against certain mining
companies that conducted historic mining operations in
the Silver Valley of northern Idaho, including 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
-32-
33
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 in May 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 (NRD) litigation with this lawsuit for discovery
and other limited pretrial purposes.
On September 30, 1998, the Federal District Court
granted the Company's summary judgment motion with
respect to the applicable statute of limitations and
dismissed the United States' NRD claim due to the
failure of EPA to comply with federal law and EPA
regulations in expanding the Natural Priority List site
boundaries to include the entire Coeur d'Alene
River/Lake Coeur d'Alene Basin which would have the
effect of extending the statute of limitations. The
United States is seeking permission to appeal the
Federal District Court's decision to the Ninth Circuit
Court of Appeals. The case is proceeding through
discovery. Summary judgment motions related to i) the
extent of Federal Trusteeship over Natural Resources in
the Coeur d'Alene Basin, ii) a constitutional challenge
to the retroactive application of Superfund liability
at the site, and iii) case management are pending
before the Court.
In May 1998, the EPA announced that it had commenced a
remedial investigation/feasibility study under CERCLA
for the entire Basin, including Lake Coeur d'Alene, in
support of its response cost claims asserted in
its March 1996 lawsuit.
-33-
34
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
- State of Idaho Claims
In March 1996, the Company entered into an
agreement (the Idaho Agreement) with the State of Idaho
(the 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 September 30, 1998, the Company's accrual for
remediation activity in the Basin, not including the
Bunker Hill Site, totaled approximately $0.6 million.
These expenditures are anticipated to be made over the
next three 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
-34-
35
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
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 September 30, 1998, the Company had not reduced
its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance
proceeds.
Other Claims
- George Creque, Jr. et. al. vs. Cactus Gold Mines Co.,
et. al. (including The Company)
On October 22, 1998, Hecla Mining Company and
certain affiliates were served with a lawsuit filed in
Superior Court of Kern County, California. The
Complaint pertains to the Cactus Gold mine located near
Mojave, California. Seventy-four plaintiffs allege
that during the period from 1960 through the present,
the named defendants' operations and activities caused
personal injury and property damage to the plaintiffs.
The plaintiffs seek monetary damages of $29,600,000,000
for general negligence, nuisance, trespass, statutory
violations, ultra-hazardous activities, strict
liability, and other torts. The Company has provided
notice and demand for defense/indemnity to its
insurance carriers providing coverage for the Cactus
Gold mine operation. To date, the Company has not
received any response from the carriers. The Company
has retained outside counsel to defend the Company in
advance of any response from the insurance companies.
Based on our preliminary review of the allegations in
the Complaint as it relates to the historical
operations at the Cactus Gold mine, the Company
believes the allegations are without merit.
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.
-35-
36
PART II - OTHER INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1(a) First Amendment to Credit Agreement dated
September 30, 1998
12 - Fixed Charge Coverage Ratio Calculation
13 - Third Quarter Report to Shareholders for
the quarter ended September 30, 1998, for
release dated November 3, 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.
-36-
37
HECLA MINING COMPANY and SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HECLA MINING COMPANY
-----------------------------------
(Registrant)
Date: November 12, 1998 By /s/ Arthur Brown
--------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: November 12, 1998 By /s/ Stanley E. Hilbert
--------------------------------
S. E. Hilbert,
Corporate Controller
(Chief Accounting Officer)
-37-
38
EXHIBIT INDEX
Exhibit
No. Description
- --------- -------------------------
10.1(a) First Amendment to Credit Agreement dated
September 30, 1998
12 Fixed Charge Coverage Ratio Calculation
13 Third Quarter Report to Shareholders for the
quarter ended September 30, 1998, for release
dated November 3, 1998
27 Financial Data Schedule
-38-