1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
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
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for at least
the past 90 days. Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding July 30, 1999
- ---------------------------- --------------------------
Common stock, par value 66,683,965 shares
$0.25 per share
2
Hecla Mining Company and Subsidiaries
Form 10-Q
For The Quarter Ended June 30, 1999
I N D E X*
PAGE
PART I. - Financial Information
Item l - Consolidated Balance Sheets - June 30,
1999 and December 31, 1998 3
- Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three
Months and Six Months Ended June 30,
1999 and 1998 4
- Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
PART II. - Other Information
Item 1 - Legal Proceedings 44
Item 4 - Annual Meeting of Shareholders 49
Item 6 - Exhibits and Reports on Form 8-K 50
*Items omitted are not applicable.
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Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In thousands, except share data)
June 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,831 $ 2,480
Accounts and notes receivable 36,117 25,919
Income tax refund receivable 16 1,087
Inventories 20,640 22,757
Other current assets 1,163 1,251
--------- ---------
Total current assets 69,767 53,494
Investments 2,173 3,406
Restricted investments 5,914 6,331
Properties, plants and equipment, net 197,604 178,168
Other noncurrent assets 11,178 10,663
--------- ---------
Total assets $ 286,636 $ 252,062
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 17,021 $ 12,172
Accrued payroll and related benefits 3,501 2,852
Preferred stock dividends payable 2,013 2,012
Accrued taxes 941 772
Accrued reclamation and closure costs 6,912 6,537
--------- ---------
Total current liabilities 30,388 24,345
Deferred income taxes 300 300
Long-term debt 48,503 42,923
Accrued reclamation and closure costs 20,407 23,216
Other noncurrent liabilities 10,107 9,542
--------- ---------
Total liabilities 109,705 100,326
--------- ---------
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 1999 - 66,746,075;
issued 1998 - 55,166,728 16,687 13,792
Capital surplus 399,966 374,017
Accumulated deficit (233,682) (230,493)
Accumulated other comprehensive loss (5,229) (5,269)
Less stock held by grantor trust;
1999 - 132,290 shares, 1998 - 0 shares (500) - -
Less treasury stock, at cost;
1999 and 1998 - 62,110 shares (886) (886)
--------- ---------
Total shareholders' equity 176,931 151,736
--------- ---------
Total liabilities and shareholders' equity $ 286,636 $ 252,062
========= =========
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 (Loss)(Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
Sales of products $ 46,058 $ 45,655 $ 87,716 $ 85,784
--------- --------- --------- ---------
Cost of sales and other direct production costs 35,081 36,487 66,427 67,014
Depreciation, depletion and amortization 5,892 5,048 11,944 10,174
--------- --------- --------- ---------
40,973 41,535 78,371 77,188
--------- --------- --------- ---------
Gross profit 5,085 4,120 9,345 8,596
--------- --------- --------- ---------
Other operating expenses:
General and administrative 1,802 2,136 3,813 4,277
Exploration 1,018 1,136 2,180 1,952
Depreciation and amortization 81 99 173 193
Provision for closed operations and
environmental matters 343 72 610 131
--------- --------- --------- ---------
3,244 3,443 6,776 6,553
--------- --------- --------- ---------
Income from operations 1,841 677 2,569 2,043
--------- --------- --------- ---------
Other income (expense):
Interest and other income 1,823 1,403 2,519 3,937
Miscellaneous expense (282) (94) (831) (651)
Gain on investments - - 1,155 - - 1,241
Interest expense:
Interest costs (958) (865) (1,882) (1,605)
Less amount capitalized - - 317 - - 588
--------- --------- --------- ---------
583 1,916 (194) 3,510
--------- --------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting principle 2,424 2,593 2,375 5,553
Income tax benefit (provision) (89) 403 (154) 290
--------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle 2,335 2,996 2,221 5,843
Cumulative effect of change in accounting principle,
net of income tax - - - - (1,385) - -
--------- --------- --------- ---------
Net income 2,335 2,996 836 5,843
Preferred stock dividends (2,013) (2,013) (4,025) (4,025)
--------- --------- --------- ---------
Income (loss) applicable to common shareholders 322 983 (3,189) 1,818
--------- --------- --------- ---------
Other comprehensive income, net of income tax:
Unrealized holding gains on securities 23 61 40 42
--------- --------- --------- ---------
Other comprehensive income 23 61 40 42
--------- --------- --------- ---------
Comprehensive income (loss) applicable to
common shareholders $ 345 $ 1,044 $ (3,149) $ 1,860
========= ========= ========= =========
Basic and diluted income (loss) per common share
before cumulative effect of change in
accounting principle $ 0.01 $ 0.02 $ (0.04) $ 0.03
Cumulative effect of change in accounting
principle - - - - (0.02) - -
--------- --------- --------- ---------
Basic and diluted income (loss) per common share $ 0.01 $ 0.02 $ (0.06) $ 0.03
========= ========= ========= =========
Cash dividends per common share $ - - $ - - $ - - $ - -
========= ========= ========= =========
Weighted average number of common
shares outstanding 60,687 55,102 57,944 55,098
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended
------------------------------
June 30, 1999 June 30, 1998
------------- -------------
Operating activities:
Net income $ 836 $ 5,843
Noncash elements included in net income:
Depreciation, depletion and amortization 12,117 10,367
Cumulative effect of change in accounting principle 1,385 - -
Gain on disposition of properties,
plants and equipment (1,347) (2,326)
Gain on sale of investments - - (1,241)
Provision for reclamation and closure costs 463 287
Change in assets and liabilities net of effects from
purchase of Monarch Resources Investments Limited:
Accounts and notes receivable (9,214) (10,252)
Income tax refund receivable 1,071 (294)
Inventories 3,075 3,027
Other current and noncurrent assets (394) (1,605)
Accounts payable and accrued expenses 41 671
Accrued payroll and related benefits 649 907
Accrued taxes 169 163
Accrued reclamation and closure costs and
other noncurrent liabilities (2,421) (4,149)
------- -------
Net cash provided by operating activities 6,430 1,398
------- -------
Investing activities:
Purchase of Monarch Resources Investments Limited,
net of cash acquired (9,183) - -
Additions to properties, plants and equipment (4,617) (10,437)
Proceeds from disposition of properties,
plants and equipment 1,687 3,506
Proceeds from sale of investments 311 1,241
Decrease in restricted investments 417 719
Purchase of investments and change in cash
surrender value of life insurance, net 37 (641)
Other, net (43) 2
------- -------
Net cash used by investing activities (11,391) (5,610)
------- -------
Financing activities:
Common stock issued under stock and stock option plans 20 54
Common stock issuance, net of offering costs 11,860 - -
Preferred stock dividends (4,025) (4,025)
Borrowings, net of repayments, against cash surrender
value of life insurance 925 - -
Borrowings on long-term debt 38,040 26,500
Repayments on long-term debt (32,508) (16,003)
------- -------
Net cash provided by financing activities 14,312 6,526
------- -------
Net increase in cash and cash equivalents 9,351 2,314
Cash and cash equivalents at beginning of period 2,480 3,794
------- -------
Cash and cash equivalents at end of period $11,831 $ 6,108
======= =======
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, 1998, as set forth in Hecla Mining
Company's 1998 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 with the exception of an adjustment
recognized for the cumulative effect of a change in
accounting principle as described in Note 6. All
financial statements presented herein are unaudited.
However, the balance sheet as of December 31, 1998, 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 1999 presentation. These
reclassifications had no effect on the net income
(loss) or accumulated deficit as previously reported.
Note 3. On June 25, 1999, Hecla acquired from Monarch
Resources Limited all of the outstanding stock of
Monarch Resources Investments Limited, or MRIL, a
Bermuda company, as well as two subsidiaries owned by
MRIL. MRIL's principal assets include the La Camorra
gold mine, located in Bolivar State in Venezuela, and
the El Salidillo silver exploration property located in
the Durango region of Mexico. The acquisition price of
$25.0 million consisted of $9.0 million in cash and
6,700,250 Hecla common shares which are subject to
certain trading restrictions.
The acquisition of MRIL has been accounted
for as a purchase and, accordingly, Hecla's
consolidated financial statements include the financial
position, results of operations, and cash flows of MRIL
prospectively from June 25, 1999. Approximately $20.0
million of the total purchase price has been allocated
to the mineral properties at La Camorra and will be
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
amortized on a units-of-production basis over the
La Camorra mine life.
Note 4. The components of the income tax provision
(benefit) for the six months ended June 30, 1999 and
1998 are as follows (in thousands):
1999 1998
------ ------
Current:
State income taxes $ 135 $ 181
Federal income taxes - - (517)
Foreign income taxes 19 46
------ ------
Total $ 154 $ (290)
====== ======
Hecla's income tax provision (benefit) for
the first half of 1999 and 1998 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.
Note 5. Inventories consist of the following (in thousands):
June 30, Dec. 31,
1999 1998
--------- --------
Concentrates, bullion, metals
in transit and other products $ 4,588 $ 3,879
Industrial mineral products 6,738 10,240
Materials and supplies 9,314 8,638
-------- --------
$ 20,640 $ 22,757
======== ========
Note 6. In April 1998, Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" was
issued. SOP 98-5 requires costs of start-up activities
and organizational costs to be expensed as incurred, as
well as the recognition of a cumulative effect of a
change in accounting principle for retroactive
application of the standard. Hecla adopted SOP 98-5
effective as of January 1, 1999. The impact of this
change in accounting principle related to unamortized
start-up costs associated with Hecla's 29.7% ownership
interest in the Greens Creek mine. SOP 98-5 requires
that these costs be expensed as incurred whereas
Hecla's previous policy was to capitalize these costs.
The $1.4 million cumulative effect of this change in
accounting principle is included in the consolidated
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
statement of operations for the six months ended
June 30, 1999.
Note 7. Contingencies
- Bunker Hill
In 1994, Hecla, as a potentially responsible
party under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (CERCLA),
entered into a consent decree with the Environmental
Protection Agency and the State of Idaho, concerning
environmental remediation obligations at the Bunker
Hill Superfund site located at Kellogg, Idaho. The
consent decree settled Hecla's response-cost liability
under CERCLA at the Bunker Hill site. As of June 30,
1999, Hecla has estimated and accrued an allowance for
liability for remedial activity costs at the Bunker
Hill site of $4.6 million. These estimated
expenditures are anticipated to be made over the next
three to five years. Although Hecla believes the
allowance is adequate based upon current estimates of
aggregate costs, Hecla plans to reassess its
obligations under the consent decree as new information
is developed during 1999. Depending on the results of
the reassessment, it is reasonably possible that
Hecla's estimate of its obligations 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
brought a lawsuit, under CERCLA, in Idaho Federal
District Court against Hecla 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.
Hecla answered the tribe's complaint denying liability
for natural resource damages (NRD). In October 1996,
following a court imposed four-year suspension of the
proceeding, the tribe's natural resource damage
litigation was consolidated with the United States
Natural Resources Damage litigation described below for
discovery and other limited pretrial purposes.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- 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 Hecla. The lawsuit asserts claims under
CERCLA and the Clean Water Act and seeks recovery for
alleged damages to or loss of natural resources located
in the Coeur d'Alene River Basin in northern Idaho for
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 Hecla 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. Hecla 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 activities in the Basin which
contributed to the releases and damages alleged by the
United States. Hecla believes it also has a number of
defenses to the United States' claims.
On September 30, 1998, the Federal District
Court granted Hecla's summary judgment motion with
respect to the applicable statute of limitations and
dismissed the United States' NRD claim due to the
failure of the EPA to comply with federal law and EPA
regulations in expanding the national 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 has appealed the Federal District Court's
decision to the Ninth Circuit Court of Appeals. The
case is proceeding through discovery. On March 31,
1999, the court issued a case management order setting
trial in this case for November 2000. Summary judgment
motions related to 1) the extent of federal trusteeship
over natural resources in the Basin and 2) a
constitutional challenge to the retroactive application
of Superfund liability at the site are currently
pending before the Federal District Court.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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, Hecla entered into an
agreement with the State of Idaho pursuant to which
Hecla 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 Hecla for damage to
natural resources for which the state is a trustee for
a period of five years, to pursue settlement with Hecla
of the state's NRD claims and to grant Hecla 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 June 30, 1999, Hecla's accrual for
remediation activity in the Basin, not including the
Bunker Hill site, totaled approximately $0.2 million.
These expenditures are anticipated to be expended
during 1999. Depending on the results of the
aforementioned lawsuits, it is reasonably possible that
Hecla's estimate of its obligation may change in the
near or longer term.
Insurance Coverage Litigation
In 1991, Hecla 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
Hecla and its predecessors. Hecla believes that the
insurance companies have a duty to defend and indemnify
Hecla under their policies of insurance for all
liabilities and claims asserted against Hecla by the
EPA and the tribe under CERCLA related to the Bunker
Hill site and the Basin in northern Idaho. In 1992,
the Idaho State District Court ruled that the primary
insurance companies had a duty to defend Hecla in the
Tribe's lawsuit. During 1995 and 1996, Hecla entered
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
into settlement agreements with a number of the
insurance carriers named in the litigation. Hecla 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 suspended until the
underlying environmental claims against Hecla are
resolved or settled. The remaining insurer is
providing Hecla with a partial defense in all Basin
environmental litigation. As of June 30, 1999, Hecla
had not reduced its accrual for reclamation and closure
costs to reflect the receipt of any anticipated
insurance proceeds.
Other Claims
On October 22, 1998, Hecla 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 $29.6 billion for
general negligence, nuisance, trespass, statutory
violations, ultra-hazardous activities, strict
liability, and other torts. Hecla has provided notice
and demand for defense/indemnity to its insurance
carriers providing liability insurance coverage for the
Cactus Gold mine operation. The primary carrier has
denied coverage. Hecla is currently investigating the
advisability of seeking court enforcement of the
carrier's coverage obligations under the policies.
Hecla has retained outside counsel to defend Hecla.
Based on a prior health risk assessment completed for
the operation as required by the State of California
and a preliminary review with outside legal counsel of
the allegations in the complaint as it relates to the
historical operations of Hecla and its predecessors at
the Cactus Gold mine, Hecla believes the allegations
are without merit.
In 1997, Hecla's subsidiary, Kentucky-
Tennessee Clay, terminated shipments of 1% of annual
ball clay
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
production, sold to animal feed producers, when
the Food and Drug Administration determined trace
elements of dioxin were present in poultry. Dioxin is
inherently present in ball clays generally. Hecla
believes $11.0 million of insurance coverage is
available for approximately $8.0 million in claims to
date. Although the outcome cannot be assured, Hecla
believes that there will be no material adverse effect
on Hecla's results of operations, financial condition
or cash flows from this matter.
Hecla 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 Hecla's
management that the outcome of these matters will not
have a material adverse effect on the financial
condition of the Company. However, it is possible that
these matters could have a material effect on quarterly
or annual operating results, when they are resolved, in
future periods.
Note 8. At June 30, 1999, there was $25.0 million
outstanding under Hecla's $55.0 million bank agreement
classified as long-term debt. On May 7, 1999, Hecla
amended its bank agreement. Under the revised terms of
the bank agreement, the amount available to borrow will
remain at $55.0 million, subject to certain
limitations. On June 25, 1999, Hecla entered into a
first amendment to the bank agreement which provided
for the waiver of certain restrictive covenants,
allowing Hecla to enter into a project financing
facility to acquire MRIL, as discussed below. Hecla
was in compliance with all restrictive covenants
pursuant to the bank agreement as of June 30, 1999.
Hecla also has outstanding $9.8 million aggregate
principal amount of tax-exempt, solid waste disposal
revenue bonds as of June 30, 1999. The amount
available to borrow under the bank agreement is reduced
by the $9.8 million principal amount of these bonds.
At June 30, 1999, the Company had the ability to borrow
an additional $20.2 million under the bank agreement.
On June 25, 1999, Hecla's newly acquired,
wholly owned subsidiary, MRIL, entered into a credit
agreement
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
to provide project financing of up to $11.0
million nonrecourse to Hecla to finance the acquisition
of MRIL. MRIL granted a security interest over the
stock of its Venezuelan subsidiary, certain Venezuelan
real property assets and all cash proceeds of the newly
acquired La Camorra mine. MRIL must maintain
compliance with certain financial and other restrictive
covenants related to the available ore reserves and
financial performance of the La Camorra mine. MRIL
borrowed $10.5 million pursuant to the terms of the
project financing agreement, which is repayable in nine
semiannual payments beginning June 30, 2000. At
June 30, 1999, MRIL had outstanding pursuant to the
project financing agreement $10.5 million principal
amount. In connection with the project financing
agreement, as of June 25, 1999, Hecla entered into a
subordinated loan agreement which provided a $3.0
million zero coupon loan, subordinate to Hecla's
existing $55.0 million credit agreement, repayable in
three annual payments beginning June 30, 2003. The
entire $3.0 million subordinated loan was outstanding
at June 30, 1999. The terms of the subordinated loan
agreement provide that Hecla must maintain compliance
with the financial covenants of Hecla's $55.0 million
credit agreement. The interest rates in the
subordinated loan agreement and the project financing
agreement are based on the London Interbank Offered
Rates. Additionally, MRIL sold forward 306,045 ounces
of gold on a quarterly basis over the period December
1999 to December 2004, at a flat forward price of
$288.25 per ounce, and as a portion of the sale entered
into an agreement specifying a quarterly Gold Lease
Rate Swap at a fixed rate of 1.5% on the outstanding
volume of the above forward sales, commencing June
2000.
Note 9. The following table presents a reconciliation of
the numerators (net income (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 and six months ended
June 30, 1999 and 1998 in computing basic and diluted
income (loss) per common share (dollars and shares in
thousands, except per share amounts).
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended June 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------- ------ ------ ------- ------ ------
Net income before preferred
stock dividends $ 2,335 $ 2,996
Less: Preferred
stock dividends (2,013) (2,013)
------- -------
Basic income applicable to
common shareholders 322 60,687 $ 0.01 983 55,102 $ 0.02
Effect of dilutive
securities - - - - - - - - 10 - -
------- ------ ------ ------- ------ ------
Diluted income applicable
to common shareholders $ 322 60,687 $ 0.01 $ 983 55,112 $ 0.02
======= ====== ====== ======= ====== ======
Six Months Ended June 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount
------- ------ ------ ------- ------ ------
Net income before preferred
stock dividends $ 836 $ 5,843
Less: Preferred
stock dividends (4,025) (4,025)
------- -------
Basic income (loss) applicable
to common shareholders (3,189) 57,944 $ (0.06) 1,818 55,098 $ 0.03
Effect of dilutive
securities - - - - - - - - - - - -
------- ------ ------- ------- ------ ------
Diluted income (loss) applicable
to common shareholders $(3,189) 57,944 $ (0.06) $ 1,818 55,098 $ 0.03
======= ====== ======= ======= ====== ======
These calculations of diluted earnings per
share for the three months and six months ended June
30, 1999 and 1998 exclude the effects of $115,000,000
of convertible preferred stock as such conversion would
be antidilutive. Also excluded from these calculations
are the effects of common stock issuable upon exercise
of stock options as of June 30, 1999 and 1998, as their
exercise would be antidilutive, as follows:
Three Months Ended Six Months Ended
--------------------- -----------------------
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
2,316,000 1,198,000 2,316,000 1,678,500
The calculations of diluted earnings per share
for the three and six months ended June 30, 1999, also
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
exclude 1,603,988 warrants to purchase common
stock, as their exercise would be antidilutive.
Note 10. In March 1999, Hecla issued 155,955 shares of its
common stock realizing proceeds of approximately
$478,000, net of issuance costs of approximately
$22,000. In May 1999, Hecla issued 4,582,852 shares of
its common stock realizing proceeds of approximately
$11.4 million, net of approximately $0.6 million of
issuance costs. In connection with the shares sold in
May, Hecla issued 1,603,998 warrants to purchase Hecla
common stock. Each warrant entitles the holder to
purchase one share of common stock at an exercise price
equal to the lesser of (i) $3.19 and (ii) 102% of the
volume weighted average price on the NYSE for each
trading day during the ten consecutive trading days
immediately preceding the date that notice of exercise
is given to Hecla. These warrants are exercisable
until May 11, 2002. Shares of both equity offerings
were sold under Hecla's existing Registration Statement
on Form S-3 which provides for the issuance of up to
$100.0 million of equity and debt securities. Hecla
used the net proceeds for general corporate purposes
including repayment of indebtedness under the existing
$55.0 million bank credit agreement.
Note 11. Hecla has a nonqualified deferred compensation
plan which permits eligible officers, directors, and
key employees to defer a portion of their compensation.
In November 1998, Hecla amended the plan to permit
participants to irrevocably transfer all or a portion
of their deferred compensation amounts into a Hecla
common stock account to be held in trust until
distribution. As of June 30, 1999, a total of 132,290
shares of Hecla's common stock are held in the grantor
trust. Shares held in the grantor trust are valued at
fair value at the time of issuance, are recorded in the
contra equity account "Stock held by grantor trust,"
and are legally outstanding for registration purposes
and dividend payments. The shares held in the grantor
trust are considered outstanding for purposes of
calculating earnings (loss) per share.
Note 12. During the first quarter of 1999, Hecla sold call
options for 1,350,000 ounces of silver through
December 31, 1999, at an average strike price of $5.33.
Hecla received a premium of $460,000 for the sale of
-15-
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
the call options. These contracts are designed to
provide some price protection, to the extent of the
amount of the premium received, in the event of a
decline in the price of silver. They also limit the
maximum price Hecla may receive for a portion of
Hecla's silver production to the strike price of the
call options plus the premium received. The options
are considered to be held for trading purposes, and as
such the premiums received are deferred until the
expiration of the contract or exercise of the option
contract by the counterparties. Due to the trading
nature of the option contracts, Hecla recognizes, in
revenue, a mark to market adjustment at the end of each
reporting period for the change in the fair value of
the remaining outstanding option contracts. During the
first six months of 1999, Hecla recognized $183,000 of
revenue from these call options based upon a mark to
market adjustment as of June 30, 1999. During the
second quarter of 1999, Hecla recognized a $24,000 loss
from these call options based upon a mark to market
adjustment as of June 30, 1999. Also in the second
quarter of 1999, contracts for 450,000 ounces expired
and Hecla recognized an additional $29,000 of revenue
from the expired contracts.
Note 13. Hecla is organized and managed primarily on the
basis of the principal products being produced from its
eleven operating units. Three of the operating units
have been aggregated into the Metals-Gold segment, two
of the operating units have been aggregated into the
Metals-Silver segment, and six operating units have
been combined to form the Industrial Minerals segment.
General corporate activities not associated with
operating units as well as idle properties are
presented as Other.
-16-
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The tables below present information about
reportable segments for the three months and six months
ended June 30 (in thousands):
Three Months Ended Six Months Ended
---------------------- --------------------
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales to unaffiliated customers:
Metals-Gold $ 5,600 $ 8,375 $ 11,991 $ 17,630
Metals-Silver 11,790 9,914 24,359 20,036
Industrial Minerals 28,668 27,366 51,366 48,118
-------- -------- -------- --------
$ 46,058 $ 45,655 $ 87,716 $ 85,784
======== ======== ======== ========
Three Months Ended Six Months Ended
---------------------- --------------------
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Income (loss) from operations:
Metals-Gold $ (763) $ 556 $ (1,175) $ 1,913
Metals-Silver 784 (376) 1,659 (77)
Industrial Minerals 4,046 2,804 6,681 4,808
Other (2,226) (2,307) (4,596) (4,601)
-------- -------- -------- --------
$ 1,841 $ 677 $ 2,569 $ 2,043
======== ======== ======== ========
The table below presents identifiable assets by
reportable segment as of June 30, 1999, and December 31,
1998 (in thousands):
June 30, December 31,
1999 1998
--------- ------------
Identifiable assets:
Metals-Gold(1) $ 61,518 $ 23,808
Metals-Silver 124,373 127,499
Industrial Minerals 76,295 71,593
Other 24,450 29,162
--------- ---------
$ 286,636 $ 252,062
========= =========
(1) Includes assets of La Camorra mine acquired June 25, 1999.
Note 14. In June 1998, Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued. SFAS
133 establishes accounting and reporting standards for
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18
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
derivative instruments, including certain
derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for
hedging activities. It requires that an entity
recognizes all derivatives as either assets or
liabilities in the statement of financial position and
measures those instruments at fair value. In June
1999, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" was issued.
SFAS 137 defers the effective date of SFAS 133 to all
fiscal quarters of all fiscal years beginning after
June 15, 2000; however, earlier application is
encouraged as of the beginning of any fiscal quarter.
Hecla is presently evaluating the effect the adoption
of this standard will have on Hecla's financial
condition, results of operations, and cash flows.
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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 is involved in the
exploration, development, mining, and processing of
gold, silver, lead, zinc, and industrial minerals.
Hecla's gold and silver segment 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 Hecla'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 current metals price
environment, Hecla's industrial minerals segment has
been a significant contributor to overall revenues,
including 59% of total revenue during the first six
months of 1999. In the following descriptions, where
there are changes that are attributable to more than
one factor, Hecla 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 metal prices and metal
production volatility,
- changing market conditions and the regulatory
environment, and
- the other risks detailed from time to time in
Hecla'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 Hecla's 1998 Annual Report on Form
10-K).
-19-
20
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As a result of the above factors and
potentially others, actual results may differ
materially from those projected, forecasted or implied.
These forward-looking statements represent Hecla's
judgment as of the date of this filing. Hecla
disclaims, however, any intent or obligation to update
these forward-looking statements as circumstances may
change or develop.
On June 25, 1999, Hecla completed its
acquisition of Monarch Resources Investments Limited,
or MRIL, which was treated as a purchase for financial
statement and accounting purposes. The $25.0 million
purchase price consisted of $9.0 million in cash and
6,700,250 Hecla common shares. In addition, MRIL's
seller, Monarch Resources Limited, will receive a
royalty payment on future production from purchased
assets that exceed the current resource. MRIL's
significant assets include the La Camorra gold mine in
Venezuela and the El Salidillo silver exploration
property in Mexico. Hecla has temporarily discontinued
production at the La Camorra mine to construct a new
tailings impoundment and to perform additional mine
development. Hecla currently anticipates that
production will resume in the fourth quarter of 1999.
In order to finance the acquisition and anticipated
capital expenditures at La Camorra, a project-financed
credit facility was secured for $11.0 million, of which
$10.5 million was advanced at June 30, 1999. In
addition, $3.0 million was borrowed under a subordinate
note to fund the acquisition.
In the first six months of 1999, Hecla
produced approximately 55,000 ounces of gold compared
to approximately 67,000 ounces of gold production in
the first six months of 1998. The following table
displays the actual gold production (in ounces) by
operation for the six months ended June 30, 1999 and
1998, projected gold production for the year ending
December 31, 1999, and actual gold production for the
year ended December 31, 1998:
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21
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Actual Actual Projected Actual
June 30, June 30, Dec. 31, Dec. 31,
Operation 1999 1998 1999 1998
- --------- -------- -------- --------------- --------
Rosebud 33,000 32,000 58,000-60,000 65,000
Greens Creek 13,000 8,000 21,000-23,000 18,000
La Camorra (1) - - - - 16,000-18,000 - -
La Choya (2) 8,000 23,000 11,000 40,000
Other sources 1,000 4,000 1,000 4,000
-------- -------- --------------- --------
Totals 55,000 67,000 107,000-113,000 127,000
======== ======== =============== ========
(1) Production is anticipated to resume during the
fourth quarter of 1999 at the La Camorra mine.
(2) Mining at La Choya was completed in December
1998. Gold production in 1999 is from residual
recoveries from the heap leach pads.
In the first six months of 1999, the Company
produced approximately 3.7 million ounces of silver
compared to the first six months of 1998 silver
production of 3.2 million ounces. The following table
displays the actual silver production (in ounces) by
operation for the six months ended June 30, 1999 and
1998, projected silver production for the year ending
December 31, 1999, and actual silver production for the
year ended December 31, 1998 (in thousands):
Actual Actual Projected Actual
June 30, June 30, Dec. 31, Dec. 31,
Operation 1999 1998 1999 1998
- --------- -------- -------- --------------- --------
Lucky Friday 2,159 1,817 4,250-4,500 4,137
Greens Creek 1,481 1,279 2,750-2,900 2,824
Rosebud 81 122 160-170 278
Other sources 1 4 2 6
-------- -------- ------------- --------
Totals 3,722 3,222 7,162-7,572 7,245
======== ======== ============= ========
In 1998, Hecla shipped approximately
1,005,000 tons of product from the Kentucky-Tennessee
Clay group, including ball clay, kaolin, and feldspar.
Hecla's shipments of industrial minerals are expected
to increase in 1999 to approximately 1,101,000 tons.
During the first six months of 1999, Hecla shipped
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
approximately 51,000 tons of specialty aggregates
from the Colorado Aggregate division of our subsidiary
MWCA, and approximately 719,000 cubic yards of
landscape material from the Mountain West Products
division of MWCA. In order to provide funds for
possible metals and other industrial minerals
expansion, as well as to reduce indebtedness, Hecla has
decided to attempt to sell MWCA. Hecla anticipates
closing on a sales transaction in the second half of
1999, although there can be no assurance that Hecla
will be successful.
Results of Operations
---------------------
First Six Months 1999 Compared to First Six Months 1998
-------------------------------------------------------
Hecla recorded income before the cumulative
effect of a change in accounting principle of
approximately $2.2 million, or $0.04 per common share,
in the first six months of 1999 compared to net income
of approximately $5.8 million, or $0.11 per common
share, in the same period of 1998. After recognizing a
$1.4 million charge from an accounting change to write
off unamortized start-up costs associated with the
Greens Creek mine, and after $4.0 million in dividends
to holders of Hecla's Series B cumulative convertible
preferred stock, Hecla's loss applicable to common
shareholders for the first six months of 1999 was
approximately $3.2 million, or $0.06 per common share,
compared to income of $1.8 million, or $0.03 per common
share, in the comparable 1998 period. The change in
income (loss) applicable to common shareholders during
1999 was attributable to a variety of factors, the most
significant which are discussed below.
Depreciation, depletion, and amortization
increased $1.8 million, or 17%, from the first six
months of 1998 to the first six months of 1999
principally due to:
- increased depreciation at the La
Choya mine ($0.9 million), the result of
depreciating costs associated with the La Choya
pit expansion completed in 1998,
- increased depreciation at the
Lucky Friday mine ($0.5 million) due to
increased production in the 1999 period, and
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23
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- increased depreciation at the
Greens Creek mine ($0.5 million) due to
increased production in the 1999 period.
Interest and other income decreased
approximately $1.4 million, from $3.9 million in the
1998 period to $2.5 million in the 1999 period. The
decrease in 1999 was principally the result of a
nonrecurring 1998 gain of $2.3 million on sale of land
located near Hecla's corporate headquarters in Coeur
d'Alene, Idaho, partly offset by a $1.3 million gain on
the sale of the corporate airplane in 1999.
The cumulative effect of change in accounting
principle totaled $1.4 million in 1999, due to the
write off of unamortized start-up costs relating to
Hecla's 29.7% ownership interest in the Greens Creek
mine. The adjustment was the result of application of
Statement of Position No. 98-5, "Accounting for Start-
up Activities."
Gain on investments decreased $1.2 million as
a result of the sale of Metaline Contact Mine stock in
1998 which was nonrecurring in 1999.
Interest expense, net of amounts capitalized
increased $0.9 million in the first six months of 1999
as compared to the same period in 1998. The $0.9
million increase was the result of decreased
capitalized interest of $0.6 million, associated with
the Lucky Friday expansion project in 1998, and
increased interest expense under Hecla's bank loan
($0.3 million), as a result of higher borrowings in the
1999 period.
Hecla's provision for closed operations and
environmental matters increased $0.5 million, from $0.1
million in the first six months of 1998 to $0.6 million
in the 1999 period. The increase resulted principally
from expenditures for technical studies and legal costs
associated with the Coeur d'Alene River Basin area. For
further information on the Coeur d'Alene River Basin
area, see Item 3, "Legal Proceedings" of this Form
10-Q.
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24
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Exploration expense increased $0.2 million,
or 12%, during the first six months of 1999 as compared
to the same period of 1998 principally due to increased
expenditures at the Cacique property in Chile ($0.4
million) and increased expenditures in Mexico ($0.2
million). These increases were partly offset by
decreased expenditures at other South American targets
($0.3 million).
Income tax expense increased $0.5 million
from a benefit of $0.3 million in the first six months
of 1998 to a provision of $0.2 million in the
comparable 1999 period. The benefit in 1998 related to
the carryback of certain 1998 expenditures to reduce
U.S. income taxes previously provided, partly offset by
a provision for state income taxes. The provision in
1999 primarily represents a provision for state income
taxes.
Cost of sales and other direct production
costs decreased approximately $0.6 million, or 1%, from
the first six months of 1998 to the comparable 1999
period primarily due to:
- decreased cost of sales at the
La Choya mine ($2.7 million) due to completion
of mining in December 1998,
- decreased cost of sales at the
Greens Creek mine ($2.0 million) principally
due to the timing of concentrate shipments,
- elimination of cost of sales
at the American Girl mine ($0.6 million) due to
final gold sales in 1998,
- decreased cost of sales at the Rosebud mine ($0.4 million)
due to decreased tons mined and milled,
- increased cost of sales at the industrial minerals segment
($1.6 million) associated with increased sales of $3.2 million,
and
- increased cost of sales at the Lucky Friday mine ($3.6
million) due to increased production.
-24-
25
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Cost of sales and other direct production
costs as a percentage of sales from products decreased
from 78% in the first six months of 1998 to 76% in the
comparable 1999 period. The decrease was principally a
result of improved margins in the silver and industrial
minerals segments, partly offset by decreased margins
in the gold segment.
Sales of products increased by approximately
$1.9 million, or 2%, in the first six months of 1999 as
compared to the same period in 1998 primarily due to:
- increased sales totaling
approximately $4.3 million from silver
operations primarily as a result of increased
production and sales,
- increased sales totaling
approximately $3.2 million from Hecla's
industrial minerals segment principally the
result of increased shipments at both the K-T
Clay group and the MWCA group, and
- decreased sales of $5.6
million from gold operations principally a
result of completion of mining operations at
the La Choya mine in December 1998.
The following table compares the average
metal prices for the first six months of 1999 with the
comparable 1998 period:
Metal 1999 1998 $ Change % Change
---------------- ------ ------ -------- ---------
Gold-Realized ($/oz.) $ 294 $ 303 $ (9) (3)%
Gold-London Final ($/oz.) 280 297 (17) (6)
Silver-Handy & Harman ($/oz.) 5.23 5.97 (0.74) (12)
Lead-LME Cash (cents/pound) 0.232 0.246 (0.014) (6)
Zinc-LME Cash (cents/pound) 0.457 0.480 (0.023) (5)
Cash operating and total cash cost per gold
ounce decreased from $170 and $181 for the first six
months of 1998 to $160 and $173 for the first six
months of 1999, respectively. The decreases in the
cash operating and total cash cost per gold ounce were
primarily attributable to a greater share of 1999
production coming from the lower cost Rosebud mine.
Total production costs per gold ounce increased from
$239 per ounce in 1998 to $273 per ounce in 1999. The
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26
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
increase in the total production cost per gold
ounce was attributable to increased depreciation
charges associated with the La Choya pit expansion that
was completed in 1998.
Cash operating, total cash, and total
production cost per silver ounce decreased from $4.06,
$4.06 and $5.53 in the first six months of 1998 to
$3.73, $3.73, and $5.29 in the first six months of
1999, respectively. The decreases in the cost per
silver ounce are due primarily to positive impacts of
increased by-product production, as well as increased
silver production, partly offset by lower by-product
metal prices. Gold, lead, and zinc are by-products of
Hecla's silver production, the revenues from which are
netted against production costs in the calculation of
production cost per ounce of silver.
Three Months Ended June 30, 1999 Compared to
--------------------------------------------
Three Months Ended June 30, 1998
--------------------------------
Hecla recorded net income of approximately
$2.3 million, or $0.04 per common share, in the second
quarter of 1999 compared to net income of approximately
$3.0 million, or $0.05 per common share, in the same
period of 1998. After $2.0 million in dividends to
holders of Hecla's Series B cumulative convertible
preferred stock, Hecla's income applicable to common
shareholders for the second quarter of 1999 was
approximately $0.3 million, or $0.01 per common share,
compared to income of $1.0 million, or $0.02 per common
share, in the comparable 1998 period. The change in
income applicable to common shareholders during 1999
was attributable to a variety of factors, the most
significant which are discussed below.
Gain on investments decreased $1.2 million as
a result of the sale of Metaline Contact Mine stock in
1998 which was nonrecurring in 1999.
Depreciation, depletion, and amortization
increased $0.8 million, or 17%, from the second quarter
of 1998 to the second quarter of 1999 principally due
to:
-26-
27
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- increased depreciation at the
Lucky Friday mine ($0.3 million) due to
increased production in the 1999 period,
- increased depreciation at the
La Choya mine ($0.3 million), the result of
depreciating costs associated with the La Choya
pit expansion completed in 1998, and
- increased depreciation at the
Greens Creek mine ($0.2 million) due to
increased production in the 1999 period.
Income taxes changed by $0.5 million from a
tax benefit of approximately $0.4 million in 1998 to an
approximate $0.1 million tax provision in 1999. The
benefit in 1998 related to the carryback of certain
1998 expenditures to reduce U.S. income taxes
previously provided, partly offset by a provision for
various state income taxes. The 1999 provision
primarily represents a provision for state income
taxes.
Interest expense, net of amounts capitalized
increased $0.4 million in the second quarter of 1999 as
compared to the second quarter of 1998. The $0.4
million increase was the result of decreased
capitalized interest of $0.3 million, associated with
the Lucky Friday expansion project in 1998, and
increased interest expense under Hecla's bank loan
($0.1 million), as a result of higher borrowings in the
1999 period.
Hecla's provision for closed operations and
environmental matters increased $0.2 million, from
approximately $0.1 million in the second quarter of
1998 to $0.3 million in the 1999 period. The increase
resulted principally from expenditures for technical
studies and legal costs associated with the Coeur
d'Alene River Basin area. For further information on
the Coeur d'Alene River Basin area, see Item 3, "Legal
Proceedings" of this Form 10-Q.
Sales of products increased by approximately
$0.4 million, or 1%, in the second quarter of 1999 as
compared to the same period in 1998 primarily due to:
-27-
28
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- increased sales totaling
approximately $1.9 million from silver
operations primarily as a result of increased
production and shipments,
- increased sales totaling
approximately $1.3 million from Hecla's
industrial minerals segment principally the
result of increased shipments at both the K-T
Clay group and the MWCA group, and
- decreased sales of $2.8
million from gold operations principally a
result of completion of mining operations at
the La Choya mine in December 1998, combined
with a lower gold price in the 1999 period.
The following table compares the average
metal prices for the second quarter of 1999 with the
comparable 1998 period:
Metal 1999 1998 $ Change % Change
---------------- ------ ------ -------- --------
Gold-Realized ($/oz.) $ 288 $ 307 $ (19) (6)%
Gold-London Final ($/oz.) 273 300 (27) (9)
Silver-Handy & Harman ($/oz.) 5.16 5.71 (0.55) (10)
Lead-LME Cash (cents/pound) 0.233 0.248 (0.015) (6)
Zinc-LME Cash (cents/pound) 0.463 0.479 (0.016) (3)
Interest and other income increased
approximately $0.4 million, from $1.4 million in the
1998 period to $1.8 million in the 1999 period. The
increase in 1999 was principally the result of a 1999
gain of $1.3 million on the sale of Hecla's corporate
airplane, partly offset by a nonrecurring 1998 gain on
sale of land located near Hecla's Coeur d'Alene office
($0.5 million) and other items totaling $0.4 million.
Cost of sales and other direct production
costs decreased approximately $1.4 million, or 4%, from
the second quarter of 1998 to the comparable 1999
period primarily due to:
- decreased cost of sales at the
Greens Creek mine ($1.7 million) principally
due to the timing of concentrate shipments,
-28-
29
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- decreased cost of sales at the
La Choya mine ($1.3 million) due to completion
of mining in December 1998,
- decreased cost of sales at the
Rosebud mine ($0.3 million) due to decreased
tons mined and milled,
- elimination of cost of sales at the American
Girl mine ($0.2 million) due to final gold
sales in 1998,
- increased cost of sales at the
industrial minerals segment ($0.3 million)
associated with increased sales of $1.3
million, and
- increased cost of sales at the
Lucky Friday mine ($1.9 million) due to
increased production and shipments from the
Lucky Friday expansion area.
Cost of sales and other direct production
costs as a percentage of sales from products decreased
from 80% in the second quarter of 1998 to 76% in the
comparable 1999 period. The improvement was
principally a result of improved margins in the silver
and industrial minerals segments.
Cash operating and total cash cost per gold
ounce decreased from $179 and $192 for the second
quarter of 1998 to $163 and $178 for the second quarter
of 1999, respectively. The decreases in the cash
operating and total cash cost per gold ounce were
primarily attributable to a greater share of 1999
production coming from the lower cost Rosebud mine.
Total production costs per gold ounce increased from
$253 per ounce in 1998 to $277 per ounce in 1999. The
increase in the total production cost per gold ounce
was attributable to increased depreciation charges
associated with the La Choya pit expansion that was
completed in 1998.
Cash operating, total cash, and total
production cost per silver ounce increased from $3.70,
$3.70 and $5.14 in the second quarter of 1998 to $3.75,
$3.75, and $5.30 in the second quarter of 1999,
respectively. The increases in the cost per silver
ounce are due to lower by-product metal prices, partly
offset by
-29-
30
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
increased by-product and silver production. Gold,
lead, and zinc are by-products of Hecla's silver
production, the revenues from which are netted against
production costs in the calculation of production cost
per ounce of silver.
Financial Condition and Liquidity
---------------------------------
A substantial portion of Hecla's revenue is
derived from the sale of products, the prices of which
are affected by numerous factors beyond Hecla's
control. Prices may change dramatically in short
periods of time and such changes have a significant
effect on revenues, profits and liquidity of Hecla.
Hecla is subject to many of the same inflationary
pressures as the U.S. economy in general. Hecla
continues to implement cost-cutting measures in an
effort to reduce per unit production costs. Management
believes, however, that Hecla 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 Hecla have a
much greater impact than inflation on 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.
The variability of metals prices requires
that Hecla, 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. Hecla 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 Hecla'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 Hecla determines that the
carrying values attributed to individual assets are not
recoverable given reasonable expectations for future
production and market conditions.
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31
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
At June 30, 1999, assets totaled
approximately $287 million and shareholders' equity
totaled approximately $177 million. Cash and cash
equivalents increased by $9.3 million to $11.8 million
at June 30, 1999 from $2.5 million at December 31,
1998.
During the first six months of 1999,
approximately $14.3 million of cash was provided by
financing activities. The major sources of cash were
borrowings of long-term debt of $38.0 million and
proceeds from common stock issuances, net of offering
costs, of $11.9 million. These sources were partially
offset by uses of cash, including repayments of long-
term debt of $32.5 million, and payment of preferred
stock dividends of $4.0 million.
Operating activities provided approximately
$6.4 million of cash during the first half of 1999.
The primary sources of cash were from Rosebud, Lucky
Friday, the industrial minerals segment, and Greens
Creek. Significant uses of cash included (1) a $9.2
million increase in accounts and notes receivable
principally due to seasonal sales at MWCA, increased
sales at the K-T Clay group and timing of shipments and
cash receipts at Greens Creek, and (2) $2.4 million for
reclamation activities and other noncurrent
liabilities. Principal noncash charges included
depreciation, depletion, and amortization of
approximately $12.1 million, the cumulative effect of
change in accounting principle of $1.4 million, and
provision for reclamation and closure costs of $0.5
million.
Hecla's investing activities used $11.4
million of cash during the first half of 1999. The
most significant uses of cash were (1) the purchase of
Monarch Resources Investments Limited, net of cash
acquired, for $9.2 million, and (2) additions to
properties, plants, and equipment totaling $4.6
million, including significant additions at the Noche
Buena project of $2.2 million, the Greens Creek mine of
$1.3 million, the industrial minerals segment of $0.8
million, and other additions of $0.3 million. These
uses of cash were partly offset by (1) proceeds from
disposition of properties, plants, and equipment during
the first six months of 1999 totaling approximately
$1.7 million, principally from sale of the corporate
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32
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
airplane; (2) the release of restricted
investments ($0.4 million); and (3) proceeds from the
sale of investments ($0.3 million).
Due to declines in the prices of metals that
Hecla produces, including gold, silver, lead, and zinc,
Hecla has developed and implemented plans to generate
and preserve cash during the current low metals price
environment. Hecla's plans include marketing for sale
its MWCA subsidiary and certain other assets. Hecla
has also implemented certain cost cutting measures to
reduce operating cash costs. Without improvements in
the prices of metals, Hecla anticipates that its
history of losses applicable to common shareholders
will continue. There can be no assurance that Hecla
will be successful in its efforts to sell the MWCA
subsidiary and other assets, or in its implementation
of additional cost cutting measures.
Hecla estimates that minimum capital
expenditures, including capitalized interest, to be
incurred during the remainder of 1999 will be
approximately $9.4 million. These capital expenditures
consist primarily of:
Property Expenditure
------------------ ------------
La Camorra $6.0 million
Greens Creek (29.7% interest) $2.1 million
Industrial minerals segment $0.9 million
Other $0.4 million
These planned capital expenditures will
depend, in large part, on Hecla's ability to obtain the
required funds from operating activities, amounts
available under its restated bank agreement and the
possible issuance of additional equity. There can be
no assurance that actual capital expenditures will be
as projected based upon the uncertainties associated
with the estimates for capital projects, uncertainties
associated with possible development projects, and
Hecla' ability to generate adequate funding for the
projected capital expenditures.
Hecla's estimate of its capital expenditure
requirements assumes, with respect to the Greens Creek
and Rosebud properties, that the Company's joint
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33
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
venture partners will not default with respect to
their portion of development costs and capital
expenditures.
During the first six months of 1999, Hecla
continued its feasibility study on the Noche Buena gold
project in Mexico. Hecla completed fill-in drilling to
35-meter centers on the core of the deposit as well as
step out drilling to expand the deposit. Additional
metallurgical testing was also completed during the
first half of 1999. However, at the current gold
price, Hecla has decided to suspend development of this
project. Hecla will reconsider the status of this
project when the gold price returns to a higher level
although there can be no assurance that Hecla will
develop the Noche Buena project.
Pursuant to a Registration Statement filed
with the Securities and Exchange Commission and
declared effective in the third quarter of 1995, Hecla
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. During the
first half of 1999, in two separate issuances, Hecla
sold an aggregate of 4,738,807 shares of common stock
realizing proceeds of approximately $11.9 million, net
of issuance costs. Additionally, 1,603,998 warrants to
purchase Hecla common stock were issued in connection
with one of the issuances. Each warrant entitles the
holder to purchase one share of common stock at an
exercise price equal to the lesser of $3.19 or 102% of
the volume weighted average price on the NYSE for each
trading day during the ten consecutive trading days
immediately preceding the date that notice of exercise
is given to Hecla. The warrants are exercisable until
May 11, 2002. These equity issuances were sold under
the above-described Registration Statement. To date,
Hecla has issued $62.2 million of Hecla's common shares
under the Registration Statement.
At June 30, 1999, there was $25.0 million
outstanding under Hecla's $55.0 million bank agreement
classified as long-term debt. On May 7, 1999, Hecla
amended its bank agreement. Under the revised terms of
the bank agreement, the amount available to borrow will
remain at $55.0 million, subject to certain
limitations. On June 25, 1999, Hecla entered into a
first amendment to the bank agreement which provided
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34
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
for the waiver of certain restrictive covenants,
allowing Hecla to enter into a project financing
facility to acquire MRIL, as discussed below. Hecla
was in compliance with all restrictive covenants
pursuant to the bank agreement as of June 30, 1999.
Hecla also has outstanding $9.8 million aggregate
principal amount of tax-exempt, solid waste disposal
revenue bonds as of June 30, 1999. The amount
available to borrow under the bank agreement is reduced
by the $9.8 million principal amount of these bonds.
At June 30, 1999, the Company had the ability to borrow
an additional $20.2 million under the bank agreement.
On June 25, 1999, Hecla's newly acquired,
wholly owned subsidiary, MRIL, entered into a credit
agreement to provide project financing of up to $11.0
million nonrecourse to Hecla to finance the acquisition
of MRIL. MRIL granted a security interest over the
stock of its Venezuelan subsidiary, certain Venezuelan
real property assets and all cash proceeds of the newly
acquired La Camorra mine. MRIL must maintain
compliance with certain financial and other restrictive
covenants related to the available ore reserves and
financial performance of the La Camorra mine. MRIL
borrowed $10.5 million pursuant to the terms of the
project financing agreement, which is repayable in nine
semiannual payments beginning June 30, 2000. At
June 30, 1999, MRIL had outstanding pursuant to the
project financing agreement $10.5 million principal
amount. In connection with the project financing
agreement, as of June 25, 1999, Hecla entered into a
subordinated loan agreement which provided a $3.0
million zero coupon loan, subordinate to Hecla's
existing $55.0 million credit agreement, repayable in
three annual payments beginning June 30, 2003. The
entire $3.0 million subordinated loan was outstanding
at June 30, 1999. The terms of the subordinated loan
agreement provide that Hecla must maintain compliance
with the financial covenants of Hecla's $55.0 million
credit agreement. The interest rates in the
subordinated loan agreement and the project financing
agreement are based on the London Interbank Offered
Rates. Additionally, MRIL sold forward 306,045 ounces
of gold on a quarterly basis over the period December
1999 to December 2004, at a flat forward price of
$288.25 per ounce, and as a portion of the sale entered
into an agreement at a quarterly Gold Lease Rate Swap
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
at a fixed rate of 1.5% on the outstanding volume
of the above forward sales, commencing June 2000.
Exploration expenditures for the remainder of
1999 are estimated to be approximately $2.0 to $2.5
million. Hecla's exploration strategy is to focus
further exploration at, or in the vicinity of, its
currently owned domestic and foreign properties, as
well as grass roots and advanced stage projects.
Accordingly, domestic exploration expenditures will be
incurred principally at Rosebud and Greens Creek.
Foreign exploration efforts in 1999 will center
primarily on targets in Mexico and South America. There
can be no assurances that actual exploration
expenditures will be as projected.
Hecla's planned environmental and reclamation
expenditures for the remainder of 1999 are expected to
be approximately $7.0 to $8.0 million. These
expenditures will occur at the Grouse Creek mine, the
Bunker Hill Superfund site, the Coeur d'Alene River
Basin, the Cactus mine, the American Girl mine, the
Republic mine, the Yellow Pine mine, other idle
properties, and the Durita property. There can be no
assurances that actual environmental and reclamation
expenditures will be as projected.
Reserves for closure costs, reclamation and
environmental matters totaled $27.3 million at June 30,
1999. Hecla anticipates that expenditures relating to
these reserves will be made over the next several
years. Although Hecla believes the allowance is
adequate based on current estimates of aggregate costs,
Hecla plans to reassess its environmental and
reclamation obligations, including obligations under
the Bunker Hill Consent Decree, and at Grouse Creek,
Yellow Pine and other idle properties as new
information develops on these sites during 1999.
Depending on the results of the reassessment, it is
reasonably possible that Hecla's estimate of its
obligations may change in the near term.
In the normal course of its business, Hecla
uses forward sales commitments, commodity swap
contracts, 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
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36
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
generally designed to ensure that Hecla 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 these contracts are recognized at the
time contracts are closed out by delivery of the
underlying commodity, when Hecla matches specific
production to a contract, or upon settlement of the net
position in cash. Hecla is exposed to certain losses,
generally the amount by which the contract price
exceeds the spot price of a commodity, in the event of
nonperformance by the counterparties to these
agreements.
At June 30, 1999, Hecla had forward sales
commitments through December 31, 2004 for 306,045
ounces of gold at an average price of $288 per ounce.
These gold forward sales commitments were entered into
as required under Hecla's $11.0 million project
financing facility for the La Camorra gold mine. The
estimated fair value of these forward sales commitments
was $45,000 as of June 30, 1999. The London Final gold
price at June 30, 1999, was $261. In connection with
the $11.0 million project financing for the La Camorra
gold mine, Hecla entered into a quarterly Gold Lease
Rate Swap at a fixed rate of 1.5% on 257,242 ounces of
the aforementioned gold forward sales, commencing June
2000. The estimated cost to close out the Gold Lease
Rate Swap at June 30, 1999 was $550,000. Additionally,
at June 30, 1999, Hecla had forward sales commitments
through December 31, 2000 for 1,200,000 ounces of
silver at an average price of $5.51. If Hecla's
forward silver sales commitments were closed on
June 30, 1999, the estimated fair value of these
forward sales commitments was approximately $225,000.
The Handy & Harman silver price at June 30, 1999 was
$5.28. At June 30, 1999, Hecla had zinc swap contracts
through July 2000 for 3,000 metric tonnes of zinc at an
average price of $0.495 per pound. The estimated fair
value of these zinc swaps was approximately $112,000 as
of June 30, 1999. The LME cash zinc price at June 30,
1999, was $0.457. Additionally at June 30, 1999, Hecla
had lead swap contracts through July 2000 for 6,000
metric tonnes of lead at an average price of $0.245 per
pound. The estimated fair value of these lead swaps
was approximately $197,000 as of June 30, 1999. The
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37
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
LME cash lead price at June 30, 1999, was $0.220.
The nature and purpose of the forward sales contracts,
however, do not presently expose Hecla to any
significant net loss. All of these contracts were
designated as hedges as of June 30, 1999.
During the first quarter of 1999, Hecla sold
call options for 1,350,000 ounces of silver through
December 31, 1999, at an average strike price of $5.33.
Hecla received a premium of $460,000 for the sale of
these call options. Through June 30, 1999, Hecla has
recognized revenue of $153,000 from expired call option
contracts and an additional $104,000 of revenue from
these call options based upon a mark to market
adjustment of the call options as of June 30, 1999.
These contracts are not designated as hedges and are
subject to revenue recognition based upon the changes
in the fair market value of the contracts. These
contracts are designed to provide some price
protection, to the extent of the amount of the premium
received, in the event of a decline in the price of
silver. They also limit the maximum price that Hecla
may receive on a portion of Hecla's silver production
to the strike price of the call options plus the
premium received.
Hecla 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 and Note 7 of Notes
to Consolidated Financial Statements). Although the
ultimate disposition of these matters and various other
pending legal actions and claims is not presently
determinable, it is the opinion of Hecla's management
that the outcome of these matters will not have a
material adverse effect on the financial position of
Hecla and its subsidiaries. However, it is possible
that these matters could have a material effect on
quarterly or annual operating results, when they are
resolved, in the future periods.
Year 2000
---------
Hecla 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.
This problem
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38
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
concerns the inability of information systems,
primarily computer software programs and certain
hardware, to properly recognize and process date-
sensitive information as the Year 2000 approaches.
Absent corrective actions, computer programs that have
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.
Hecla has established thirteen teams to
identify and correct Year 2000 compliance issues.
Hecla's primary information systems (IS) with non-
compliant code are expected to be modified or replaced
with systems that are Year 2000 compliant. Hecla has
also evaluated its non-IS applications, primarily
systems embedded in processing and other facilities.
Additionally, the teams have evaluated Hecla's critical
suppliers and vendors as to their state of readiness
for the Year 2000.
Hecla's primary IS was originally evaluated
in 1996, and out of 2,300 programs, 850 were identified
that required modification. All of the 850 programs
have been modified, installed and tested by Hecla's
information services department. End user testing is
complete. Hecla's other IS's have been evaluated and
are compliant systems. Remediation and contingency
plans are in progress with completion scheduled on or
before September 30, 1999.
Inventories and assessments of non-IS systems
have been completed by all thirteen teams. Remediation
efforts are currently being implemented, where
necessary. Contingency plans are being developed for
all major components in case of system failures
surrounding the Year 2000.
Hecla 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 Board of Directors at
each respective meeting.
Hecla has identified critical suppliers, as
well as other essential service providers, and has
surveyed
-38-
39
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
their Year 2000 compliancy. Based on expected
compliance dates expressed by some of these critical
suppliers and other service providers, additional
follow-up may be required to fully assess their state
of readiness for the Year 2000. These follow-up
activities will occur throughout 1999. For other
suppliers and service providers, risk assessments and
contingency plans, where necessary, will be finalized
by the end of the third quarter of 1999. Hecla has
taken the above-described steps to address issues
surrounding suppliers and service providers; however,
Hecla has no direct ability to influence other parties'
compliance actions. Hecla believes it has taken the
necessary actions to mitigate the effect of Year 2000
risks, although Hecla is not able to eliminate the
risks or to estimate the ultimate effect Year 2000 will
have on Hecla's operating results and financial
condition.
Contingency plans for Year 2000 related
business interruptions are being developed and will
include, but are not limited to, the development of
emergency backup recovery procedures, replacing
automated processes with manual processes,
identification of alternate suppliers, and increasing
raw material supplies and finished goods inventory
prior to December 31, 1999. Substantially all plans are
expected to be completed by the end of the third
quarter of 1999, but ongoing monitoring will continue
throughout 1999.
Hecla'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 $175,000 from 1998 to
2000, of which approximately $110,000 has been spent as
of June 30, 1999. Hecla'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
Hecla will not incur significant Year 2000 costs on
behalf of its suppliers or customers.
Hecla's Year 2000 efforts are ongoing and its
overall plan, as well as the consideration of
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40
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
contingency plans, will continue to evolve as new
information becomes available. While Hecla is taking
steps it believes to be necessary to prevent any major
interruption to its business activities, that will
depend in part, upon the ability of third parties to be
Year 2000 compliant.
New Accounting Pronouncement
----------------------------
In June 1998, Statement of Financial Accounting
Standards No. 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 recognizes all
derivatives as either assets or liabilities in the
statement of financial position and measures those
instruments at fair value. In June 1999, SFAS No. 137,
"Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133" was issued. SFAS 137 defers the
effective date of SFAS 133 to all fiscal quarters of
all fiscal years beginning after June 15, 2000;
however, earlier application is encouraged as of the
beginning of any fiscal quarter. Hecla is presently
evaluating the effect the adoption of this standard
will have on Hecla's financial condition, results of
operations, and cash flows.
Quantitative and Qualitative Disclosure About
---------------------------------------------
Market Risk
-----------
The following discussion about Hecla's risk-
management activities include "forward-looking
statements" that involve risk and uncertainties.
Actual results could differ materially from those
projected in the forward-looking statements.
The following tables summarize the financial
instruments and derivative instruments held by Hecla at
June 30, 1999, which are sensitive to changes in
interest rates and commodity prices. In the normal
course of business, Hecla also faces risks that are
either nonfinancial or nonquantifiable (See "Investment
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41
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Considerations" of Part I, Item 1 of Hecla's 1998
Annual Report on Form 10-K).
Interest-Rate Risk Management
-----------------------------
At June 30, 1999, Hecla's debt is subject to
changes in market interest rates and is sensitive to
those changes. Hecla currently has no derivative
instruments to offset the risk of interest rate
changes. Hecla may choose to use derivative
instruments, such as interest rate swaps to manage the
risk associated with interest rate changes.
The following table presents principal cash
flows for debt outstanding at June 30, 1999, by
maturity date and the related average interest rate.
The variable rates are estimated based on implied
forward rates in the yield curve at the reporting date.
(in thousands)
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
------ ------ ------ ------- ------- ---------- ------- -------
Bank credit agreement $ - - $ - - $ - - $12,500 $12,500 $ - - $25,000 $25,000
Average interest rate 7.62% 8.10% 8.52% 8.65% 8.75% - -%
Revenue bonds $ - - $ - - $ - - $ - - $ - - $ 9,800 $ 9,800 $ 9,800
Average interest rate 3.50% 3.66% 4.07% 4.33% 4.48% 4.69%
Project financing debt $ - - $ 500 $3,000 $ 3,000 $ 3,000 $ 1,000 $10,500 $10,500
Average interest rate 8.07% 8.55% 8.97% 9.10% 9.20% 9.34%
Subordinated bank debt $ - - $ - - $ - - $ - - $ 2,000 $ 1,000 $ 3,000 $ 3,000
Average interest rate 9.57% 10.05% 10.47% 10.60% 10.70% 10.84%
Commodity-Price Risk Management
-------------------------------
Hedging
Hecla uses commodity forward sales
commitments, commodity swap contracts, and commodity
put and call option contracts to manage its exposure to
fluctuation in the prices of certain metals which it
produces. Contract positions are designed to ensure
that Hecla will receive a defined minimum price for
certain quantities of its production. Hecla uses these
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42
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
instruments to reduce risk by offsetting market
exposures. Hecla 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. The instruments held by Hecla are not
leveraged and are held for purposes other than trading.
All of these contracts are designated as hedges at
June 30, 1999.
The following table provides information
about Hecla's forward sales commitments and commodity
swap contracts at June 30, 1999. The table presents the
notional amount in ounces or tonnes, the average
forward sales price, and the total-dollar contract
amount expected by the maturity dates, which occur
between April 30, 1999, and December 31, 2004.
Expected Expected Expected Expected Expected Expected Estimated
Maturity Maturity Maturity Maturity Maturity Maturity Fair
1999 2000 2001 2002 2003 2004 Value
-------- -------- -------- -------- -------- -------- ---------
Forward contracts:
Gold sales (ounces) 22,681 52,196 62,010 60,428 59,802 48,928
Future price (per ounce) $ 288 $ 288 $ 288 $ 288 $ 288 $ 288
Contract amount (in $000's) $ 6,538 $ 15,045 $ 17,874 $ 17,418 $ 17,238 $ 14,103 $ 45
Silver sales (ounces) - - 1,200,000 - - - - - - - -
Future price (per ounce) $ - - $ 5.51 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ - - $ 6,606 $ - - $ - - $ - - $ - - $ 223
Swap contracts:
Zinc (tonnes) 1,500 1,500 - - - - - - - -
Future price (per pound) $ 0.495 $ 0.495 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 1,637 $ 1,637 $ - - $ - - $ - - $ - - $ 112
Lead (tonnes) 3,000 3,000 - - - - - - - -
Future price (per pound) $ 0.245 $ 0.245 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 1,620 $ 1,620 $ - - $ - - $ - - $ - - $ 197
In addition to the above contracts, Hecla has
a quarterly Gold Lease Rate Swap at a fixed rate of
1.5% on 257,242 ounces of the above gold forward
contracts. The ounces covered under the swap are
adjusted each quarter, commencing June 2000, in
accordance with the expiration of the forward gold
contracts. The estimated cost to close out the Gold
Lease Rate Swap at June 30, 1999 was $550,000.
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43
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Trading
During the first quarter of 1999, Hecla sold
call options for 1,350,000 ounces of silver through
December 31, 1999, at an average strike price of $5.33.
Hecla sold the call options to provide additional cash
flow. The sale of the options are designed to provide
some price protection, to the extent of the amount of
the call premium received, in the event of a decline in
the price of silver. These contracts also limit the
maximum that Hecla may receive on a portion of Hecla's
silver production to the strike price of the options
plus the premium received. Hecla is exposed to price
risk on these call options, and the value of the call
options are marked to market with a gain or loss, if
any, recorded in earnings. Through June 30, 1999,
Hecla has recognized revenue of $153,000 from expired
call option contracts and an additional $104,000 of
revenue from a mark to market adjustment.
The following table provides information
about Hecla's silver call options at June 30, 1999.
The table presents the notional amount in ounces, the
weighted average strike price, and the total-dollar
contract amount expected by the maturity dates, which
occur between July 30, 1999, and December 31, 1999.
Expected Estimated
Maturity Fair
1999 Value
--------- ---------
Sold call options:
Silver calls (ounces) 900,000
Weighted average strike price (per ounce) $ 5.33
Contract amount (in $000's) $ 4,797 $ 104
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44
Part II - Other Information
Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
- ------- -----------------
- Bunker Hill
In 1994, Hecla, as a potentially responsible
party under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (CERCLA),
entered into a consent decree with the Environmental
Protection Agency and the State of Idaho, concerning
environmental remediation obligations at the Bunker
Hill Superfund site located at Kellogg, Idaho. The
consent decree settled Hecla's response-cost liability
under CERCLA at the Bunker Hill site. As of June 30,
1999, Hecla has estimated and accrued an allowance for
liability for remedial activity costs at the Bunker
Hill site of $4.6 million. These estimated
expenditures are anticipated to be made over the next
three to five years. Although Hecla believes the
allowance is adequate based upon current estimates of
aggregate costs, Hecla plans to reassess its
obligations under the consent decree as new information
is developed during 1999. Depending on the results of
the reassessment, it is reasonably possible that
Hecla's estimate of its obligations 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
brought a lawsuit, under CERCLA, in Idaho Federal
District Court against Hecla 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.
Hecla answered the tribe's complaint denying liability
for natural resource damages (NRD). In October 1996,
following a court imposed four-year suspension of the
proceeding, the tribe's natural resource damage
litigation was consolidated with the United States
Natural Resources Damage litigation described below for
discovery and other limited pretrial purposes.
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45
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
- 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 Hecla. The lawsuit asserts claims under
CERCLA and the Clean Water Act and seeks recovery for
alleged damages to or loss of natural resources located
in the Coeur d'Alene River Basin in northern Idaho for
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 Hecla 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. Hecla 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 activities in the Basin which
contributed to the releases and damages alleged by the
United States. Hecla believes it also has a number of
defenses to the United States' claims.
On September 30, 1998, the Federal District
Court granted Hecla's summary judgment motion with
respect to the applicable statute of limitations and
dismissed the United States' NRD claim due to the
failure of the EPA to comply with federal law and EPA
regulations in expanding the national 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 has appealed the Federal District Court's
decision to the Ninth Circuit Court of Appeals. The
case is proceeding through discovery. On March 31,
1999, the court issued a case management order setting
trial in this case for November 2000. Summary judgment
motions related to 1) the extent of federal trusteeship
over natural resources in the Basin and 2) a
constitutional challenge to the retroactive application
of Superfund liability at the site are currently
pending before the Federal District Court.
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46
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
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, Hecla entered into an
agreement with the State of Idaho pursuant to which
Hecla 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 Hecla for damage to
natural resources for which the state is a trustee for
a period of five years, to pursue settlement with Hecla
of the state's NRD claims and to grant Hecla 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 June 30, 1999, Hecla's accrual for
remediation activity in the Basin, not including the
Bunker Hill site, totaled approximately $0.2 million.
These expenditures are anticipated to be expended
during 1999. Depending on the results of the
aforementioned lawsuits, it is reasonably possible that
Hecla's estimate of its obligation may change in the
near or longer term.
Insurance Coverage Litigation
In 1991, Hecla 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
Hecla and its predecessors. Hecla believes that the
insurance companies have a duty to defend and indemnify
Hecla under their policies of insurance for all
liabilities and claims asserted against Hecla by the
EPA and the tribe under CERCLA related to the Bunker
Hill site and the Basin in northern Idaho. In 1992,
the Idaho State District Court ruled that the primary
insurance companies had a duty to defend Hecla in the
Tribe's lawsuit. During 1995 and 1996, Hecla entered
into settlement agreements with a number of the
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47
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
insurance carriers named in the litigation. Hecla
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 suspended until
the underlying environmental claims against Hecla are
resolved or settled. The remaining insurer is
providing Hecla with a partial defense in all Basin
environmental litigation. As of June 30, 1999, Hecla
had not reduced its accrual for reclamation and closure
costs to reflect the receipt of any anticipated
insurance proceeds.
Other Claims
On October 22, 1998, Hecla 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 $29.6 billion for
general negligence, nuisance, trespass, statutory
violations, ultra-hazardous activities, strict
liability, and other torts. Hecla has provided notice
and demand for defense/indemnity to its insurance
carriers providing liability insurance coverage for the
Cactus Gold mine operation. The primary carrier has
denied coverage. Hecla is currently investigating the
advisability of seeking court enforcement of the
carrier's coverage obligations under the policies.
Hecla has retained outside counsel to defend Hecla.
Based on a prior health risk assessment completed for
the operation as required by the State of California
and a preliminary review with outside legal counsel of
the allegations in the complaint as it relates to the
historical operations of Hecla and its predecessors at
the Cactus Gold mine, Hecla believes the allegations
are without merit.
In 1997, Hecla's subsidiary, Kentucky-
Tennessee Clay, terminated shipments of 1% of annual
ball clay production, sold to animal feed producers,
when the
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48
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Food and Drug Administration determined trace
elements of dioxin were present in poultry. Dioxin is
inherently present in ball clays generally. Hecla
believes $11.0 million of insurance coverage is
available for approximately $8.0 million in claims to
date. Although the outcome cannot be assured, Hecla
believes that there will be no material adverse effect
on Hecla's results of operations, financial condition
or cash flows from this matter.
Hecla 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 Hecla's
management that the outcome of these matters will not
have a material adverse effect on the financial
condition of the Company. However, it is possible that
these matters could have a material effect on quarterly
or annual operating results, when they are resolved, in
future periods.
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49
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Item 4. Annaul Meeting of Shareholders
- ------- ------------------------------
At the annual meeting of shareholders held on
May 7, 1999 the following matters were voted on by
Hecla's shareholders:
Election of Three Directors:
Votes Votes
For Withheld
----- --------
Leland O. Erdahl 43,841,109 633,472
---------- -------
Thomas J. O'Neil 43,845,187 629,394
---------- -------
Paul A. Redmond 43,834,465 640,116
---------- -------
Approval of selection of
PricewaterhouseCoopers LLP as
Hecla's Auditors for 1999
Votes Votes
For Against Abstentions
----- ------- -----------
43,927,860 323,972 222,749
---------- ---------- -----------
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50
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
10.1 Purchase Agreement between Monarch
Resources Limited and Hecla Mining Company dated
May 17, 1999 (incorporated by reference as
Exhibit 4.1 in the Form 8-K/A for the event dated
June 25, 1999).
10.2 Restated Credit Agreement between Hecla
Mining Company and NationsBank, N.A. and certain
financial institutions dated May 7, 1999.
10.2(a) First Amendment to Restated Credit Agreement
between Hecla Mining Company and NationsBank,
N.A. dated June 25, 1999.
10.3 Credit Agreement between Monarch
Resources Investments Limited and Standard Bank
London Limited dated as of June 25, 1999.
10.4 Subordinated Loan Agreement between
Hecla Mining Company and Standard Bank London
Limited dated as of June 25, 1999.
10.5 NationsBank Subordination Agreement
between Hecla Mining Company, NationsBank, N.A.
and Standard Bank London Limited dated as of June
25, 1999.
12 Fixed Charge Coverage Ratio Calculation
13 Second Quarter Report to Shareholders
for the quarter ended June 30, 1999, for release
dated August 3, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated May 10, 1999,
related to the Form of Warrant Agreement between
Hecla Mining Company and Warrant Agent and Form of
Agreement to purchase common stock and warrants
between Hecla Mining Company and purchasers.
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51
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Report on Form 8-K/A dated May 12, 1999,
related to Amended Form of Warrant Agreement
between Hecla Mining Company and Warrant Agent.
Report on Form 8-K dated May 19, 1999,
related to Hecla Mining Company agreement to
acquire the assets of Monarch Resources Limited.
Report on Form 8-K dated June 25, 1999,
related to news release on purchase of the assets
of Monarch Resources Limited by Hecla Mining
Company.
Report on Form 8-K/A dated June 25, 1999,
related to purchase agreement between Hecla Mining
Company and Monarch Resources Limited dated May
17, 1999.
Items 2, 3, and 5 of Part II are omitted from this report as
inapplicable.
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52
Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HECLA MINING COMPANY
----------------------------------
(Registrant)
Date: August 12, 1999 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: August 12, 1999 By /s/ Lewis E. Walde
--------------------------------
Lewis E. Walde,
Assistant Controller
(Chief Accounting Officer)
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53
EXHIBIT INDEX
Exhibit
No. Description
- -------- ----------------------
10.1 Purchase Agreement between Monarch
Resources Limited and Hecla Mining Company dated
May 17, 1999 (incorporated by reference as
Exhibit 4.1 in the Form 8-K/A for the event dated
June 25, 1999).
10.2 Restated Credit Agreement between Hecla
Mining Company and NationsBank, N.A. and certain
financial institutions dated May 7, 1999.
10.2(a) First Amendment to Restated Credit Agreement
between Hecla Mining Company and NationsBank,
N.A. dated June 25, 1999.
10.3 Credit Agreement between Monarch
Resources Investments Limited and Standard Bank
London Limited dated as of June 25, 1999.
10.4 Subordinated Loan Agreement between
Hecla Mining Company and Standard Bank London
Limited dated as of June 25, 1999.
10.5 NationsBank Subordination Agreement
between Hecla Mining Company, NationsBank, N.A.
and Standard Bank London Limited dated as of June
25, 1999.
12 Fixed Charge Coverage Ratio Calculation
13 Second Quarter Report to Shareholders
for the quarter ended June 30, 1999, for release
dated August 3, 1999
27 Financial Data Schedule
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