1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes XX . No .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding October 29, 1999
- -------------------------- ----------------------------
Common stock, par value 66,780,964 shares
$0.25 per share
2
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 1999
I N D E X*
Page
PART I. - Financial Information
Item l - Consolidated Balance Sheets - September 30,
1999 and December 31, 1998 3
- Consolidated Statements of Operations and
Comprehensive Loss - Three Months and Nine
Months Ended September 30, 1999 and 1998 4
- Consolidated Statements of Cash Flows - Nine
Months Ended September 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 18
PART II. - Other Information
Item 1 - Legal Proceedings 39
Item 6 - Exhibits and Reports on Form 8-K 42
*Items omitted are not applicable.
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Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,099 $ 2,480
Accounts and notes receivable 32,102 25,919
Income tax refund receivable 8 1,087
Inventories 22,075 22,757
Other current assets 2,768 1,251
---------- ----------
Total current assets 63,052 53,494
Investments 2,199 3,406
Restricted investments 5,962 6,331
Properties, plants and equipment, net 194,194 178,168
Other noncurrent assets 9,968 10,663
---------- ----------
Total assets $ 275,375 $ 252,062
========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 11,106 $ 12,172
Accrued payroll and related benefits 4,492 2,852
Preferred stock dividends payable 2,013 2,012
Accrued taxes 2,509 772
Accrued reclamation and closure costs 8,447 6,537
---------- ----------
Total current liabilities 28,567 24,345
Deferred income taxes 300 300
Long-term debt 51,855 42,923
Accrued reclamation and closure costs 43,131 23,216
Other noncurrent liabilities 10,266 9,542
---------- ----------
Total liabilities 134,119 100,326
---------- ----------
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 - 66,843,075; issued 1998 - 55,166,728 16,711 13,792
Capital surplus 400,186 374,017
Accumulated deficit (269,697) (230,493)
Accumulated other comprehensive loss (5,133) (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 141,256 151,736
---------- ----------
Total liabilities and shareholders' equity $ 275,375 $ 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 Loss (Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998
------------- ------------- ------------- -------------
Sales of products $ 38,305 $ 38,611 $ 126,021 $ 124,395
--------- --------- --------- ---------
Cost of sales and other direct production costs 30,281 29,904 96,708 96,918
Depreciation, depletion and amortization 5,404 5,678 17,348 15,852
--------- --------- --------- ---------
35,685 35,582 114,056 112,770
--------- --------- --------- ---------
Gross profit 2,620 3,029 11,965 11,625
--------- --------- --------- ---------
Other operating expenses:
General and administrative 1,835 1,669 5,648 5,946
Exploration 1,739 1,396 3,919 3,348
Depreciation and amortization 75 100 248 293
Provision for closed operations and
environmental matters 27,923 332 28,533 463
Reduction in carrying value of mining properties 4,077 - - 4,077 - -
--------- --------- --------- ---------
35,649 3,497 42,425 10,050
--------- --------- --------- ---------
Income (loss) from operations (33,029) (468) (30,460) 1,575
--------- --------- --------- ---------
Other income (expense):
Interest and other income 772 744 3,291 4,681
Miscellaneous expense (349) (536) (1,180) (1,187)
Gain (loss) on investments (96) 53 (96) 1,294
Interest expense:
Total interest cost (1,234) (802) (3,116) (2,407)
Less amount capitalized 19 362 19 950
--------- --------- --------- ---------
(888) (179) (1,082) 3,331
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (33,917) (647) (31,542) 4,906
Income tax benefit (provision) (85) 6 (239) 296
--------- --------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle (34,002) (641) (31,781) 5,202
Cumulative effect of change in accounting principle,
net of income tax - - - - (1,385) - -
--------- --------- --------- ---------
Net income (loss) (34,002) (641) (33,166) 5,202
Preferred stock dividends (2,013) (2,013) (6,038) (6,038)
--------- --------- --------- ---------
Loss applicable to common shareholders (36,015) (2,654) (39,204) (836)
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities - - (139) 40 (97)
Reclassification adjustment for loss (gain)
included in net income (loss) 96 (62) 96 (62)
--------- --------- --------- ---------
Other comprehensive income (loss) 96 (201) 136 (159)
--------- --------- --------- ---------
Comprehensive loss applicable to common
shareholders $ (35,919) $ (2,855) $ (39,068) $ (995)
========= ========= ========= =========
Basic and diluted loss per common share before
cumulative effect of change in
accounting principle $ (0.54) $ (0.05) $ (0.62) $ (0.02)
Cumulative effect of change in accounting
principle - - - - (0.02) - -
--------- --------- --------- ---------
Basic and diluted loss per common share $ (0.54) $ (0.05) $ (0.64) $ (0.02)
========= ========= ========= =========
Cash dividends per common share $ - - $ - - $ - - $ - -
========= ========= ========= =========
Weighted average number of common shares
outstanding 66,716 55,105 60,868 55,100
========= ========= ========= =========
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)
Nine Months Ended
-----------------------------
Sept 30, 1999 Sept 30, 1998
------------- -------------
Operating activities:
Net income (loss) $ (33,166) $ 5,202
Noncash elements included in net income (loss):
Depreciation, depletion and amortization 17,596 16,145
Cumulative effect of change in accounting principle 1,385 - -
Gain on disposition of properties, plants and equipment (1,548) (2,259)
Loss (gain) on sale of investments 96 (1,294)
Reduction in carrying value of mining properties 4,077 - -
Provision for reclamation and closure costs 28,049 436
Change in assets and liabilities net of effects from
purchase of Monarch Resources Investments Limited:
Accounts and notes receivable (5,199) (6,219)
Income tax refund receivable 1,079 (294)
Inventories 1,466 (1,572)
Other current and noncurrent assets (2,336) (2,068)
Accounts payable and accrued expenses (5,874) (360)
Accrued payroll and related benefits 1,640 872
Accrued taxes 1,737 15
Accrued reclamation and closure costs and other
noncurrent liabilities (5,590) (7,271)
--------- ---------
Net cash provided by operating activities 3,412 4,477
--------- ---------
Investing activities:
Purchase of Monarch Resources Investments Limited,
net of cash acquired (9,183) - -
Additions to properties, plants and equipment (9,512) (17,263)
Proceeds from disposition of properties, plants and equipment 1,991 3,548
Proceeds from the sale of investments 311 1,294
Decrease in restricted investments 369 865
Purchase of investments and change in cash surrender value
of life insurance, net 11 (768)
Other, net 325 (125)
--------- ---------
Net cash used by investing activities (15,688) (12,199)
--------- ---------
Financing activities:
Common stock issued under stock and stock option plans 20 54
Issuance of common stock, net of offering costs 12,104 - -
Preferred stock dividends (6,038) (6,038)
Borrowings against cash surrender value of life insurance 925 - -
Borrowings on long-term debt 45,536 33,000
Repayments on long-term debt (36,652) (19,003)
--------- ---------
Net cash provided by financing activities 15,895 8,013
--------- ---------
Net increase in cash and cash equivalents 3,619 291
Cash and cash equivalents at beginning of period 2,480 3,794
--------- ---------
Cash and cash equivalents at end of period $ 6,099 $ 4,085
========= =========
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 is amortized on a units-
of-production basis over the La Camorra mine life.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 4.
The components of the income tax provision (benefit) for the nine months
ended September 30, 1999 and 1998 were as follows (in thousands):
1999 1998
------ ------
Current:
State income taxes $ 204 $ 184
Federal income taxes 2 (529)
Foreign income taxes 33 49
------ ------
Total $ 239 $ (296)
====== ======
Hecla's income tax provision (benefit) for the first nine months of 1999
and 1998 varies from the amount that would have been provided by applying the
statutory rate to the income (loss) before income taxes primarily due to the
inability to use tax losses in 1999 and the availability of net operating losses
in 1998.
Note 5.
Inventories consist of the following (in thousands):
Sept. 30, Dec. 31,
1999 1998
-------- --------
Concentrates, bullion, metals
in transit and other products $ 5,102 $ 3,879
Industrial mineral products 7,281 10,240
Materials and supplies 9,692 8,638
-------- --------
$ 22,075 $ 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 statement of operations for
the nine months ended September 30, 1999.
Note 7.
In the third quarter of 1999, Hecla recorded adjustments totaling $31.5
million for future environmental and reclamation expenditures and asset write-
downs. This total includes an accrual for reclamation and other closure costs
of $27.3 million for future anticipated expenditures at the Grouse Creek
property and the Bunker Hill Superfund site. The Grouse Creek mine has been on
a care-and-maintenance status since the second quarter of 1997 following
completion of mining in the Sunbeam pit. The accrual adjustment at Grouse Creek
is based upon anticipated changes to the closure plan developed in the third
quarter of 1999, including increased dewatering requirements and other
expenditures. The changes to the reclamation plan at Grouse Creek were
necessitated principally by the need to dewater the tailings impoundment rather
than reclaim it as a wetland as originally planned. Hecla is currently working
with federal and state regulators on the development of an effective plan for
dewatering of the tailings impoundment. At the Bunker Hill Superfund site,
estimated future costs were increased based upon results of sampling activities
completed through 1999 and current cost estimates to remediate residential yards
and commercial properties. Although Hecla has updated its current cost
estimates for the Grouse Creek and Bunker Hill sites, Hecla will continue to
reassess its obligations as new information is developed. Depending on the
results of any reassessment, it is reasonably possible that Hecla's estimate of
its obligations may change in the near term.
Asset write-downs during the third quarter totaled $4.2 million,
principally for an adjustment to the carrying value of MWCA. Hecla has received
letters of intent for the purchase of both the aggregate and bark divisions of
MWCA, which if completed, are expected to close during the fourth quarter of
1999. The adjustment to the carrying value of MWCA was recorded to reflect the
book value in excess of the expected sales price for MWCA.
Note 8. Contingencies
- - Bunker Hill Superfund Site
In 1994, Hecla, as a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 September 30, 1999, Hecla has estimated and accrued an
allowance for liability for remedial activity costs at the Bunker Hill site of
$7.7 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 will reassess its
obligations under the consent decree as new information is developed. Depending
on the results of any 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. 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.
- - 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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.
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.
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' natural resources damage claims 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. On September 30, 1999, the court
issued an order on one of the defendant's challenge to the constitutionality of
the retroactive application of liability under CERCLA. Although the court held
that the statute did not facially violate the due process or taking clauses of
the U.S. Constitution, the court also stated that the constitutionality of
retroactive application of liability to the defendants in this case cannot be
resolved at this stage of litigation as genuine issues of material fact exist
and liability has not been established.
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 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 September 30,
1999, Hecla had not reduced its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance proceeds.
Other Claims
In 1997, Hecla's subsidiary, Kentucky-Tennessee Clay, terminated shipments
of 1% of annual ball clay 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. On September 22, 1999, Riceland Foods (the primary purchaser
of ball clay from K-T Clay used in animal feed) commenced litigation against K-T
Clay in State Court in Arkansas to recover their losses and their insurance
company's payments to downstream users of their animal feed. The complaint
alleges negligence, strict liability and breach of implied warrants. Legal
counsel retained by the insurance company for K-T Clay will seek removal of the
case to Federal Court in Arkansas and has answered the compliant denying
liability. 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.
On October 22, 1998, Hecla, certain affiliates, and contractors were served
with a lawsuit filed in Superior Court of Kern County, California. The
complaint pertains to the prior operations at the now shut-down Cactus Gold mine
located near Mojave, California. The 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 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. One carrier has agreed to provide a partial defense of the
litigation costs. 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 information obtained from the plaintiffs in early
discovery in the litigation, Hecla believes the allegations
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
are without merit. In addition, legal counsel for plaintiffs have filed
voluntary dismissals on behalf of a portion of the plaintiffs named in the
litigation.
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 Hecla. 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 9.
At September 30, 1999, there was $28.5 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 remains 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 September 30, 1999. Hecla also
has outstanding $9.8 million aggregate principal amount of tax-exempt, solid
waste disposal revenue bonds as of September 30, 1999. The amount available to
borrow under the bank agreement is reduced by the $9.8 million principal amount
of these bonds. At September 30, 1999, Hecla had the ability to borrow an
additional $16.7 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 September 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 September 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 10.
The following table presents a reconciliation of the numerators (net income
(loss)) and denominators (shares) used in the basic and diluted loss per common
share computations. Also shown is the effect that has been given to preferred
stock dividends in arriving at loss applicable to common shareholders for the
three and nine months ended September 30, 1999 and 1998 in computing basic and
diluted loss per common share (dollars and shares in thousands, except per-share
amounts).
Three Months Ended September 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
Net Per-Share Net Per-Share
Loss Shares Amount Loss Shares Amount
--------- ------ --------- --------- ------ ---------
Net loss before preferred stock
dividends $ (34,002) $ (641)
Less: Preferred
stock dividends (2,013) (2,013)
--------- --------
Basic loss applicable to
common shareholders (36,015) 66,716 $ (0.54) (2,654) 55,105 $ (0.05)
Effect of dilutive
securities - - - - - - - - - - - -
--------- ------ ------- -------- ------ -------
Diluted loss applicable
to common shareholders $ (36,015) 66,716 $ (0.54) $ (2,654) 55,105 $ (0.05)
========= ====== ======= ======== ====== =======
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Three Months Ended September 30,
--------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Net Per-Share Net Per-Share
Loss Shares Amount Income (loss) Shares Amount
--------- ------ --------- ------------- ------ ---------
Net income (loss) before
preferred stock dividends $ (33,166) $ 5,202
Less: Preferred
stock dividends (6,038) (6,038)
--------- --------
Basic loss applicable
to common shareholders (39,204) 60,868 $ (0.64) (836) 55,100 $ (0.02)
Effect of dilutive
securities - - - - - - - - - - - -
--------- ------ ------- -------- ------ -------
Diluted loss applicable
to common shareholders $ (39,204) 60,868 $ (0.64) $ (836) 55,100 $ (0.02)
========= ====== ======= ======== ====== =======
These calculations of diluted earnings per share for the three months and
nine months ended September 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 September 30, 1999 and 1998,
as their exercise would be antidilutive, as follows:
Three Months Ended Nine Months Ended
---------------------- ----------------------
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
2,316,000 1,656,000 2,316,000 1,656,000
The calculations of diluted earnings per share for the three and nine
months ended September 30, 1999, also exclude 1,506,998 warrants to purchase
common stock, as their exercise would be antidilutive.
Note 11.
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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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. In September 1999, 97,000 warrants were exercised and Hecla
issued 97,000 shares of its common stock. Proceeds of $0.2 million were
realized from the exercise of the warrants. At September 30, 1999, 1,506,998
warrants remain outstanding. 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 from the equity offerings for general corporate purposes including
repayment of indebtedness under the existing $55.0 million bank credit
agreement.
Note 12.
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 September
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 loss per share.
Note 13.
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 the call options. During
the third quarter of 1999, Hecla sold call options for 300,000 ounces of silver
through June 30, 2000, at an average strike price of $5.50. Hecla received a
premium of $99,000 for the sale of 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
adjustment at the end of each reporting period for the change in the fair value
of the remaining outstanding option contracts. During the first nine months of
1999, Hecla recognized $281,000 of revenue from these call options based upon
expired contracts and a mark to market adjustment as of September 30, 1999.
During the third quarter of 1999, Hecla recognized $24,000 of revenue from these
call options based upon expired contracts and a mark to market adjustment as of
September 30, 1999.
Note 14.
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.
The following tables present information about reportable segments for the
three months and nine months ended September 30 (in thousands):
Three Months Ended Nine Months Ended
--------------------- ----------------------
September 30, September 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
Net sales to unaffiliated customers:
Metals-Gold $ 3,913 $ 7,150 $ 15,904 $ 24,780
Metals-Silver 13,384 11,454 37,743 31,490
Industrial Minerals 21,008 20,007 72,374 68,125
--------- --------- --------- ---------
$ 38,305 $ 38,611 $ 126,021 $ 124,395
========= ========= ========= =========
Three Months Ended Nine Months Ended
--------------------- ----------------------
September 30, September 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
Income (loss) from operations:
Metals-Gold $ (3,308) $ (459) $ (4,483) $ 1,455
Metals-Silver 1,075 513 2,734 435
Industrial Minerals (788) 1,579 5,893 6,387
Other (30,008) (2,101) (34,604) (6,702)
--------- --------- --------- ---------
$ (33,029) $ (468) $ (30,460) $ 1,575
========= ========= ========= =========
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The table below presents identifiable assets by reportable segment as of
September 30, 1999, and December 31, 1998 (in thousands):
September 30, December 31,
1999 1998
------------ -----------
Identifiable assets:
Metals-Gold(1) $ 58,250 $ 23,808
Metals-Silver 124,984 127,499
Industrial Minerals 67,183 71,593
Other 24,958 29,162
-------- --------
$275,375 $252,062
======== ========
(1) Includes assets of La Camorra mine acquired June 25, 1999.
Note 15.
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.
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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 56% of total revenue
during the first nine 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).
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.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
In the third quarter of 1999, Hecla recorded adjustments totaling $31.5
million for future environmental and reclamation expenditures and asset write-
downs. This total includes an accrual for reclamation and other closure costs
of $27.3 million for future anticipated expenditures at the Grouse Creek
property and the Bunker Hill Superfund site. The Grouse Creek mine has been on
a care-and-maintenance status since the second quarter of 1997 following
completion of mining in the Sunbeam pit. The accrual adjustment at Grouse Creek
is based upon anticipated changes to the closure plan developed in the third
quarter of 1999, including increased dewatering requirements and other
expenditures. The changes to the reclamation plan at Grouse Creek were
necessitated principally by the need to dewater the tailings impoundment rather
than reclaim it as a wetland as originally planned. Hecla is currently working
with federal and state regulators on the development of an effective plan for
dewatering of the tailings impoundment. At the Bunker Hill Superfund site,
estimated future costs were increased based upon results of sampling activities
completed through 1999 and current cost estimates to remediate residential yards
and commercial properties.
Included in the $31.5 million third quarter 1999 adjustments were asset
write-downs totaling $4.2 million, principally for an adjustment to the carrying
value of MWCA. Hecla has received letters of intent for the purchase of both
the aggregate and bark divisions of MWCA, which if completed, are expected to
close during the fourth quarter of 1999. The adjustment to the carrying value
of MWCA was recorded to reflect the book value in excess of the expected sales
price for MWCA.
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. Following the acquisition,
Hecla temporarily suspended production at the La Camorra mine to construct a new
tailings impoundment and to perform additional mine development. Production at
La Camorra resumed in October 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
September 30, 1999. In addition, $3.0 million was borrowed under a subordinate
note to fund the acquisition.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
During the first nine months of 1999, Hecla produced approximately 76,000
ounces of gold compared to approximately 95,000 ounces of gold production in the
first nine months of 1998. The following table displays the actual gold
production (in ounces) by operation for the nine months ended September 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:
Actual Actual Projected Actual
Sept. 30, Sept. 30, Dec. 31, Dec. 31,
Operation 1999 1998 1999 1998
- --------- --------- --------- --------------- --------
Rosebud 46,000 51,000 54,000-56,000 65,000
Greens Creek 19,000 13,000 22,000-24,000 18,000
La Camorra (1) - - - - 17,000-19,000 - -
La Choya (2) 10,000 29,000 12,000 40,000
Other sources 1,000 2,000 1,000 4,000
-------- -------- --------------- --------
Totals 76,000 95,000 106,000-112,000 127,000
======== ======== =============== ========
(1) Production resumed in October 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 nine months of 1999, Hecla produced approximately 5.7 million
ounces of silver compared to approximately 5.4 million ounces in the first nine
months of 1998. The following table displays the actual silver production (in
ounces) by operation for the nine months ended September 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
Sept. 30, Sept, 30, Dec. 31, Dec. 31,
Operation 1999 1998 1999 1998
- --------- --------- --------- ------------- --------
Lucky Friday 3,343 2,969 4,350-4,500 4,137
Greens Creek 2,247 2,163 2,750-2,900 2,824
Rosebud 104 214 110-120 278
Other sources 1 5 - - 6
-------- -------- ------------- --------
Totals 5,695 5,351 7,210-7,520 7,245
======== ======== ============= ========
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 1,095,000 tons. During the first nine months of 1999, Hecla
shipped approximately 68,000 tons of specialty aggregates from the Colorado
Aggregate division of our subsidiary MWCA, and approximately 985,000 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 has signed letters of intent for the purchase of both the
Colorado Aggregate and Mountain West Products divisions of MWCA. Based on the
estimated sales price for the two divisions of MWCA, Hecla recorded a third
quarter adjustment totaling $3.9 million to reflect the book value of MWCA in
excess of the anticipated sales price. Hecla anticipates closing on the sales
transactions in the fourth quarter of 1999, although there can be no assurance
that Hecla will be successful.
Results of Operations
First Nine Months 1999 Compared to First Nine Months 1998
Hecla recorded a loss, before the cumulative effect of a change in
accounting principle and preferred stock dividend, of approximately $31.8
million, or $0.52 per common share, in the first nine months of 1999 compared to
net income of approximately $5.2 million, or $0.09 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 $6.0 million in dividends to holders of Hecla's Series B
cumulative convertible preferred stock, Hecla's loss applicable to common
shareholders for the first nine months of 1999 was approximately $39.2 million,
or $0.64 per common share, compared to a loss of $0.8 million, or $0.02 per
common share, in the comparable 1998 period. The increased loss in 1999
compared to the same period in 1998 was due to a variety of factors, the most
significant of which were 1999 environmental and reclamation accruals totaling
$27.3 million for future environmental and reclamation expenditures at the
Grouse Creek mine and the Bunker Hill Superfund site; and asset write-downs
totaling $4.2 million, principally for the write-down of MWCA.
Interest expense, net of amounts capitalized, increased $1.6 million in the
first nine months of 1999 as compared to the same period in 1998. The increase
was the result of decreased capitalized interest of $0.9 million, associated
with the Lucky Friday expansion project in 1998, increased interest expense
under Hecla's revolving bank loan ($0.4 million), as a result of higher
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
borrowings, and interest and fees associated with project financing and
subordinated debt utilized for the acquisition of Monarch ($0.3 million), in the
1999 period.
Depreciation, depletion, and amortization increased $1.5 million, or 9%,
from the first nine months of 1998 to the first nine months of 1999 principally
due to:
- increased depreciation at the La Choya mine ($1.1 million), the
result of depreciating costs associated with the La Choya pit
expansion completed in 1998,
- increased depreciation at the Lucky Friday mine ($0.6 million)
due to increased production in the 1999 period,
- increased depreciation at the Greens Creek mine ($0.5 million)
due to increased production in the 1999 period, and
- decreased depreciation at the Rosebud mine ($0.5 million) due to
decreased gold production.
Interest and other income decreased approximately $1.4 million, from $4.7
million in the 1998 period to $3.3 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.
Gain on investments decreased $1.4 million primarily as a result of the
sale of Metaline Contact Mine stock in 1998 which was nonrecurring 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 the application of Statement of Position No. 98-5, "Accounting for
Start-up Activities."
Exploration expense increased $0.6 million, or 17%, during the first nine
months of 1999 as compared to the same period of 1998 principally due to
increased expenditures in Mexico ($0.6 million) and at the Cacique property in
Chile ($0.4 million). These increases were partly offset by decreased
expenditures at other South American targets ($0.4 million).
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Income tax expense increased $0.5 million from a benefit of $0.3 million in
the first nine 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
$0.2 million from the first nine months of 1998 to the comparable 1999 period
primarily due to:
- decreased cost of sales at the La Choya mine ($3.5 million) due
to the completion of mining in December 1998,
- decreased cost of sales at the Rosebud mine ($0.9 million) due to
decreased tons mined and milled,
- 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 Greens Creek mine ($0.4 million)
principally due to the timing of concentrate shipments,
- increased cost of sales at the La Camorra mine ($0.9) in 1999 as
a result of Hecla's purchase of La Camorra in June 1999,
- increased cost of sales at the industrial minerals segment ($1.3
million, or 2%) associated with increased sales of $4.2 million,
or 6%, and
- increased cost of sales at the Lucky Friday mine ($3.0 million,
or 23%) due to a 28% increase in tons milled.
Cost of sales and other direct production costs as a percentage of sales
from products decreased from 77.9% in the first nine months of 1998 to 76.7% 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.
General and administrative expense decreased $0.3 million, or 5%, in the
first nine months of 1999 from the comparable period in 1998. The decrease was
principally a result of cost-cutting measures.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Sales of products increased by approximately $1.6 million, or 1%, in the
first nine months of 1999 as compared to the same period in 1998 primarily due
to:
- increased sales totaling approximately $6.3 million from silver
operations primarily as a result of increased production and
shipments,
- increased sales totaling approximately $4.2 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 $8.9 million from gold operations principally
a result of completion of mining operations at the La Choya mine
in December 1998, lower gold production in 1999 at the Rosebud
mine and the impacts of a lower realized gold price in the 1999
period.
The following table compares the average metal prices for the first nine
months of 1999 with the comparable 1998 period:
Metal 1999 1998 $ Change % Change
----------------------------- ------- ------- ---------- ----------
Gold-Realized ($/oz.) $ 284 $ 301 $ (17) (6)%
Gold-London Final ($/oz.) 273 294 (21) (7)
Silver-Handy & Harman ($/oz.) 5.24 5.73 (0.49) (9)
Lead-LME Cash (cents/pound) 0.231 0.245 (0.014) (6)
Zinc-LME Cash (cents/pound) 0.475 0.475 - - - -
Cash operating and total cash cost per gold ounce increased from $173 and
$185 for the first nine months of 1998 to $177 and $190 for the first nine
months of 1999, respectively. The increases in the cash operating and total
cash cost per gold ounce were primarily attributable to the decrease in
production resulting from the cessation of mining at La Choya in December 1998.
Total production costs per gold ounce increased from $249 per ounce in 1998 to
$290 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
decreased from $3.88, $3.88 and $5.30 in the first nine months of 1998 to $3.66,
$3.67, and $5.21 in the first nine months of 1999, respectively. The decreases
in the cost per silver ounce were due primarily to positive impacts of increased
by-product production as well as increased silver production,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 offset
against production costs in the calculation of costs per ounce of silver.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Hecla recorded a net loss of approximately $34.0 million, or $0.51 per
common share, in the third quarter of 1999 compared to a net loss of
approximately $0.6 million, or $0.01 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 loss applicable to common shareholders for
the third quarter of 1999 was approximately $36.0 million, or $0.54 per common
share, compared to $2.7 million, or $0.05 per common share, in the comparable
1998 period. The increased loss in 1999 compared to the same period in 1998 was
due to a variety of factors, the most significant of which were 1999
environmental and reclamation accruals totaling $27.3 million for future
environmental and reclamation expenditures at the Grouse Creek mine and the
Bunker Hill Superfund site; and asset write-downs totaling $4.2 million,
principally for the write-down of MWCA.
Interest expense, net of amounts capitalized, increased $0.8 million in the
third quarter of 1999 as compared to the third quarter of 1998. The increase
was primarily the result of decreased capitalized interest of $0.3 million,
associated with the Lucky Friday expansion project in 1998, 1999 interest
expense associated with the project financing and subordinated debt used to
acquire Monarch ($0.3 million) and increased interest and fees on the revolving
credit facility ($0.1 million).
Cost of sales and other direct production costs increased approximately
$0.4 million, or 1%, from the third quarter of 1998 to the comparable 1999
period primarily due to:
- increased cost of sales at the Greens Creek mine ($1.7 million)
principally due to increased concentrate shipments in 1999,
- increased cost of sales at the La Camorra mine ($0.9) in 1999 as
a result of Hecla's purchase of La Camorra in June 1999,
- decreased cost of sales at the industrial minerals segment ($0.3
million) due to nonrecurring reorganization expenses at MWCA, and
lower operating costs at the K-T Ball Clay division resulting
from the 1998 expansion and modernization of the Gleason plant,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
- decreased cost of sales at the Rosebud mine ($0.5 million) due to
decreased tons mined and milled,
- decreased cost of sales at the Lucky Friday mine ($0.6 million)
due to decreased shipments in the 1999 period, and
- decreased cost of sales at the La Choya mine ($0.8 million) due
to completion of mining in December 1998.
Cost of sales and other direct production costs as a percentage of sales
from products increased from 77.4% in the third quarter of 1998 to 79.1% in the
comparable 1999 period. The increase was principally a result of $0.9 million
of expensed start-up costs at La Camorra in 1999.
Exploration expense increased $0.3 million, or 25%, during the third
quarter of 1999 as compared to the same period of 1998 principally due to
increased expenditures in Mexico ($0.5 million), partly offset by decreased
expenditures in South America ($0.3 million).
Sales of products decreased by approximately $0.3 million, or 1%, in the
third quarter of 1999 as compared to the same period in 1998 primarily due to:
- decreased sales of $3.2 million from gold operations principally
a result of completion of mining operations at the La Choya mine
in December 1998, and lower production and sales at the Rosebud
mine, combined with a lower gold price in the 1999 period,
- increased sales totaling approximately $1.0 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
- increased sales totaling approximately $1.9 million from silver
operations primarily as a result of increased production and
shipments.
The following table compares the average metal prices for the third quarter
of 1999 with the comparable 1998 period:
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Metal 1999 1998 $ Change % Change
----------------------------- ------- ------- ---------- ----------
Gold-Realized ($/oz.) $ 258 $ 297 $ (39) (13)%
Gold-London Final ($/oz.) 259 289 (30) (10)
Silver-Handy & Harman ($/oz.) 5.27 5.22 0.05 1
Lead-LME Cash (cents/pound) 0.228 0.242 (0.014) (6)
Zinc-LME Cash (cents/pound) 0.513 0.464 0.049 11
Depreciation, depletion, and amortization decreased $0.3 million, or 5%,
from the third quarter of 1998 to the third quarter of 1999 principally due to:
- decreased depreciation at the Rosebud mine ($0.5 million) due to
decreased gold production, and
- increased depreciation at the La Choya mine ($0.2 million), the
result of depreciating costs associated with the La Choya pit
expansion completed in 1998.
Cash operating and total cash cost per gold ounce increased from $181 and
$195 for the third quarter of 1998 to $227 and $238 for the third quarter of
1999, respectively. The increases in the cash operating and total cash cost per
gold ounce were primarily attributable to a decrease in production resulting
from the cessation of mining at the La Choya mine in December 1998. Total
production costs per gold ounce increased from $273 per ounce in 1998 to $338
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 and total cash cost per silver ounce decreased from $3.59
and $3.59 in the third quarter of 1998 to $3.55 and $3.56 in the third quarter
of 1999, respectively. The decreases in the cash operating and total cash cost
per silver ounce were due to increased by-product metal production and an
increase in the by-product zinc metal price. Total production costs per silver
ounce increased from $4.93 per ounce in 1998 to $5.08 per ounce in 1999. The
increase in the total production cost per silver ounce was attributable to
increased depreciation at the Lucky Friday mine resulting from increased ore
tons milled. Gold, lead, and zinc are by-products of Hecla's silver production,
the revenues from which are offset against production costs in the calculation
of costs per ounce of silver.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
FINANCIAL CONDITION AND LIQUIDITY
A substantial portion of the 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 Hecla's revenues and
profitability. Moreover, the discovery, development and acquisition of mineral
properties are in many instances unpredictable events. Future metals prices,
the success of exploration programs, changes in legal and regulatory
requirements, and other property transactions can have a significant impact on
the need for capital.
At September 30, 1999, assets totaled approximately $275 million and
shareholders' equity totaled approximately $141 million. Cash and cash
equivalents increased by $3.6 million to $6.1 million at September 30, 1999 from
$2.5 million at December 31, 1998.
During the first nine months of 1999, approximately $15.9 million of cash
was provided by financing activities. The major sources of cash were borrowings
of long-term debt of $45.5 million and proceeds from common stock issuances, net
of offering costs, of $12.1 million. These sources were partially offset by
uses of cash, including repayments of long-term debt of $36.7 million, and
payment of preferred stock dividends totaling $6.0 million.
Operating activities provided approximately $3.4 million of cash during the
first nine months of 1999. The primary sources of cash were from the industrial
minerals segment, the Rosebud mine, the Greens Creek mine, and the Lucky Friday
mine. Significant uses of cash included (1) a $5.9 million decrease in accounts
payable and accrued expenses principally due to decreases associated with
seasonal costs at MWCA and decreases at the La Choya mine as activity at the
mine decreased in 1999; (2) $5.6 million for reclamation activities and other
noncurrent liabilities, and (3) a $5.2 million increase in accounts and notes
receivable due to the timing of shipments and cash receipts at Greens Creek,
seasonal sales at MWCA, and increased sales at the K-T Clay group. Principal
noncash charges included a provision for reclamation and closure costs of $28.0
million, depreciation,
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
depletion, and amortization of approximately $17.6 million, a reduction in
carrying value of mining properties of $4.1 million, and the cumulative effect
of change in accounting principle of $1.4 million, partly offset by gains on
sales of properties, plants and equipment of $1.5 million.
Hecla's investing activities used $15.7 million of cash during the first
nine months of 1999. The most significant uses of cash were (1) additions to
properties, plants, and equipment totaling $9.5 million, including significant
additions at the La Camorra mine of $3.1 million, the Noche Buena project of
$2.4 million, the Greens Creek mine of $2.1 million, and the industrial minerals
segment of $1.5 million, and (2) the purchase of Monarch Resources Investments
Limited, net of cash acquired, for $9.2 million. These uses of cash were partly
offset by proceeds from disposition of properties, plants, and equipment during
the first nine months of 1999 totaling approximately $2.0 million, principally
from the sale of the corporate airplane.
During 1999, Hecla has been actively marketing for the sale of its MWCA
subsidiary. Letters of intent for the purchase of both the Colorado Aggregate
and Mountain West Products divisions have been signed and it is anticipated that
these transactions will close in the fourth quarter of 1999. Based on the
signed letters of intent and anticipated selling price, Hecla recorded a
carrying value adjustment to the assets of MWCA totaling $3.9 million in the
third quarter of 1999. There can be no assurance that Hecla will be successful
in closing the MWCA sale transactions.
Hecla estimates that minimum capital expenditures, including capitalized
interest, to be incurred during the remainder of 1999 will be approximately $4.2
million. These capital expenditures consist primarily of:
Property Expenditure
--------------------------- ------------
La Camorra $2.4 million
Greens Creek (29.7% interest) $1.0 million
Industrial minerals segment $0.6 million
Other $0.2 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
estimates for capital projects, uncertainties associated with possible
development projects, and Hecla's 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 Hecla's joint venture
partners will not default with respect to their portion of development costs and
capital expenditures.
During the first nine 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
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
nine months 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. In September 1999, 97,000 warrants
were exercised and Hecla issued 97,000 shares of its common stock. Proceeds of
$0.2 million were realized from the exercise of the warrants. At September 30,
1999, 1,506,998 warrants remain outstanding. 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 September 30, 1999, there was $28.5 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 remains at $55.0 million, subject to
certain limitations. On June 25, 1999, Hecla entered into a first amendment to
the bank
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 September 30, 1999. Hecla also has
outstanding $9.8 million aggregate principal amount of tax-exempt, solid waste
disposal revenue bonds as of September 30, 1999. The amount available to borrow
under the bank agreement is reduced by the $9.8 million principal amount of
these bonds. At September 30, 1999, Hecla had the ability to borrow an
additional $16.7 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 September 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 September 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 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 $0.7 to $1.2 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 during the
fourth quarter of 1999 are expected to be approximately $4.0 to $5.0 million,
principally for environmental and reclamation activities at the Grouse Creek
mine, Bunker Hill Superfund site, the Coeur d'Alene River Basin, and the Cactus
mine. There can be no assurances that actual environmental and reclamation
expenditures will be as projected.
Reserves for closure costs, reclamation and environmental matters totaled
$51.6 million at September 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 periodically reassess its environmental and reclamation
obligations as new information is developed. Depending on the results of any
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 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 September 30, 1999, Hecla had forward sales commitments through December
31, 2004 for 311,045 ounces of gold at an average price of $288 per ounce. Of
the gold forward sales commitments, 306,045 were entered into as required under
Hecla's $11.0 million project financing facility for the La Camorra gold mine.
The estimated cost to close out these forward sales commitments was $11,511,000
as of September 30, 1999. The London Final gold price at September 30, 1999, was
$299 per ounce. 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
rate of 1.5% on 257,242 ounces of the aforementioned 306,045 gold forward sales,
commencing June 2000. The estimated cost to close out the Gold Lease Rate Swap
at September 30, 1999, was $2.9 million. Additionally, at September 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 per ounce. If Hecla's forward
silver sales commitments were closed on September 30, 1999, the estimated cost
to close these commitments was approximately $115,000. The Handy & Harman
silver price at September 30, 1999 was $5.61 per ounce. At September 30, 1999,
Hecla had zinc swap contracts through December 2000 for 7,500 metric tonnes of
zinc at an average price of $0.508 per pound. The estimated cost to close out
these zinc swaps was approximately $387,000 as of September 30, 1999. The LME
cash zinc price at September 30, 1999, was $0.535 per pound. Additionally at
September 30, 1999, Hecla had lead swap contracts through July 2000 for 4,500
metric tonnes of lead at an average price of $0.245 per pound. The estimated
fair value of these lead swaps was approximately $108,000 as of September 30,
1999. The LME cash lead price at September 30, 1999, was $0.228 per pound. 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 September 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
per ounce. Hecla received a premium of $460,000 for the sale of these call
options. During the third quarter of 1999, Hecla sold call options for 300,000
ounces of silver through June 30, 2000 at an average strike price of $5.50 per
ounce. Hecla received a premium of $99,000 for the sale of the call options.
Through September 30, 1999, Hecla has recognized revenue of $281,000 from
expired call option contracts and a mark to market adjustment of the call
options as of September 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 8 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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
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 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 were 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
complete.
Inventories and assessments of non-IS systems have been completed by all
thirteen teams. Remediation efforts have been implemented, where necessary.
Contingency plans have been 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.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Hecla has identified critical suppliers, as well as other essential service
providers, and has surveyed their Year 2000 compliancy. Based on expected
compliance dates expressed by some of these critical suppliers and other service
providers, continued follow-up is 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, were 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.
Contingency plans for Year 2000 related business interruptions have been
developed and 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
were 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 $111,000 has been spent as of
September 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 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.
The foregoing Year 2000 disclosures are based on Hecla's current
expectations, estimates and projections. 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
operating results and financial condition. Some factors, many of which are
outside the control of Hecla including the failure of customers, suppliers,
governmental entities and others to achieve compliance, could affect Hecla's
ability to avoid disruptions or to develop appropriate contingency plans for all
Year 2000 issues that ultimately may arise.
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 recognize 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 affect 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 September 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 Considerations" of Part I, Item 1 of Hecla's 1998 Annual Report on
Form 10-K).
Interest-Rate Risk Management
At September 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.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The following table presents principal cash flows for debt outstanding at
September 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 8.25% 8.18% 8.75% 8.96% 9.15% - -%
Revenue bonds $ - - $ - - $ - - $ - - $ - - $ 9,800 $ 9,800 $ 9,800
Average interest rate 3.85% 3.91% 4.19% 4.39% 4.55% 4.65%
Project financing debt $ - - $ 500 $ 3,000 $ 3,000 $ 3,000 $ 1,000 $ 10,500 $ 10,500
Average interest rate 8.50% 8.43% 9.00% 9.21% 9.40% 9.60%
Subordinated bank debt $ - - $ - - $ - - $ - - $ 2,000 $ 1,000 $ 3,000 $ 3,000
Average interest rate 10.00% 9.93% 10.50% 10.71% 10.90% 11.10%
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 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
September 30, 1999.
The following table provides information about Hecla's forward sales
commitments and commodity swap contracts at September 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 October 29, 1999, and December 31, 2004.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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) 27,681 52,196 62,010 60,428 59,802 48,928
Future price (per ounce) $ 284 $ 288 $ 288 $ 288 $ 288 $ 288
Contract amount (in $000's) $ 7,865 $ 15,045 $ 17,874 $ 17,418 $ 17,238 $ 14,103 $ (11,511)
Silver sales (ounces) - - 1,200,000 - - - - - - - -
Future price (per ounce) $ - - $ 5.51 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ - - $ 6,606 $ - - $ - - $ - - $ - - $ (115)
Swap contracts:
Zinc (tonnes) 1,500 6,000 - - - - - - - -
Future price (per pound) $ 0.500 $ 0.510 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 1,654 $ 6,743 $ - - $ - - $ - - $ - - $ (387)
Lead (tonnes) 1,500 3,000 - - - - - - - -
Future price (per pound) $ 0.245 $ 0.245 $ - - $ - - $ - - $ - -
Contract amount (in $000's) $ 810 $ 1,620 $ - - $ - - $ - - $ - - $ 108
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
September 30, 1999 was $2,867,000.
Trading
During the first nine months of 1999, Hecla sold call options for 1,650,000
ounces of silver through June 30, 2000, at an average strike price of $5.36.
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 September 30, 1999, Hecla has recognized revenue
of $281,000 from expired call option contracts and a mark to market adjustment.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The following table provides information about Hecla's silver call options
at September 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 October 30, 1999, and June 30, 2000.
Expected Estimated Estimated Estimated
Maturity Fair Maturity Fair
1999 Value 2000 Value
-------- --------- --------- ----------
Sold call options:
Silver calls (ounces) 450,000 300,000
Weighted average strike price (per ounce) $ 5.33 $ 5.50
Contract amount (in $000's) $ 2,400 $ (12) $ 1,650 $ (13)
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Part II - Other Information
Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
- - Bunker Hill Superfund Site
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
September 30, 1999, Hecla has estimated and accrued an allowance for liability
for remedial activity costs at the Bunker Hill site of $7.7 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 will reassess its obligations under the
consent decree as new information is developed. Depending on the results of any
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. 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.
- - 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
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Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
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.
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.
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' natural resources damage claims 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. On September 30, 1999, the court
issued an order on one of the defendant's challenge to the constitutionality of
the retroactive application of liability under CERCLA. Although the court held
that the statute did not facially violate the due process or taking clauses of
the U.S. Constitution, the court also stated that the constitutionality of
retroactive application of liability to the defendants in this case cannot be
resolved at this stage of litigation as genuine issues of material fact exist
and liability has not been established.
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
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Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
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 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 September
30, 1999, Hecla had not reduced its accrual for reclamation and closure costs to
reflect the receipt of any anticipated insurance proceeds.
Other Claims
In 1997, Hecla's subsidiary, Kentucky-Tennessee Clay, terminated shipments
of 1% of annual ball clay 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. On September 22, 1999, Riceland Foods (the primary purchaser
of ball clay from K-T Clay used in animal feed) commenced litigation against K-T
Clay in State Court in Arkansas to recover their losses and their insurance
company's payments to downstream users of their animal feed. The complaint
alleges negligence, strict liability and breach of implied warrants. Legal
counsel retained by the insurance company for K-T Clay will seek removal of the
case to Federal Court in Arkansas and has answered the compliant denying
liability. 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.
On October 22, 1998, Hecla, certain affiliates, and contractors were served
with a lawsuit filed in Superior Court of Kern County, California. The
complaint pertains to the prior operations at the now shut-down Cactus Gold mine
located near Mojave, California. The 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
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Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
plaintiffs. The plaintiffs seek monetary damages 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. One carrier has agreed to provide
a partial defense of the litigation costs. 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 information obtained from
the plaintiffs in early discovery in the litigation, Hecla believes the
allegations are without merit. In addition, legal counsel for plaintiffs have
filed voluntary dismissals on behalf of a portion of the plaintiffs named in the
litigation.
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 Hecla. 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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Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 - Fixed Charge Coverage Ratio Calculation
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
Items 2, 3, 4, and 5 of Part II are omitted from this report as inapplicable.
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Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HECLA MINING COMPANY
-----------------------------------
(Registrant)
Date: November 10, 1999 By /s/ Arthur Brown
---------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: November 10, 1999 By /s/ Lewis E. Walde
---------------------------------
Lewis E. Walde,
Assistant Controller
(Chief Accounting Officer)
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Exhibit Index
Exhibit
No. Description
- -------- --------------
12 Fixed Charge Coverage Ratio Calculation
27 Financial Data Schedule
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