UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission file number 1-8491
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HECLA MINING COMPANY
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 82-0126240
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6500 N. Mineral Drive, Suite 200
Coeur d'Alene, Idaho 83815-9408
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(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 .
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes XX . No .
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding April 30, 2004
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Common stock, par value 118,266,211
$0.25 per share
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended March 31, 2004
I N D E X*
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Page
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PART I. - Financial Information
Item l - Financial Statements (unaudited)
- Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 3
- Consolidated Statements of Operations and
Comprehensive Income - Three Months Ended
March 31, 2004 and 2003 4
- Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 40
Item 4 - Controls and Procedures 42
PART II. - Other Information
Item 1 - Legal Proceedings 43
Item 2 - Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 43
Item 3 - Defaults Upon Senior Securities 43
Item 6 - Exhibits and Reports on Form 8-K 44
*Certain items are omitted, as they are not applicable.
Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In thousands, except share data)
March 31, December 31,
2004 2003
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ASSETS
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Current assets:
Cash and cash equivalents $ 94,431 $ 105,387
Short-term investments 25,455 18,003
Accounts and notes receivable 19,591 16,318
Inventories 18,092 16,936
Deferred income taxes 1,605 1,427
Other current assets 5,335 3,174
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Total current assets 164,509 161,245
Investments 1,281 722
Restricted cash and investments 9,766 6,447
Properties, plants and equipment, net 95,582 95,315
Deferred income taxes -- 896
Other noncurrent assets 13,874 13,570
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Total assets $ 285,012 $ 278,195
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LIABILITIES
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Current liabilities:
Accounts payable and accrued expenses $ 11,942 $ 13,847
Accrued payroll and related benefits 6,772 7,307
Current portion of debt 3,257 2,332
Accrued taxes 2,754 3,193
Current portion of accrued reclamation and closure costs 7,800 7,400
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Total current liabilities 32,525 34,079
Long-term debt 2,098 2,341
Accrued reclamation and closure costs 62,676 63,232
Other noncurrent liabilities 7,121 7,114
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Total liabilities 104,420 106,766
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SHAREHOLDERS' EQUITY
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Preferred stock, $0.25 par value, authorized 5,000,000 shares;
issued 2004 - 157,816 shares and 2003 - 464,777 shares,
liquidation preference 2004 - $9,962 and 2003 - $28,932 39 116
Common stock, $0.25 par value, authorized 200,000,000 shares;
issued 2004 - 118,266,211 shares and
issued 2003 - 115,543,695 shares 29,554 28,886
Capital surplus 507,030 504,858
Accumulated deficit (355,380) (361,560)
Accumulated other comprehensive loss (533) (753)
Less treasury stock, at cost; 2004 and 2003 - 8,274 common shares (118) (118)
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Total shareholders' equity 180,592 171,429
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Total liabilities and shareholders' equity $ 285,012 $ 278,195
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The accompanying notes are an integral part
of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(in thousands, except for share data)
Three Months Ended
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March 31, March 31,
2004 2003
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Sales of products $ 36,650 $ 26,441
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Cost of sales and other direct production costs 16,848 14,583
Depreciation, depletion and amortization 6,393 4,903
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23,241 19,486
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Gross profit 13,409 6,955
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Other operating expenses:
General and administrative 1,779 2,039
Exploration 2,414 1,782
Pre-development expense 296 351
Depreciation and amortization 75 29
Other operating expense (income) 1,210 (3,828)
Provision for closed operations and environmental matters 778 80
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6,552 453
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Income from operations 6,857 6,502
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Interest income (expense):
Interest income 387 279
Interest expense (198) (359)
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189 (80)
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Income from operations, before income taxes and cumulative
effect of change in accounting principle 7,046 6,422
Income tax provision (866) (759)
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Income from operations before cumulative effect of change in
accounting principle 6,180 5,663
Cumulative effect of change in accounting principle, net of income tax -- 1,072
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Net income 6,180 6,735
Preferred stock dividends (11,188) (659)
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Income (loss) applicable to common shareholders $ (5,008) $ 6,076
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Net income $ 6,180 $ 6,735
Unrealized holding gains on securities 212 50
Other 8 9
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Comprehensive income $ 6,400 $ 6,794
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Basic and diluted income (loss) per common share:
Income (loss) from operations after preferred stock dividends $ (0.04) $ 0.05
Cumulative effect of change in accounting principle -- 0.01
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Basic and diluted income (loss) per common share $ (0.04) $ 0.06
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Basic weighted average number of common shares outstanding 117,318 109,320
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Diluted weighted average number of common shares outstanding 117,318 110,209
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The accompanying notes are an integral part
of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three Months Ended
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March 31, March 31,
2004 2003
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Operating activities:
Net income $ 6,180 $ 6,735
Non-cash elements included in net income:
Depreciation, depletion and amortization 6,468 4,932
Cumulative effect of change in accounting principle -- (1,072)
Gain on disposition of properties, plants and equipment (24) (209)
Provision for reclamation and closure costs 568 234
Change in deferred income taxes 718 675
Stock compensation 767 --
Change in assets and liabilities:
Accounts and notes receivable (3,273) 264
Inventories (1,156) (917)
Other current and noncurrent assets (2,465) (415)
Accounts payable and accrued expenses (1,405) (2,476)
Accrued payroll and related benefits (344) (2,535)
Accrued taxes (439) (276)
Accrued reclamation and closure costs and other noncurrent liabilities (686) (190)
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Net cash provided by operating activities 4,909 4,750
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Investing activities:
Purchases of short-term investments (12,752) --
Maturities of short-term investments 5,300 --
Additions to properties, plants and equipment (6,796) (2,027)
Proceeds from disposition of properties, plants and equipment 55 325
Increase in restricted investments (3,666) (1,377)
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Net cash used by investing activities (17,859) (3,079)
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Financing activities:
Common stock issued under stock option plans 1,312 41
Common stock issued, net of offering costs -- 91,287
Borrowings on debt 2,396 1,350
Repayments on debt (1,714) (337)
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Net cash provided by financing activities 1,994 92,341
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Change in cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents (10,956) 94,012
Cash and cash equivalents at beginning of period 105,387 19,542
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Cash and cash equivalents at end of period $ 94,431 $ 113,554
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See Note 9 for supplemental disclosure of non-cash financing activities.
The accompanying notes are an integral part
of the consolidated financial statements.
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NOTE 1. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
balance sheets, consolidated statements of operations and comprehensive income,
consolidated statements of cash flows and notes to consolidated financial
statements contain all adjustments, consisting only of normal recurring items,
necessary to present fairly, in all material respects, the financial position of
Hecla Mining Company ("we" or "our" or "us"). These unaudited interim
consolidated financial statements should be read in conjunction with our audited
consolidated financial statements and related notes as set forth in our annual
report filed on Form 10-K for the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements, the reported
amounts of revenues and expenses during the reporting period and the disclosures
of contingent liabilities. Accordingly, ultimate results could differ materially
from those estimates.
NOTE 2. INVESTMENTS AND RESTRICTED CASH
SHORT-TERM INVESTMENTS
Short-term investments included certificates of deposit and
held-to-maturity securities, which are carried at amortized cost. Due to the
short-term nature of these investments, the amortized cost approximates fair
market value. All of these investments are due within the next twelve months and
consisted of the following as of March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
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Current Investments:
Certificates of deposit $9,479 $3,094
United States government and
federal agency securities 7,201 5,616
Municipal securities 5,591 6,091
Corporate bonds 3,184 3,202
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$25,455 $18,003
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RESTRICTED INVESTMENTS
Various laws applicable to us and certain of our permits require that
we put financial assurances in place for certain environmental and reclamation
obligations and other potential liabilities. Our restricted investments are
primarily investments in money market funds and bonds of U.S. government
agencies. These investments are restricted primarily for reclamation funding or
surety bonds and were $9.8 million and $6.4 million at March 31, 2004 and
December 31, 2003, respectively.
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During the third quarter of 2003, the parties to the Greens Creek joint
venture determined it would be necessary to replace existing surety requirements
via the establishment of a $26.6 million restricted trust for future reclamation
funding. Approximately $7.9 million was placed into restricted cash by the
Greens Creek joint venture in January 2004, with the balance estimated to be
funded from operating cash flows during the second quarter of 2004. Our 29.73%
portion of the remaining $18.7 million will be approximately $5.5 million.
We have received notification of approval of the federal permits needed
from the Bureau of Land Management ("BLM") for the Hollister Development Block
exploration project in Nevada, subject to a public comment period. The BLM has
reviewed the necessary bonding calculations associated with this project and in
March 2004 we deposited approximately $1.0 million in a restricted account as
collateral for this bond. We are awaiting final adjudication of the bond by the
BLM.
NOTE 3. INCOME TAXES
The income tax provision for the first three months of 2004 and 2003
varies from the amount that would have resulted from applying the statutory
income tax rate to our income before income taxes primarily due to the
availability and utilization of net operating losses in Mexico and a tax loss
for currency devaluation in Venezuela. For the three months ended March 31,
2004, we recorded a $0.9 million provision for foreign income taxes, consisting
primarily of deferred taxes and a current provision for accrued Mexican and
Venezuelan withholding tax payable on interest expense. For the three months
ended March 31, 2003, we recognized a $0.8 million provision for foreign income
taxes due to Mexican withholding tax payable on interest expense and utilization
of deferred tax assets.
NOTE 4. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2004 2003
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Concentrates, bullion, metals
in transit and other products $ 6,847 $ 7,788
Restricted metals in transit 1,037 --
Materials and supplies 10,208 9,148
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$ 18,092 $ 16,936
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As previously reported in a press release in March 2004, approximately
5,000 ounces of gold production, valued at a cost of $1.0 million, was
provisionally withheld from export from Venezuela by the Venezuelan government,
pending an administrative review, and is included in our product inventory at
March 31, 2004. The gold is currently being stored at the Central Bank of
Venezuela. For additional information, see Note 5 - Commitments and
Contingencies.
At March 31, 2004, we had forward sales contracts through December 31,
2004, for 35,794 ounces of gold at an average price of $288.25 per ounce,
compared to 93,729 ounces at March 31, 2003. These contracts meet the criteria
to be treated as normal sales in accordance
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with SFAS 138 and, as a result, these contracts are not required to be accounted
for as derivatives under SFAS 133. These forward sales contracts expose us 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 London Final gold price at March 31, 2004 and 2003 was
$423.70 per ounce and $335.35 per ounce, respectively.
At March 31, 2004, we have a quarterly Gold Lease Rate Swap at a fixed
rate of 1.5% on 22,660 ounces, compared to 78,728 ounces at March 31, 2003, of
gold subject to the gold forward contracts. The ounces covered under the swap
are adjusted each quarter as the gold forward contracts expire. At March 31,
2004, the fair market value of the Gold Lease Rate Swap was approximately
$106,000, compared to $253,000 at March 31, 2003, which represents the amount
the counterparty would have to pay us if the contract was terminated.
NOTE 5. COMMITMENTS AND CONTINGENCIES
BUNKER HILL SUPERFUND SITE
In 1994, we, 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 ("EPA")
and the State of Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located in the Kellogg, Idaho area. The 1994 Consent
Decree (the "1994 Decree") settled our response-cost responsibility under CERCLA
at the Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and
Refining Company, which was also a party to the 1994 Decree, filed for Chapter
11 bankruptcy and in January 2001, the Federal District Court approved a new
Consent Decree between Sunshine, the U.S. Government and the Coeur d'Alene
Indian Tribe which settled Sunshine's environmental liabilities in the Coeur
d'Alene Basin lawsuits described below and released Sunshine from further
obligations under the 1994 Decree.
In response to a request by us and ASARCO Incorporated, the United
States Federal District Court in Idaho, having jurisdiction over the 1994
Decree, issued an Order in September 2001 that the 1994 Decree should be
modified in light of a significant change in factual circumstances not
reasonably anticipated by the mining companies at the time they signed the 1994
Decree. In its Order, the Court reserved the final ruling on the appropriate
modification to the 1994 Decree until after the issuance by the EPA of a Record
of Decision ("ROD") on the Basin-wide Remedial Investigation/Feasibility Study.
The EPA issued the ROD on the Basin in September 2002, proposing a $359 million
Basin clean-up plan to be implemented over 30 years. The ROD also establishes a
review process at the end of the 30-year period to determine if further
remediation would be appropriate. Based on the 2001 Order issued by the Court,
in April 2003, we requested the Court release Hecla and ASARCO from future work
under the 1994 Decree within the Bunker Hill site. On November 18, 2003, the
Idaho Federal District Court issued its order on ASARCO's and our request for
final relief on the motion to modify the 1994 Decree. The Court held that we and
ASARCO were entitled to a reduction of $7,000,000 from the remaining work or
costs under the 1994 Decree. Pursuant to the Court's order, the parties to the
1994 Decree have negotiated an agreement for crediting this reduction against
the government's past cost claims and future work and payments under the 1994
Decree. In January
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2004, both the United States and the State of Idaho filed notice of their appeal
of the Federal District Court's order modifying the 1994 Consent Decree.
On February 2, 2003, ASARCO entered into a Consent Decree with the
United States relating to a transfer of certain assets to its parent
corporation, Grupo de Mexico, S.A. de C.V. The Consent Decree also addresses
ASARCO's environmental liabilities on a number of sites in the United States,
including the Bunker Hill site. The provisions of the Consent Decree could limit
ASARCO's annual obligation at the Bunker Hill site for 2003 to 2005.
As of March 31, 2004, we have estimated and accrued a liability for
remedial activity costs at the Bunker Hill site of $6.8 million, which are
anticipated to be made over the next four to five years. Although we believe the
accrual is adequate based upon our current estimates of aggregate costs, it is
reasonably possible that our estimate may change in the future due to the
assumptions and estimates inherent in the accrual.
COEUR D'ALENE RIVER BASIN ENVIRONMENTAL CLAIMS
COEUR D'ALENE INDIAN TRIBE CLAIMS
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against us, ASARCO and a number of other
mining companies asserting claims for damages to natural resources downstream
from the Bunker Hill site over which the Tribe alleges some ownership or
control. The Tribe's natural resource damage litigation has been consolidated
with the United States' litigation described below. Because of various
bankruptcies and settlements of other defendants, we are the only remaining
defendant in the Tribe's NRD case.
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 us. 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 it is the
trustee under CERCLA. The lawsuit claims 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 we 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. We
have asserted a number of defenses to the United States' claims.
As discussed above, 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. In October 2001, the EPA issued its proposed
clean-up plan for the Basin. The EPA issued the ROD on the Basin in September
2002, proposing a $359 million Basin clean-up plan to be implemented over 30
years. The ROD also establishes a review process at the end of the 30-year
period to
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determine if further remediation would be appropriate.
During 2000 and into 2001, we were involved in settlement negotiations
with representatives of the U.S. Government and the Coeur d'Alene Indian Tribe.
We also participated with certain of the other defendants in the litigation in a
State of Idaho-led settlement effort. On August 16, 2001, we entered into a now
terminated Agreement in Principle with the United States and the State of Idaho
to settle the governments' claims for natural resource damages and clean-up
costs related to the historic mining practices in the Coeur d'Alene Basin in
northern Idaho. In August 2002, because the parties were making no progress
toward a final settlement under the terms of the Agreement in Principle, the
United States, the State of Idaho and we agreed to discontinue utilizing the
Agreement in Principle as a settlement vehicle. However, we may participate in
further settlement negotiations with the United States, the State of Idaho and
the Coeur d'Alene Indian Tribe in the future.
The first phase of the trial commenced on the consolidated Coeur
d'Alene Indian Tribe's and the United States' claims on January 22, 2001, and
was concluded on July 30, 2001. The first phase of the trial addressed the
extent of liability, if any, of the defendants and the allocation of liability
among the defendants and others, including the U.S. Government. On September 3,
2003, the Court issued its Phase I ruling, holding that we have some liability
for Coeur d'Alene Basin environmental conditions. The Court refused to hold the
defendants jointly and severally liable for historic tailings releases and
instead allocated a 31% share of liability to us for these releases. The natural
resource damages to which this 31% applies and the Court's determination of an
appropriate clean-up plan will be addressed in the Phase II trial.
The Court also found that while certain Basin natural resources had
been injured, "there has been an exaggerated overstatement" by the plaintiffs of
Basin environmental conditions and the mining impact. The Court also
significantly limited the scope of the trustee plaintiffs' resource trusteeship
and will require proof in the Phase II trial of the trustees' percentage of
trusteeship in co-managed resources. The Court also left for the Phase II trial
issues on the deference, if any, to be afforded the government's clean-up plan
and on defendants' constitutional due process/retroactivity defense. In
disclosure documents filed with the Court in December 2003, the U.S. Government
claimed to have incurred approximately $100 million for past environmental
study, remediation and legal costs associated with the Coeur d'Alene Basin for
which it is alleging it is entitled to reimbursement in the Phase II trial. A
portion of these costs is also included in the work to be done in the ROD. The
Coeur d'Alene Tribe, in a similar disclosure document, alleges its claim for
natural resource damages in the Phase II trial will be between $965 million and
$1.8 billion and their past cost claim may be $5.6 million. The Phase II trial
is currently scheduled to commence in April 2005. Two of the defendant mining
companies, Coeur d'Alene Mines Corporation and Sunshine Mining and Refining
Company, settled their liabilities under the litigation during the first quarter
of 2001. We and ASARCO are the only defendants remaining in the United States'
litigation.
Although the U.S. Government has previously issued its ROD proposing a
clean-up plan totaling approximately $359 million, based upon the Court's prior
orders, including its September 3, 2003 order and other factors and issues to be
addressed by the Court in the Phase II trial, we estimated the range of our
potential liability for remediation in the Basin to be
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$18.0 million to $58.0 million, with no amount in the range being more likely
than any other number at this time. Based upon generally accepted accounting
principles, we accrued the minimum liability within the range. As of March 31,
2004, we have estimated and accrued a potential liability for claims in the
Coeur d'Alene Basin litigation of $18.0 million. It is reasonably possible that
our ability to estimate what, if any, additional liability we may have relating
to the Coeur d'Alene Basin may change in the future depending on a number of
factors, including information obtained or developed by us prior to the Phase II
trial, any interim Court determinations and the outcome of the Phase II trial.
CLASS ACTION LITIGATION
On or about January 7, 2002, a class action complaint was filed in the
Idaho District Court, County of Kootenai, against several corporate defendants,
including Hecla. We were served with the complaint on January 29, 2002. The
complaint seeks certification of three plaintiff classes of Coeur d'Alene Basin
residents and current and former property owners to pursue three types of
relief: various medical monitoring programs; real property remediation and
restoration programs; and damages for diminution in property value, plus other
damages and costs they allege resulted from historic mining and transportation
practices of the defendants in the Coeur d'Alene Basin. On April 23, 2002, we
filed a motion with the Court to dismiss the claims for relief relating to any
medical monitoring programs and the remediation and restoration programs. At a
hearing before the Idaho District Court on our and other defendants' motions
held October 16, 2002, the Judge struck the complaint filed by the plaintiffs in
January 2002 and instructed the plaintiffs to re-file the complaint limiting the
relief requested by the plaintiffs to wholly private damages. The Court also
dismissed the medical monitoring claim as a separate cause of action and stated
that any requested remedy that encroached upon the EPA's clean-up in the Silver
Valley would be precluded by the pending Federal Court case described above. The
plaintiffs re-filed their amended complaint on January 9, 2003. As ordered by
the Court, the amended complaint omits any cause of action for medical
monitoring and no longer requests relief in the form of real property
remediation or restoration programs. At a hearing on May 7, 2003, the Court
vacated the entire amended complaint, and gave plaintiffs' counsel until June
30, 2003, to re-file an amended complaint that complies with Idaho law.
Plaintiffs submitted a second amended complaint on June 9, 2003, which we have
answered. Discovery on the issue of class certification is proceeding. We
believe the claims alleged against us are subject to challenge on a number of
bases and we intend to vigorously defend this litigation.
INSURANCE COVERAGE LITIGATION
In 1991, we initiated litigation in the Idaho District Court, County of
Kootenai, against a number of insurance companies that provided comprehensive
general liability insurance coverage to us and our predecessors. We believe the
insurance companies have a duty to defend and indemnify us under their policies
of insurance for all liabilities and claims asserted against us 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 us in the Tribe's lawsuit. During 1995 and 1996,
we entered into settlement agreements with a number of the insurance carriers
named in the litigation. We have received a total of approximately $7.2 million
under the terms of the settlement agreements.
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Thirty percent of these settlements were paid to the EPA to reimburse the U.S.
Government for past costs under the 1994 Decree. Litigation is still pending
against one insurer with trial suspended until the underlying environmental
claims against us are resolved or settled. The remaining insurer in the
litigation, along with a second insurer not named in the litigation, is
providing us with a partial defense in all Basin environmental litigation. As of
March 31, 2004, we have not reduced our accrual or recorded a receivable for
reclamation and closure costs to reflect the receipt of any potential insurance
proceeds.
OTHER
INDEPENDENCE LITIGATION
In March 2002, Independence Lead Mines Company ("Independence"), the
holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the
Lucky Friday unit, notified us of certain alleged defaults by us under the 1968
Lease Agreement between the unit owners (Independence and us under the terms of
the 1968 DIA Unitization Agreement) as lessors and defaults by us as lessee and
operator of the properties. We are a net 81.48% interest holder under these
Agreements. Independence alleges that we violated the "prudent operator
obligations" implied under the lease by undertaking the Gold Hunter project and
violated certain other provisions of the Agreement with respect to milling
equipment and calculating net profits and losses. Under the Lease Agreement, we
have the exclusive right to manage, control and operate the DIA properties, and
our decisions with respect to the character of work are final. On June 17, 2002,
Independence filed a lawsuit in Idaho State District Court seeking termination
of the Lease Agreement and requesting unspecified damages. On March 18, 2003,
Independence filed a motion for partial summary judgment or in the alternative,
for preliminary injunction ("Motion"). The Motion requested that the Court
terminate our leasehold interest in property owned by Independence within the
DIA area, rule that we have committed waste while mining ore within property
owned by Independence, and prohibit us from any further mining within property
owned by Independence. We filed our response to the Motion on May 28, 2003, and
a hearing was held in July 2003 on the Motion. By order dated August 8, 2003,
the Court denied plaintiff's Motion. Trial of the case occurred from March 23
through April 1, 2004 and we are awaiting a decision. We believe that we have
fully complied with all of our obligations under the 1968 Lease Agreement and
intend to defend our right to operate the property under the Lease Agreement.
VELARDENA MILL LITIGATION
In Mexico, our subsidiary, Minera Hecla, is involved in litigation in
Mexico City concerning a lien on certain major components of the Velardena mill
that predated the sale of the mill to Minera Hecla. At the time of the purchase,
the lien amount was believed to be approximately $590,000, which was deposited
by the prior owner of the mill with the Court. On January 23, 2003, Minera Hecla
deposited $145,000, which represented the amount of accrued interest since the
date of sale, and the Court in Mexico City canceled the lien. On September 17,
2003, the lien holder filed the last in a series of unsuccessful appeals before
a federal appeals court in Mexico City. On February 3, 2004, the federal appeals
court in Mexico City upheld the lower court decisions that the lien had been
cancelled. We believe that the lien has been fully satisfied and the lienholder
has exhausted all appeals.
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Minera Hecla is also involved in other litigation in state and federal
courts located within the State of Durango, Mexico concerning the Velardena
mill. On October 10, 2003, representatives from Minera William, S.A. de C.V. (an
affiliate of the prior owner of the Velardena mill and subsidiary of ECU Silver
Mining, a Canadian company) presented to Minera Hecla court documents from a
state court in Durango, Mexico that purported to award custody of the mill to
Minera William to satisfy an alleged unpaid debt by the prior owner. Minera
Hecla was not a party to and did not have any notice of the legal proceeding in
Durango. On October 21, 2003, Minera Hecla obtained a temporary restraining
order from a federal court in Durango to preserve our possession of the mill. On
February 2, 2004, Minera Hecla obtained a permanent restraining order that
prohibits further interference with our operation and possession of the mill. We
believe the claim of Minera William is without merit and it has no right to any
portion of the Velardena mill. We intend to zealously defend our ownership
interest.
The court proceedings discussed above do not affect Minera Hecla's San
Sebastian mine, located approximately 65 miles from the Velardena mill. The
above-mentioned dispute could result in future disruption of operations at the
Velardena mill. Although there can be no assurance as to the outcome of these
proceedings, we believe an adverse ruling will not have a material adverse
effect on our financial condition.
VENEZUELA LITIGATION
On February 20, 2004, the Venezuelan National Guard impounded a
shipment of approximately 5,000 ounces of gold dore produced from the La Camorra
unit that is owned and operated by our wholly owned subsidiary, Minera Hecla
Venezolana ("MHV"). The impoundment was allegedly made due to irregularities in
documentation that accompanied that shipment. That shipment is currently being
stored at the Central Bank of Venezuela. All subsequent shipments of gold dore
have been exported without intervention by Venezuelan government authorities. We
have cooperated with the Venezuelan government in its investigation of the
matter. On March 19, 2004, we filed with the Superior Tax Court in Bolivar City,
state of Bolivar an injunction action against the National Guard to release the
impounded gold dore. On April 6, 2004, that Court granted our request for an
injunction but conditioned release of the gold pending resolution of an
unrelated matter involving the Venezuelan tax authority (SENIAT), discussed
below. We believe we are in compliance with our export license and all
applicable laws. We intend to zealously pursue release of our gold.
MHV is also involved in litigation in Venezuela with SENIAT concerning
alleged unpaid tax liabilities that predate our purchase of the La Camorra unit
from Monarch Resources Investments Limited ("Monarch") in 1999. Pursuant to our
Purchase Agreement, Monarch has assumed defense of and responsibility for that
pending tax case in the Superior Tax Court in Caracas. On or about April 2,
2004, SENIAT filed with the Superior Tax Court in Bolivar City, state of Bolivar
an embargo action against all of MHV's assets in Venezuela to secure the alleged
unpaid tax liabilities. In order to prevent the embargo, on April 7, 2004, MHV
made a cash deposit with the Court of approximately $4.2 million. As of the date
of this filing, we are awaiting a decision concerning the embargo action.
Although the Company believes the cash deposit will prevent any further action
by SENIAT with respect to the embargo, there can be no
-13-
assurances as to the outcome of this proceeding. If the Court were to award
SENIAT all of its requested embargo, it could disrupt our operations in
Venezuela and have a material adverse affect on our financial condition.
We are subject to other legal proceedings and claims not disclosed
above which have arisen in the ordinary course of our business and have not been
finally adjudicated. Although there can be no assurance as to the ultimate
disposition of these other matters, it is the opinion of our management that the
outcome of these other proceedings will not have a material adverse effect on
our financial condition.
NOTE 6. LONG-TERM DEBT AND CREDIT AGREEMENTS
In February 2004, we made final payments of $0.5 million and $1.0
million, respectively, on the outstanding balances of a pre-existing credit
agreement, used to provide project financing at the La Camorra mine, and a
subordinated loan agreement, entered into in connection with the project
financing agreement. Additionally, approximately $0.9 million in interest was
paid at the same time under these agreements.
At March 31, 2004, our wholly owned subsidiary, Minera Hecla, S.A. de
C.V. ("Minera Hecla"), had $3.0 million outstanding under a project loan used to
acquire a processing mill at Velardena, Mexico, to process ore mined from the
San Sebastian mine near Durango, Mexico. The credit facility is nonrecourse to
us. Under the terms of the credit facility, Minera Hecla will make monthly
payments for principal and interest over 63 months at a fixed interest rate
equal to 13%. The final payment on this loan is due July 1, 2006. The loan is
collateralized by the mill at Velardena and the Saladillo, Saladillo 1 and
Saladillo 5 mining concessions.
In February 2003, the Venezuelan government implemented exchange
controls, which have required us, in some instances, to convert United States
dollars into the country's currency. Rules and regulations regarding the
implementation of exchange controls in Venezuela have been published and
periodically revised and/or updated. In March 2004, MHV established a line of
credit in Venezuelan bolivares at a local bank to facilitate the payment of
national vendors in the country's currency. At March 31, 2004, approximately
$2.4 million was outstanding under the line of credit and is secured by $2.0
million held by the bank, classified as other current assets on our Consolidated
Balance Sheet. The outstanding balance on this line of credit bears interest at
the rate of 17% and is due on June 29, 2004.
NOTE 7. INCOME (LOSS) PER COMMON SHARE
The following table presents a reconciliation of the numerators and
denominators used in the basic and diluted income (loss) per common share
computations. Also shown is the effect that has been given to cumulative
preferred dividends in arriving at the income (loss) applicable to common
shareholders for the three months ended March 31, 2004 and 2003, in computing
basic and diluted income (loss) per common share (dollars and shares in
thousands, except per-share amounts).
-14-
Three Months Ended
-----------------------
March 31,
2004 2003
--------- ---------
Income from operations before cumulative effect of change in
accounting principle and preferred stock dividends $ 6,180 $ 5,663
Add: Cumulative effect of change in accounting principle -- 1,072
Less: Preferred stock dividends (11,188) (659)
--------- ---------
Basic income (loss) applicable to common shareholders $ (5,008) $ 6,076
Basic weighted average number of common shares outstanding 117,318 109,320
--------- ---------
Basic income (loss) per common share
$ (0.04) $ 0.06
========= =========
Basic weighted average number of common shares outstanding 117,318 109,320
Effect of dilutive stock options -- 675
Effect of dilutive warrants -- 214
--------- ---------
Diluted weighted average number of common shares 117,318 110,209
========= =========
Basic and diluted income (loss) per common share
$ (0.04) $ 0.06
========= =========
These calculations of diluted income (loss) per share for the three
months ended March 31, 2004 and 2003 exclude the effects of convertible
preferred stock ($7.9 million in 2004 and $37.6 million in 2003), as well as
common stock issuable upon the exercise of various stock options and warrants,
as their conversion and exercise would be antidilutive, as follows:
Three Months Ended
--------------------------
March 31,
2004 2003
---------- ----------
Stock Options 213,500 1,328,500
Warrants -- 2,000,000
NOTE 8. BUSINESS SEGMENTS
We are organized and managed into three segments, which represent the
geographical areas in which we operate: Venezuela (the La Camorra unit), Mexico
(the San Sebastian unit) and the United States (the Greens Creek unit and the
Lucky Friday unit). Prior to the fourth quarter of 2003, we were organized into
a silver segment and a gold segment. We have changed our reportable segments to
better reflect the economic characteristics of our operating properties and have
restated the corresponding information for all periods presented. General
corporate activities not associated with operating units, as well as idle
properties, are presented as Other. Interest expense, interest income and income
taxes are considered a general corporate expense and are not allocated to the
segments.
The following tables present information about reportable segments for
the three months ended March 31, 2004 and 2003 (in thousands):
-15-
Three Months Ended
------------------------
March 31,
2004 2003
-------- --------
Net sales to unaffiliated customers:
United States $ 14,797 $ 8,571
Venezuela 11,755 8,976
Mexico 10,170 8,353
Other (72) 541
-------- --------
$ 36,650 $ 26,441
======== ========
Income (loss) from operations:
United States $ 3,966 $ (45)
Venezuela 2,926 1,801
Mexico 4,232 3,646
Other (4,267) 1,100
--------- --------
$ 6,857 $ 6,502
======== ========
The following table presents identifiable assets by reportable segment
as of March 31, 2004 and December 31, 2003 (in thousands):
March 31, December 31,
2004 2003
---------- ------------
Identifiable assets:
United States $ 76,005 $ 71,539
Venezuela 58,052 47,538
Mexico 18,229 17,837
Other 132,726 141,281
---------- ---------
$ 285,012 $ 278,195
========== =========
NOTE 9. SHAREHOLDERS' EQUITY
In February 2004, we reduced the number of Series B preferred shares
outstanding by 273,961 shares, or 58.9%, pursuant to an exchange offer. This
exchange offer allowed participating shareholders to receive 7.94 shares of
common stock for each preferred share exchanged, which resulted in the issuance
of a total of 2,175,237 common shares. During March 2004, we entered into
privately negotiated exchange agreements with holders of approximately 17% of
the then outstanding preferred stock (190,816 preferred shares) to exchange such
shares for shares of common stock. A total of 33,000 preferred shares were
exchanged for 260,861 common shares as a result of the privately negotiated
exchange agreements. As of March 31, 2004, a total of 157,816 shares of
preferred stock remain outstanding.
Included in the first quarter 2004 loss applicable to common
shareholders were preferred stock dividends of $11.2 million, which included
non-cash dividend charges of approximately $10.9 million related to the
exchanges of preferred stock for common stock as discussed above. The non-cash
dividends represent the difference between the value of the common stock issued
in the exchange transactions and the value of the shares of common stock that
would have been issued if the shares of the preferred stock had been converted
into common stock pursuant to their original
-16-
conversion terms. The non-cash dividend had no net impact on our total
shareholders' equity. Following the exchanges, the total of cumulative preferred
dividends in arrears was $2.1 million as of March 31, 2004.
NOTE 10. STOCK-BASED PLANS
At March 31, 2004, executives, key employees and directors had been
granted options to purchase our common shares or were credited with common
shares under the stock-based plans described below. We have adopted the
disclosure-only provisions of SFAS No. 123. Had compensation expense for our
stock-based plans been determined based on the fair market value at the grant
date for awards during the three months ended March 31, 2004 and 2003 consistent
with the provisions of SFAS No. 123, our income (loss) and per share income
(loss) applicable to common shareholders would have been increased to the pro
forma amounts indicated below (in thousands, except per share amounts):
Three Months Ended
March 31,
2004 2003
------- -------
Income (loss) applicable to common shareholders
As reported $(5,008) $ 6,076
Stock-based employee compensation expense
included in reported income (loss) 767 385
Total stock-based employee compensation
expense determined under fair value
based methods for all awards (767) (1,053)
------- -------
Pro forma income (loss) applicable to common
shareholders $(5,008) $ 5,408
======= =======
Three Months Ended
March 31,
2004 2003
------- -------
Income (loss) applicable to common
shareholders per share:
As reported $ (0.04) $ 0.06
Pro forma $ (0.04) $ 0.05
NOTE 11. ASSET RETIREMENT OBLIGATIONS
Commencing in the third quarter of 2003, the Greens Creek joint venture
determined it necessary to establish a $26.6 million restricted trust for
reclamation funding in the future. Approximately $7.9 million was placed into
restricted cash in January 2004, with the balance to be funded from operating
cash flows during the second quarter of 2004. Our 29.73% portion of the
remaining $18.7 million will be approximately $5.6 million. There are no other
assets legally restricted for purposes of settling asset retirement obligations
at March 31, 2004.
-17-
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations," which became effective January 1, 2003. This statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. Subsequently, reclamation costs will be allocated to
expense over the life of the related assets and will be adjusted for changes
resulting from the passage of time and changes to either the timing or amount of
the original fair value estimate underlying the obligation. The sum of our
estimated reclamation and abandonment costs was discounted using a credit
adjusted, risk-free interest rate of 6% from the time we expect to pay the
retirement obligation to the time we incurred the obligation. Upon initial
application of SFAS No. 143 on January 1, 2003, we recorded the following:
1. An increase of approximately $0.7 million to accrued reclamation and
closure costs to reflect the estimated present value of reclamation
liabilities based on the discounted fair market value of future cash
flows to settle the obligation;
2. An increase to the carrying amounts of the associated long-lived assets
of approximately $3.3 million to capitalize the present value of the
liabilities as of the date the obligation occurred, offset by $1.5
million of accumulated depletion through January 1, 2003; and
3. A cumulative effect of change in accounting principle of $1.1 million
gain, reflecting the difference between those amounts and amounts
previously recorded in our consolidated financial statements at January
1, 2003.
The following is a reconciliation of our total liability for asset
retirement obligations (in thousands):
Balance January 1, 2003 $ 6,053
Revisions in estimated cash flows 1,031
Accretion expense 747
Cash payments (200)
-------
Balance December 31, 2003 7,631
Accretion expense 132
Cash payments (7)
-------
Balance March 31, 2004 (unaudited) $ 7,756
=======
NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS
In April 2004, the Financial Accounting Standards Board ("FASB")
ratified Emerging Issues Task Force ("EITF") Issue No. 04-2, which amends
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" to the extent all mineral rights are to be considered tangible
assets for accounting purposes. There has been diversity in practice related to
the application of SFAS No. 141 to certain mineral rights held by mining
entities that are not
-18-
within the scope of SFAS No. 19 "Financial Accounting and Reporting by Oil and
Gas Producing Companies." The SEC staff's position previously was entities
outside the scope of SFAS No. 19 should account for mineral rights as intangible
assets in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets."
We have reclassified the net of our cost of mineral interests and associated
accumulated amortization to property, plant and equipment as of March 31, 2004
($5.1 million) and December 31, 2003 ($5.3 million).
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
a revision to this interpretation (FIN 46(r)). FIN 46(r) clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements." FIN 46 clarifies the application of ARB No. 51 to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. We adopted FIN 46(r) in its entirety for the period
ended March 31, 2004, which did not have a material effect on our consolidated
financial statements.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK (INCLUDING INFORMATION INCORPORATED BY REFERENCE)
ARE INTENDED TO BE COVERED BY THE SAFE HARBOR PROVIDED FOR UNDER SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. OUR FORWARD-LOOKING STATEMENTS INCLUDE OUR
CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE RESULTS, PERFORMANCE, RESULTS
OF LITIGATION, PROSPECTS AND OPPORTUNITIES. WE HAVE TRIED TO IDENTIFY THESE
FORWARD-LOOKING STATEMENTS BY USING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "INTEND," "PLAN," "ESTIMATE" AND SIMILAR EXPRESSIONS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO
US AND ARE EXPRESSED IN GOOD FAITH AND BELIEVED TO HAVE A REASONABLE BASIS.
HOWEVER, OUR FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS,
PERFORMANCE, PROSPECTS OR OPPORTUNITIES TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS.
THESE RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE SET FORTH UNDER ITEM 1 - BUSINESS - RISK FACTORS IN OUR ANNUAL
REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003. GIVEN THESE
RISKS AND UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
OUR FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO HECLA MINING COMPANY OR TO PERSONS ACTING ON OUR
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THESE CAUTIONARY STATEMENTS.
EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS, WE DO NOT INTEND TO UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
OVERVIEW
Hecla Mining Company is a precious metals company originally
incorporated in 1891 (in this report, "we" or "our" refers to Hecla Mining
Company and/or our affiliates and subsidiaries). We are engaged in the
exploration, development, mining and processing of silver, gold, lead and zinc,
and own or have interests in a number of precious and nonferrous metals
properties. Our business is to discover, acquire, develop, produce and market
mineral resources. In doing so, we intend to:
o Manage all our business activities in a safe, environmentally
responsible and cost-effective manner;
o Give preference to projects where we will be the manager of
the operation;
o Provide a work environment that promotes personal excellence
and growth for all our employees; and
o Conduct our business with integrity and honesty.
Our strategy for growth is to focus our efforts and resources on
expanding our precious metals reserves through exploration efforts, primarily on
properties we currently own and through future potential acquisitions.
-20-
We are organized and managed primarily on the basis of our products
being produced from our three primary silver operating units: the San Sebastian
unit in Mexico (the Mexico segment), the Greens Creek unit in Alaska and the
Lucky Friday unit in Idaho (both in the United States segment); and one gold
operation or the La Camorra unit in Venezuela (the Venezuela segment). The maps
below indicate the locations of our operating units and our exploration
projects, the Hollister Development Block and Block B concessions. For GAAP
purposes and in accordance with SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information," we are organized into three segments:
Venezuela (the La Camorra unit), Mexico (the San Sebastian unit) and the United
States (the Greens Creek unit and the Lucky Friday unit) as of March 31, 2004.
[MAP APPEARS HERE]
We produce both metal concentrates, which we sell to custom smelters on
contract, and unrefined gold and silver bullion bars (dore), which is further
refined before sale to metals traders. Our revenue is derived from the sale of
silver, gold, lead and zinc and, as a result, our earnings are directly related
to the prices of these metals. Silver, gold, lead and zinc prices fluctuate
widely and are affected by numerous factors beyond our control. From January to
March 2004, we have seen rises in the prices of the metals we produce and the
price increases have assisted in our improved revenues and cash flows. In the
event these metals prices decline (as the price of silver did in April), we feel
our strong balance sheet and low cost properties will allow us to continue to be
successful.
For the first quarter of 2004, we recorded net income of $6.2 million,
compared to income of $6.7 million during the first quarter of 2003. However,
while 2003's income was affected by a one-time positive $4.0 million legal
settlement and a $1.1 million positive cumulative effect of change in accounting
principle, net income during the first three months of 2004 is a direct result
of an over 90% favorable variance in gross profit quarter-on-quarter. For the
first quarter of 2004 compared to the same period in 2003, the average price of
silver
-21-
increased 43%, our average realized price of gold increased 14% and the average
prices of lead and zinc increased 84% and 36%, respectively, both of which are
important by-products at our Greens Creek and Lucky Friday units. As part of our
corporate objectives to grow and expand production, exploration expenditures
increased by 35%, primarily in Mexico, while our corporate general and
administrative expenses decreased by 13% in the first quarter of 2004 compared
to the first quarter of 2003. Our balance sheet continues to be strong, with
over $94 million in cash, $25 million in investments with maturities within the
next twelve months and minimal debt.
In February 2004, we reduced the number of Series B preferred shares
outstanding by 273,961 shares pursuant to an exchange offer. This exchange offer
allowed participating shareholders to receive 7.94 shares of common stock for
each preferred share exchanged which resulted in the issuance of a total of
2,175,237 common shares. During March 2004, we entered into privately negotiated
exchange agreements with holders of approximately 17% of the then outstanding
preferred stock to exchange such shares for shares of common stock. A total of
33,000 preferred shares were exchanged for 260,861 common shares as a result of
the privately negotiated exchange agreements. In order to eliminate the effect
of our dividend arrearages on our capital raising activities, we intend to
evaluate and potentially implement further programs to reduce the number of
remaining preferred shares outstanding, including the possible redemption of
shares. At April 1, 2004, a redemption of the remaining preferred shares would
cost approximately $10.0 million.
As previously reported in a press release in March 2004, approximately
5,000 ounces of gold production was provisionally withheld from export from
Venezuela by the Venezuelan government, pending an administrative review. The
gold is currently being stored at the Central Bank of Venezuela. We have
cooperated with the Venezuelan government in its investigation of the matter.
Subsequent shipments of gold have been exported out of Venezuela without
incident. For additional information, see Note 5 to our Notes to Consolidated
Financial Statements.
The following table displays our actual silver and gold production (in
thousand ounces) by operation for the quarters ended March 31, 2004 and 2003,
and projected silver and gold production for the year ending December 31, 2004.
Projected First Quarters Ended March 31,
2004 2004 2003
---------- -------- --------
Silver ounce production:
San Sebastian unit 3,300 857 1,022
Greens Creek unit (1) 3,500 745 741
Lucky Friday unit 2,200 483 635
---------- -------- --------
Total silver ounces 9,000 2,085 2,398
========== ======== ========
-22-
Projected First Quarters Ended March 31,
2004 2004 2003
---------- -------- --------
Gold ounce production:
La Camorra unit 142 38 35
San Sebastian unit 44 11 11
Greens Creek unit (1) 29 7 7
------- ------- -------
Total gold ounces 215 56 53
======= ======= =======
(1) Reflects our 29.73% portion.
Total cash and total production costs, and average metals prices were
as follows:
First Quarters Ended
March 31,
--------------------
2004 2003
------ ------
Average costs per ounce of silver produced:
Total cash costs per ounce ($/oz.) (1,3) 1.43 1.67
Total production costs per ounce ($/oz.) (1,3) 2.93 2.83
Average costs per ounce of gold produced:
Total cash costs per ounce ($/oz.) (2,3) 142 137
Total production costs per ounce ($/oz.) (2,3) 234 206
Average Metals Prices:
Silver-Handy & Harman ($/oz.) 6.71 4.69
Gold-Realized ($/oz.) 379 333
Gold-London Final ($/oz.) 408 352
Lead-LME Cash ($/pound) 0.38 0.21
Zinc-LME Cash ($/pound) 0.49 0.36
(1) The lower costs per silver ounce during the first quarter of
2004 compared to 2003 are due in part to significant
by-product credits from increased metals prices from our
silver operating properties. Our costs per ounce amounts are
calculated pursuant to standards of The Gold Institute.
(2) Costs per ounce of gold are based on the gold produced from
gold operating properties only. Gold produced from San
Sebastian and Greens Creek is treated as a by-product credit
in calculating silver costs per ounce.
(3) Cash costs per ounce of silver or gold represent non-GAAP
measurements that management uses to monitor and evaluate the
performance of its mining operations. We believe cash costs
per ounce of silver or gold provide an indicator of cash flow
generation at each location and on a consolidated basis, as
well as providing a meaningful basis to compare our results to
those of other mining companies and other mining operating
properties. A reconciliation of this non-GAAP measure to cost
of sales and
-23-
other direct production costs, the most comparable GAAP
measure, can be found below under Reconciliation of Total Cash
Costs (non-GAAP) to Costs of Sales and Other Direct Production
Costs (GAAP).
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP
requires management to make a wide variety of estimates and assumptions that
affect: (i) the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements,
and (ii) the reported amounts of revenues and expenses during the reporting
periods covered by the financial statements. Our management routinely makes
judgments and estimates about the effect of matters that are inherently
uncertain. As the number of variables and assumptions affecting the future
resolution of the uncertainties increases, these judgments become even more
subjective and complex. Our accounting policies are described in Note 1 of the
Consolidated Financial Statements in our annual report filed on Form 10-K for
the year ended December 31, 2003. We have identified our most critical
accounting policies below that are most important to the portrayal of our
current financial condition and results of operations. Management has discussed
the development and selection of these critical accounting policies with the
audit committee of our board of directors and the audit committee has reviewed
the disclosures presented below.
REVENUE RECOGNITION
Sales of metals products sold directly to smelters are recorded when
title and risk of loss transfer to the smelter at current spot metals prices.
Due to the time elapsed from the transfer to the smelter and the final
settlement with the smelter (generally three months), we must estimate the price
at which our metals will be sold in reporting our profitability and cash flow.
Recorded values are adjusted monthly until final settlement at month-end metals
prices. If there was a significant variance in estimated metals prices or assays
compared to the final actual metals prices and assays, our monthly results of
operations could be affected. Sales of metal in products tolled, rather than
sold to smelters, are recorded at contractual amounts when title and risk of
loss transfer to the buyer.
Sales of concentrates and precipitates from the Greens Creek, Lucky
Friday and San Sebastian units are sold directly to smelters, with recorded
amounts adjusted to month-end metals prices until final settlement. As a result
of significant decrease in metals prices during April, we adjusted our estimated
sales prices and our first quarter revenue by $1.7 million. At April 21, 2004,
the prices for gold, silver, lead and zinc had declined from the March 31, 2004
balances by 7%, 22%, 12% and 9%, respectively, to $390 per ounce, $6.18 per
ounce, $0.32 per pound and $0.45 per pound.
Changes in the market price of metals significantly affect our
revenues, profitability and cash flow. Metals prices can and often do fluctuate
widely and are affected by numerous factors beyond our control, such as
political and economic conditions, demand, forward selling by producers,
expectations for inflation, central bank sales, custom smelter activities, the
relative exchange rate of the U.S. dollar, purchases and lending, investor
sentiment and global mine production levels. The aggregate effect of these
factors is impossible to predict. Because a significant portion of our revenues
is derived from the sale of silver, gold, lead and zinc, our
-24-
earnings are directly related to the prices of these metals. If the market price
for these metals falls below our total production costs, we will experience
losses on such sales.
PROVEN AND PROBABLE ORE RESERVES
On a periodic basis, management reviews the reserves that reflect
estimates of the quantities and grades of ore at our mines which management
believes can be recovered and sold at prices in excess of the total cost
associated with extracting and processing the ore. Management's calculations of
proven and probable ore reserves are based on in-house engineering and
geological estimates using current operating costs, metals prices and demand for
our products. Periodically, management obtains external audits of reserves.
Reserve estimates will change as existing reserves are depleted through
production and as production costs and/or metals prices change. Changes in
reserves may also reflect that actual grades of ore processed may be different
from stated reserve grades because of variation in grades in areas mined, mining
dilution and other factors. Reserves estimated for properties that have not yet
commenced production may require revision based on actual production experience.
Declines in the market price of metals, as well as increased production
or capital costs, reduction in the grade or tonnage of the deposit, an increase
in the dilution of the ore or reduced recovery rates, may render ore reserves
uneconomic to exploit unless the utilization of forward sales contracts or other
hedging techniques is sufficient to offset such effects. If our realized price
for the metals we produce, including hedging benefits, were to decline
substantially below the levels set for calculation of reserves for an extended
period, there could be material delays in the development of new projects, net
losses, reduced cash flow, restatements or reductions in reserves and asset
write-downs in the applicable accounting periods. Reserves should not be
interpreted as assurances of mine life or of the profitability of current or
future operations. No assurance can be given that the estimate of the amount of
metal or the indicated level of recovery of these metals will be realized.
DEPRECIATION AND DEPLETION
The mining industry is extremely capital intensive. We capitalize and
depreciate property, plant and equipment consistently with industry standards.
The cost of property, plant and equipment is charged to depreciation expense
based on the estimated useful lives of the assets using straight-line and
unit-of-production methods. Depletion is computed using the unit-of-production
method. As discussed above, our estimates of proven and probable ore reserves
may change, possibly in the near term, resulting in changes to depreciation,
depletion and amortization rates in future reporting periods.
IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews the net carrying value of all facilities, including
idle facilities, on a periodic basis. We estimate the net realizable value of
each property based on the estimated undiscounted future cash flows that will be
generated from operations at each property, the estimated salvage value of the
surface plant and equipment and the value associated with property interests.
These estimates of undiscounted future cash flows are dependent upon the future
metals price estimates over the estimated remaining mine life. If undiscounted
cash flows
-25-
are less than the carrying value of a property, an impairment loss is recognized
based upon the estimated expected future cash flows from the property discounted
at an interest rate commensurate with the risk involved.
Management's estimates of metals prices, recoverable proven and
probable ore reserves, and operating, capital and reclamation costs are subject
to risks and uncertainties of change affecting the recoverability of our
investment in various projects. Although management believes it has made a
reasonable estimate of these factors based on current conditions and
information, it is reasonably possible that changes could occur in the near term
which could adversely affect management's estimate of net cash flows expected to
be generated from our operating properties and the need for asset impairment
write-downs.
ENVIRONMENTAL MATTERS
Our operations are subject to extensive federal, state and local
environmental laws and regulations. The major environmental laws to which we are
subject include, among others, the Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA," also known as the Superfund law).
CERCLA can impose joint and several liability for cleanup and investigation
costs, without regard to fault or legality of the original conduct, on current
and predecessor owners and operators of a site, as well as those who generate,
or arrange for the disposal of, hazardous substances. The risk of incurring
environmental liability is inherent in the mining industry. We own or operate
property, or have owned and operated property, used for industrial purposes. Use
of these properties may subject us to potential material liabilities relating to
the investigation and clean-up of contaminants, claims alleging personal injury
or property damage as the result of exposures to, or release of, hazardous
substances.
At our operating properties, we accrue costs associated with
environmental remediation obligations in accordance with SFAS No. 143
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires us to
record a liability for the present value of our estimated environmental
remediation costs and the related asset created with it in the period in which
the liability is incurred. The liability will be accreted and the asset will be
depreciated over the life of the related asset. Adjustments for changes
resulting from the passage of time and changes to either the timing or amount of
the original present value estimate underlying the obligation will be made.
At our non-operating properties, we accrue costs associated with
environmental remediation obligations when it is probable that such costs will
be incurred and they are reasonably estimable. Accruals for estimated losses
from environmental remediation obligations have historically been recognized no
later than completion of the remedial feasibility study for such facility and
are charged to provision for closed operations and environmental matters.
We periodically review our accrued liabilities for remediation costs as
evidence becomes available indicating that our remediation liabilities have
potentially changed. Such costs are based on management's current estimate of
amounts expected to be incurred when the remediation work is performed within
current laws and regulations. Recoveries of environmental remediation costs from
other parties are recorded as assets when their receipt is deemed probable.
-26-
Future closure, reclamation and environment-related expenditures are
difficult to estimate in many circumstances due to the early stages of
investigation, uncertainties associated with defining the nature and extent of
environmental contamination, the uncertainties relating to specific reclamation
and remediation methods and costs, application and changing of environmental
laws, regulations and interpretations by regulatory authorities and the possible
participation of other potentially responsible parties. Reserves for closure
costs, reclamation and environmental matters totaled $70.5 million at March 31,
2004, and we anticipate that expenditures relating to these reserves will be
made over the next thirty years. This amount was derived from a range of
reasonable estimates in accordance with SFAS No. 5 "Accounting for
Contingencies." It is reasonably possible that the ultimate cost of remediation
could change in the future and that changes to these estimates could have a
material effect on future operating results as new information becomes known.
For environmental remediation sites known as of March 31, 2004, if the highest
estimate from the range (based upon information presently available) were
recorded, the total estimated liability would be increased by approximately
$40.0 million. For additional information, see Note 5 to our Notes to
Consolidated Financial Statements.
FOREIGN EXCHANGE GAINS IN VENEZUELA
The Venezuelan government has fixed the exchange rate of their currency
to the U.S. dollar at 1,920 to $1 (as of February 7, 2004, formerly 1,600 to $1
since February 2003); which is the exchange rate we utilize to translate the
financial statements of our Venezuelan subsidiary included in our consolidated
financial statements. Rules and regulations regarding the implementation of
exchange controls in Venezuela have been published and periodically revised
and/or updated.
Due to the exchange controls in place, the La Camorra unit recognized a
foreign exchange gain of $2.8 million as a reduction to cost of sales,
exploration and capital expenditures during the first quarter of 2004 due to the
use of multiple exchange rates in valuing U.S. dollar denominated transactions.
As discussed above, the Venezuelan government has fixed the exchange rate of the
bolivar to the U.S. dollar at 1,920 to $1; however, markets outside of Venezuela
reflect a devaluation of the Venezuelan currency at approximately 40%.
BY-PRODUCT CREDITS AT THE SAN SEBASTIAN UNIT IN MEXICO
Cash costs per ounce of silver at the San Sebastian unit include
significant by-product credits from gold production and the continued increase
in its price. Cash costs per ounce are calculated pursuant to standards of the
Gold Institute and are consistent with how costs per ounce are calculated within
the mining industry. For the quarter ended March 31, 2004, the total cash cost
was a negative $0.44 per silver ounce, compared to a negative $0.07 per silver
ounce during the same period in 2003. For the quarters ended March 31, 2004 and
2003, gold by-product credits were approximately $5.47 per silver ounce and
$3.97 per silver ounce, respectively. By-product credits at the San Sebastian
unit are deducted from operating costs in the calculation of cash costs per
ounce. If our accounting policy was changed to treat gold production as a
co-product, the following total cash costs per ounce would be reported:
-27-
THREE MONTHS ENDED MARCH 31,
2004 2003
------------------------------
Silver $ 2.77 $ 2.11
Gold $ 168 $ 158
Cash costs per ounce of silver or gold represent non-U.S. Generally
Accepted Accounting Principles ("GAAP") measurements that management uses to
monitor and evaluate the performance of its mining operations. We believe cash
costs per ounce of silver or gold produced provide an indicator of cash flow
generation at each location and on a consolidated basis, as well as providing a
meaningful basis to compare our results to those of other mining companies and
other mining operating properties. A reconciliation of this non-GAAP measure to
cost of sales and other direct production costs, the most comparable GAAP
measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales
and Other Direct Production Costs.
RESULTS OF OPERATIONS
For the quarter ended March 31, 2004, we recorded net income of $6.2
million, compared to net income of $6.7 million during the first quarter of
2003, primarily due to significantly improved operating results. Factors
contributing to these changes are in the discussion of each operating property
below.
For the quarter ended March 31, 2004, we recorded a loss applicable to
common shareholders of approximately $5.0 million ($0.04 per common share),
compared to income of approximately $6.1 million ($0.06 per common share) during
the first quarter of 2003. Included in the first quarter 2004 loss were
preferred stock dividends of $11.2 million, which included non-cash dividend
charges of approximately $10.9 million related to the exchanges of preferred
stock for common stock as discussed above. The non-cash dividends represent the
difference between the value of the common stock issued in the exchange
transactions and the value of the shares of common stock that would have been
issued if the shares of the preferred stock had been converted into common stock
pursuant to their terms. For more information, see Note 9 to our Notes to
Consolidated Financial Statements.
THE MEXICO SEGMENT
For the quarter ended March 31, 2004, the San Sebastian unit, located
in the State of Durango, Mexico, reported sales of $10.2 million, compared to
$8.4 million in 2003, and income from operations of $4.2 million in the 2004
period, compared to $3.6 million in 2003. These increases are primarily due to a
43% and 16% increase in the average price of silver and gold quarter-on-quarter,
respectively, despite a 13% decrease in silver production during the first
quarter of 2004 primarily due to lower ore grade. Cost of sales and other direct
production costs as a percentage of sales from products decreased to 32.4%
during the first quarter in 2004, from 43.7% in the 2003 period, primarily due
to the increased sales .
Silver and gold production during the first quarter of 2004 was
approximately 857,000 ounces and 11,000 ounces, respectively, compared to
1,022,000 ounces and 12,000 ounces,
-28-
respectively, during the first quarter of 2003. Tons milled were approximately
22% more during the first quarter of 2004, or almost 40,000 tons, compared to
the same period in 2003, although the grade of silver was approximately 25
ounces per ton during the first quarter of 2004 compared to 32 ounces per ton
during the 2003 period. San Sebastian had an average grade of 0.32 ounce of gold
per ton during the first quarter of 2004 compared to an average grade of 0.39
ounce of gold per ton during the 2003 period. San Sebastian is estimated to
produce approximately 3.3 million ounces of silver and 44,000 ounces of gold,
respectively, for the year ending December 31, 2004.
The total cash cost at San Sebastian decreased to a negative $0.44
during the first quarter of 2004, from a negative $0.07 during the 2003 period.
Because gold is considered a by-product of our silver production, it contributed
to the decrease in average total costs during the comparable period due
primarily to a higher average gold price. For the quarters ended March 31, 2004
and 2003, gold by-product credits were approximately $5.47 per silver ounce and
$3.97 per silver ounce, respectively.
THE UNITED STATES SEGMENT
GREENS CREEK
The Greens Creek unit, a 29.73%-owned joint-venture arrangement with
Kennecott Greens Creek Mining Company located on Admiralty Island, near Juneau,
Alaska, reported sales of $10.1 million for our account during the first quarter
of 2004, as compared to $5.5 million during the 2003 period, and income from
operations of $3.0 million in the first quarter of 2004, compared to a loss of
$0.1 million in the 2003 period, primarily due to higher average metals prices.
Greens Creek silver production was approximately the same during the first
quarter of 2004 compared to the first quarter of 2003, although production was
offset by a 5% negative variance in the silver ore grade. Silver production was
744,967 ounces during the first quarter of 2004, compared to 740,660 ounces
during the 2003 period. During the first quarter of 2004, Greens Creek produced
approximately 6,700 ounces of gold, 1,700 tons of lead and 5,400 tons of zinc,
compared to 6,800 ounces of gold, 2,000 tons of lead and 6,100 tons of zinc
during the first quarter of 2003. Cost of sales and other direct production
costs as a percentage of sales from products decreased to 53.5% in the first
quarter of 2004, from 64.6% in the 2003 period, primarily due to increases in
gold, silver, lead and zinc prices during 2004, all of which contributed to
increased gross margins.
Ore grades of silver and gold during the first quarter of 2004 were
approximately 17 ounces per ton of silver and 0.17 ounce of gold per ton,
compared to approximately 18 ounces per ton of silver and 0.18 ounce of gold per
ton during the first quarter of 2003.
The total cash costs per silver ounce decreased by approximately 41%
from $1.67 per silver ounce during the first quarter of 2003, to $0.98 per
silver ounce during the first quarter of 2004. The decreases in costs per ounce
are primarily due to the increased by-product credits primarily from higher
average gold, lead and zinc prices during the first quarter of 2004 over the
2003 period. For the year ending December 31, 2004, production is forecasted to
total approximately 3.5 million silver ounces, 29,000 ounces of gold and 7,000
and 23,000 tons of lead and zinc, respectively.
-29-
LUCKY FRIDAY
The Lucky Friday unit, located in northern Idaho and a producing mine
for Hecla since 1958, reported sales of approximately $4.7 million during the
first quarter of 2004, compared to $3.1 million during the 2003 period, and
income from operations of $1.0 million during the first quarter of 2004,
compared with $0.1 million during the first quarter of 2003. The increase in
both sales and income from operations during the 2004 period over 2003 is due
primarily to the increase in metals prices, offset by a 16% decrease in silver
production, a 16% negative variance in the silver ore grade quarter-on-quarter
and an 8% decrease in tons milled. These factors are primarily attributable to
overall deeper mining resulting in longer haulage, fewer tons mined in February
2004 due to ore pass pocket repair and higher-grade mining that took place
during 2003.
Cost of sales and other direct production costs as a percentage of
sales from products decreased to 77.9% during the first quarter of 2004, from
98.2% during the first quarter of 2003, primarily due to the increase in sales,
offset by increased maintenance and development costs, as well as an increase in
labor costs as compared to the first quarter of 2003. In December 2003, we
announced the approval by the board of directors to develop the 5900 level of
the Gold Hunter deposit, currently anticipated to cost approximately $8.0
million. Development of the 5900 level commenced with three, 3-man crews that
began the first week of April and a fourth, 3-man crew that began the second
week of April.
Due primarily to the decrease in silver production, the total cash
costs per silver ounce during the first quarter of 2004 increased to $5.44,
compared to $4.47 during the 2003 period. For the year ending December 31, 2004,
production is forecasted to total approximately 2.2 million silver ounces and
12,000 tons of lead.
THE VENEZUELA SEGMENT
We currently operate the La Camorra unit, located in the eastern
Venezuelan State of Bolivar, approximately 120 miles southeast of Puerto Ordaz.
The La Camorra unit refers to our Venezuelan operating properties and
exploration projects, currently comprised of the La Camorra mine and Block B
concessions. At the present time, the La Camorra unit is our sole designated
gold operation.
Sales of product increased to $11.7 million, or by 31%, during the
first quarter of 2004, from sales of $9.0 million during the first quarter of
2003, primarily due to a 12% increase in the realized price of gold ($365 per
ounce in 2004 vs. $325 per ounce in 2003), a 7% increase in gold ounces produced
and the timing of gold sales due to the movement in product inventory. Our
realized gold prices were less than the average London Final prices for the
quarter ($408 per ounce in 2004 vs. $352 per ounce in 2003) due to forward gold
sales commitments at $288.25 per ounce for a portion of our production. As of
March 31, 2004, a total of 35,794 ounces of gold are subject to forward
contracts at the price of $288.25 per ounce, all scheduled for delivery by the
end of 2004. During the first quarter of 2004, income from operations increased
to $2.9 million, or 62%, compared to $1.8 million during the first quarter of
2003, primarily due to the above-mentioned increase in sales partly offset by an
increase in exploration expenditures. Cost of sales and other direct production
costs as a percentage of sales from products decreased to
-30-
36.0% during the first quarter of 2004, from 42.7% during the same period in
2003 due primarily to the higher average realized gold price.
During the first quarter of 2004, the La Camorra unit produced
approximately 38,000 gold ounces at a total cash cost of $142 per ounce,
compared to approximately 35,000 gold ounces at a total cash cost of $137 per
ounce during the first quarter of 2003. During the 2004 period, La Camorra
produced gold at an average grade of 0.84 ounces of gold per ton, compared to an
average grade of 0.82 ounce of gold per ton during the first quarter of 2003.
Total gold production for the La Camorra unit is projected to reach
approximately 142,000 ounces for the year ending December 31, 2004.
As reported in our Form 10-K for the year ended December 31, 2003,
Venezuela continues to experience political unrest that has resulted in a severe
economic downturn since the fourth quarter of 2002. The Venezuelan Constitution
contains a provision to call a presidential referendum halfway through the term
of office if a prescribed percentage of the electorate petitions for a
referendum. During December 2003, approximately 3.4 million signatures were
collected on petitions with approximately 2.4 million valid signatures needed
for a recall election. In March 2004, Venezuela's elections council ruled that
1.83 million signatures on the petitions were deemed valid, and another 876,000
signatures were deemed to require confirmation, which lead to public protests.
The national electoral council recently announced May 27th through 30th as the
dates voters can verify their signatures.
We continue to maintain low costs in part due to the weak Venezuelan
currency, the bolivar. The Venezuelan government has fixed the exchange rate of
their currency to the U.S. dollar at 1,920 to $1 (as of February 7, 2004,
formerly 1,600 to $1 since February 2003); which is the exchange rate we utilize
to translate the financial statements of our Venezuelan subsidiary included in
our consolidated financial statements. Rules and regulations regarding the
implementation of exchange controls in Venezuela have been published and
periodically revised and/or updated. However, markets outside of Venezuela
reflect a devaluation of the Venezuelan currency at approximately 40%, which
benefits our cost structure, as a portion of the gains are offset against costs
of production, exploration and capital expenditures.
Because of the exchange controls in place and their impact on local
suppliers, some supplies, equipment parts and other items previously purchased
in Venezuela have been ordered outside the country. Increased lead times in
receiving orders from outside Venezuela has continued to require an increase in
supply inventory, including an increase of 13% as of the end of March compared
to December 31, 2003.
As previously reported in a press release in March 2004, approximately
5,000 ounces of gold production was provisionally withheld from export from
Venezuela by the Venezuelan government, pending an administrative review. The
gold is currently being stored at the Central Bank of Venezuela. We have
cooperated with the Venezuelan government in its investigation of the matter.
Subsequent shipments of gold have been exported out of Venezuela without
incident. For more information, see Note 5 to our Notes to Consolidated
Financial Statements.
-31-
Although we believe we will be able to manage and operate the La
Camorra unit and related exploration projects successfully, due to the continued
political, regulatory and economic uncertainty and its ramifications on the
office of the president, exportation, and exchange controls and the effect of
all of these on our operations including, among other things, litigation, labor
stoppages and the impact on our supplies of oil, gas and other products, there
can be no assurance we will be able to operate without interruptions to our
operations.
CORPORATE MATTERS
Other operating expense, net of other operating income, increased $5.0
million during the first quarter of 2004 compared to the first quarter of 2003,
primarily due to a cash settlement from Zemex Corporation received during the
first quarter of 2003 ($4.0 million) and increased accruals for tax offset
bonuses on employee stock options outstanding due to the increase in our common
stock price at March 31, 2004 ($1.0 million). We record stock options granted
with a tax offset provision at full market value as of the last trading day of
the period, as these options are considered to be variable stock option plans.
On March 31, 2004, the closing price of our common stock was $8.41 and 498,000
shares remained outstanding granted below this price.
Included in the first quarter 2003 net income is a positive cumulative
effect of a change in accounting principle of $1.1 million relating to the
adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations." For
additional information, see Note 11 to our Notes to Consolidated Financial
Statements.
Exploration expense increased $0.6 million during the first quarter of
2004 compared to the same period in 2003, primarily due to increased exploration
expenditures in Mexico on the Andrea vein ($0.4 million) and other areas at or
near San Sebastian ($0.3 million). Exploration expenditures remained
approximately the same in Venezuela, with increased activity of $0.2 million on
the Block B concessions, offset by decreased expenditures of $0.2 million at the
Canaima resource.
Activity at the Hollister Development Block in Nevada, or
pre-development expense, was approximately $0.3 million during the first quarter
of 2004, compared to $0.4 million during the same period in 2003. At the end of
the first quarter of 2004, Hecla received notification of approval of the
federal permits needed from the Bureau of Land Management ("BLM") for this
project, subject to a public comment period. The BLM has also reviewed the
necessary bonding calculations for this project and is expected to adjudicate
the bond in early May. Once the final permits are issued, the bond is
adjudicated, and an interim arrangement for property access and work
authorization is reached, site preparation work can commence, with actual
underground exploration ramp construction expected to commence in the summer.
The provision for closed operations and environmental matters increased
$0.7 million during the first quarter of 2004 compared to the same period in
2003, principally due to a provision for future reclamation and other closure
costs during the first quarter of 2004 ($0.4 million) and legal and other
expenditures related to Idaho's Coeur d'Alene Basin.
-32-
General and administrative expenses decreased $0.3 million during the
first quarter of 2004 compared to the same period in 2003, primarily due to
lower accruals for employee incentive compensation during the first quarter of
2004 ($0.6 million), offset by other general and administrative increases.
Provision for income taxes was higher by $0.1 million during the first
quarter of 2004 compared to the first quarter of 2003. For further information
see Note 3 to our Notes to Consolidated Financial Statements.
Interest expense decreased $0.1 million during the first quarter of
2004 compared to the first quarter of 2003, principally due to lower average
borrowings and lower interest rates on debt. Interest income increased $0.1
million during the 2004 period compared to 2003, primarily due to increased
income generated from short-term investments.
RECONCILIATION OF TOTAL CASH COSTS (NON-GAAP) TO COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP)
The following tables present reconciliations between non-GAAP total
cash costs to cost of sales and other direct production costs (GAAP) for our
gold (the Venezuela segment only) and silver operations (the Mexico and United
States segments), as well as a reconciliation for each individual silver
operating property, for the quarters ended March 31, 2004 and 2003 (in
thousands, except costs per ounce). We believe cash costs per ounce of silver or
gold provide an indicator of cash flow generation at each location and on a
consolidated basis, as well as providing a meaningful basis to compare our
results to those of other mining companies and other operating mining
properties. Cost of sales and other direct production costs is the most
comparable financial measure calculated in accordance with GAAP to total cash
costs. The sum of the cost of sales and other direct production costs for our
silver and gold operating properties in the tables below, as well as the cost of
sales and other direct production costs associated with our former industrial
minerals segment, is presented in our Consolidated Statement of Operations and
Comprehensive Income.
-33-
Venezuela Segment
------------------------------
Three Months Ended March 31,
2004 2003
------------------------------
Total cash costs $ 5,377 $ 4,785
Divided by ounces produced 38 35
------- -------
Total cash cost per ounce produced $ 142 $ 137
======= =======
Reconciliation to GAAP:
Total cash costs $ 5,377 $ 4,785
Treatment & freight costs (459) (347)
Change in product inventory (402) (659)
Reclamation and other costs (31) 52
------- -------
Cost of sales and other direct
production costs (GAAP) $ 4,485 $ 3,831
======= =======
U.S. Mexico
---------------------- -----------
Mexico & Lucky Greens San
U.S. Segments Friday Creek Sebastian
Combined Unit Unit Unit (1)
-----------------------------------------------------
Three months ended March 31, 2004
-----------------------------------------------------
Total cash costs $ 2,982 $ 2,629 $ 729 $ (376)
Divided by ounces produced 2,085 483 745 857
-----------------------------------------------------
Total cash cost per ounce produced $ 1.43 $ 5.44 $ 0.98 $ (0.44)
=====================================================
Reconciliation to GAAP:
Total cash costs $ 2,982 $ 2,629 $ 729 $ (376)
Reclamation and other costs 175 11 89 75
Treatment & freight costs (4,695) (1,164) (3,069) (462)
By-product credits 13,508 2,112 6,711 4,685
Change in product inventory 393 89 932 (628)
-----------------------------------------------------
Cost of sales and other direct
production costs (GAAP) $ 12,363 $ 3,677 $ 5,392 $ 3,294
=====================================================
-34-
Three months ended March 31, 2003
-----------------------------------------------------
Total cash costs $ 4,005 $ 2,840 $ 1,237 $ (72)
Divided by ounces produced 2,398 635 741 1,022
-----------------------------------------------------
Total cash cost per ounce produced $ 1.67 $ 4.47 $ 1.67 $ (0.07)
=====================================================
Reconciliation to GAAP:
Total cash costs $ 4,005 $ 2,840 $ 1,237 $ (72)
Reclamation 224 -- 72 152
Treatment & freight costs (4,654) (1,155) (2,989) (510)
By-product credits 10,891 1,315 5,514 4,062
Change in product inventory (249) 26 (293) 18
-----------------------------------------------------
Cost of sales and other direct
production costs (GAAP) $ 10,217 $ 3,026 $ 3,541 3,650
=====================================================
(1) Gold is accounted for as a by-product at the San Sebastian
unit whereby revenues from gold are deducted from operating
costs in the calculation of cash costs per ounce. If our
accounting policy was changed to treat gold production as a
co-product, the following costs per ounce would be reported:
THREE MONTHS ENDED MARCH 31,
2004 2003
---------------------------
Total cash costs $4,309 $ 3,989
Revenues
Silver 55.2% 54.1%
Gold 44.8% 45.9%
Ounces produced
Silver 857 1,022
Gold 11 12
Total cash cost per ounce produced
Silver $ 2.77 $ 2.11
Gold $ 168 $ 158
FINANCIAL CONDITION AND LIQUIDITY
Our financial condition continues to be strong, with cash and cash
equivalents of $94.4 million and $25.5 million in short-term investments with
maturities due within the next twelve months. Our cash needs over the next nine
months will be primarily related to capital expenditures, exploration activities
and reclamation expenditures and will be funded through a combination of current
cash, maturities or sales of investments, future cash flows from operations
and/or future borrowings or debt or equity security issuances. Although we
believe existing cash and cash equivalents are adequate, we cannot project the
cash impact of possible future investment opportunities or acquisitions, and our
operating properties may require more cash than forecasted.
-35-
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The table below presents our fixed, noncancelable contractual
obligations and commitments primarily with regards to payment of debt, future
funding for reclamation bonds, our earn-in agreement obligations, certain
capital expenditures and lease arrangements as of March 31, 2004 (in thousands).
For additional information on outstanding debt, see Note 6 to our Notes to
Consolidated Financial Statements.
Payments Due By Period
----------------------------------------------------------
Less than 1 After 5
year 1-3 years 4-5 years years Total
----------------------------------------------------------
Long-term Debt (1) $ 2,618 $ 2,341 $ -- $ -- $ 4,959
Reclamation bond (2) 5,546 -- -- -- 5,546
Purchase obligations (3) 15,609 -- -- -- 15,609
Earn-in agreement (4) 7,503 307 -- -- 7,810
Operating lease commitments (5) 491 1,485 120 -- 2,096
-------- ------- ----- ----- --------
Total contractual cash obligations $ 31,767 $ 4,133 $ 120 $ -- $ 36,020
======== ======= ===== ===== ========
(1) These amounts are included on our Consolidated Balance Sheet.
See Note 6 of Notes to Consolidated Financial Statements for
additional information about our debt and related matters.
There are no provisions in our outstanding debt agreements
that would accelerate the debt payments listed above.
(2) During the third quarter of 2003, the parties to the Greens
Creek joint venture determined it would be necessary to
replace existing surety requirements via the establishment of
a $26.6 million restricted trust for reclamation funding in
the future. Approximately $7.9 million was placed into
restricted cash in January 2004, with the balance currently
estimated to be funded from operating cash flows during the
second quarter of 2004. Our 29.73% portion of the remaining
$18.7 million will be approximately $5.6 million.
(3) As of March 31, 2004, we were committed to approximately $8.2
million for the construction of a shaft and other capitalized
projects at the La Camorra unit.
(4) In August 2002, we entered into an earn-in agreement with
Rodeo Creek Gold, Inc., a wholly owned subsidiary of Great
Basin Gold Ltd. ("Great Basin"), concerning exploration,
development and production on Great Basin's Hollister
Development Block gold property. The agreement provides us
with an option to earn a 50% working interest in the Hollister
Development Block in return for funding a two-stage, advanced
exploration and development program leading to commercial
production. As of March 31, 2004, we were contractually
committed to approximately $7.8 million, which represents the
remaining portion of the first stage of the agreement. The
$7.8 million has not been recorded in our Consolidated
Financial Statements; although project to date, we have
incurred expenditures of $2.5 million, which has been recorded
on our Consolidated Financial Statements as pre-development
expenditures.
(5) We enter into operating leases in the normal course of
business. Substantially all lease agreements have fixed
payment terms based on the passage of time. Some lease
agreements provide us with the option to renew the lease or
purchase the leased property. Our future operating lease
obligations would change if we exercised these renewal options
and if we entered into additional operating lease
arrangements.
We maintain reserves for costs associated with mine closure,
reclamation of land and other environmental matters. At March 31, 2004, our
reserves for these matters totaled $70.5 million, for which no contractual or
commitment obligations exist. Future expenditures related to closure,
reclamation and environmental expenditures are difficult to estimate, although
we anticipate we will make expenditures relating to these obligations over the
next thirty years. During 2004, expenditures for environmental remediation and
reclamation are estimated to be in the range of $8.0 million and $10.0 million.
For additional information relating to our environmental obligations, see Note 5
to our Notes to Consolidated Financial Statements.
-36-
OPERATING ACTIVITIES
Operating activities provided approximately $4.9 million in cash during
the first quarter, compared to $4.8 million at March 31, 2003, primarily from
cash provided by our operating properties. Net cash provided by operating
activities was negatively affected by increases in accounts and notes
receivable, primarily due to increased value added tax receivables recorded in
Venezuela and increased receivables at Greens Creek and Lucky Friday due to the
timing and value of product shipments ($3.3 million); decreases in accounts
payable and other accrued expenses, including taxes ($2.2 million); changes in
other current assets primarily related to the collateralization of a line of
credit in Venezuela ($2.5 million); increases in supply inventory at La Camorra
and both supply and product inventory at San Sebastian ($1.2 million); and cash
required for reclamation activities and other noncurrent liabilities ($0.7
million).
We have recorded value added taxes paid in Venezuela and Mexico as
recoverable assets. At March 31, 2004, value added tax receivables totaled $4.2
million in Venezuela and $2.4 million in Mexico. We periodically evaluate the
recoverability of these receivables and will establish a reserve for
uncollectibility, if warranted. It is possible we will not recover the full
amount owed to us by the Venezuelan and Mexican tax authorities.
Positive non-cash elements included charges for depreciation, depletion
and amortization ($6.5 million), a $0.8 million adjustment for compensation
expense recognized for outstanding stock options granted with a tax offset bonus
and a change in deferred income taxes primarily a result of utilization of
deferred tax assets in Mexico ($0.7 million) and provisions for reclamation and
closure costs ($0.6 million).
Sales of concentrates and precipitates from the Greens Creek, Lucky
Friday and San Sebastian units are sold directly to smelters, with recorded
amounts adjusted to month-end metals prices until final settlement. Due to
unusual volatility in metals prices during the month of April 2004, we adjusted
our sales and receivables for concentrates and precipitates to April metals
prices in accordance with our revenue recognition policy for a total of $1.7
million. At April 21, 2004, the prices for gold, silver, lead and zinc had
declined from the March 31, 2004 balances by 7%, 22%, 12% and 9%, respectively,
to $390 per ounce, $6.18 per ounce, $0.32 per pound and $0.45 per pound.
As previously reported in a press release in March 2004, approximately
5,000 ounces of gold production was provisionally withheld from export from
Venezuela by the Venezuelan government, pending an administrative review. The
gold is currently being stored at the Central Bank of Venezuela. We have
cooperated with the Venezuelan government in its investigation of the matter.
Subsequent shipments of gold have been exported out of Venezuela. For more
information, see Note 5 to our Notes to Consolidated Financial Statements.
-37-
INVESTING ACTIVITIES
Investing activities required $17.9 million in cash during the first
quarter of 2004 primarily for the purchase of short-term investments ($12.8
million), additions to properties, plants and equipment ($6.8 million) and the
establishment of a restricted trust for future reclamation at Greens Creek (as
discussed above) and surety bond collateral for the Hollister Development Block
($3.7 million), offset by maturities of investments ($5.3 million). Capital
expenditures during the first quarter of 2004 consisted of additions in
Venezuela of $5.0 million, including construction on a new shaft and mine
development at the La Camorra mine and definition drilling and surface equipment
purchases at the Isidora mine; mine equipment and development, as well as
additions to the mine and mill infrastructure, at the Greens Creek unit ($1.0
million); and mine development at the Lucky Friday unit ($0.6 million).
In 2004, we estimate our capital expenditures will be in the range of
$38.0 to $45.0 million, which represents sustaining capital at our existing
operations and expansion capital for shaft construction at the La Camorra mine,
equipment and development at the Isidora mine and development at the Lucky
Friday unit. There can be no assurance that our estimated capital expenditures
for 2004 will be in the range we have projected.
FINANCING ACTIVITIES
During the first quarter of 2004, financing activities generated
approximately $2.0 million in cash due to short-term borrowings on a line of
credit for national currency in Venezuela ($2.4 million) and proceeds of $1.3
million received upon exercise of employee stock options (285,962 shares),
offset by the repayment of debt ($1.7 million), including final payments of $0.5
million and $1.0 million, respectively, on the outstanding balances of a credit
agreement, used to provide project financing at the La Camorra mine, and a
subordinated loan agreement, entered into in connection with the project
financing agreement.
OTHER
In February 2004, we reduced the number of Series B preferred shares
outstanding by 273,961 shares, or 58.9%, pursuant to an exchange offer. This
exchange offer allowed participating shareholders to receive 7.94 shares of
common stock for each preferred share exchanged, which resulted in the issuance
of a total of 2,175,237 common shares. The completed exchange offer eliminated
$3.4 million in accumulated dividends on the preferred stock, and reduced the
annual dividend payable on the preferred stock by $1.0 million to $0.7 million.
During March 2004, we entered into exchange agreements with holders of
approximately 17% of the then outstanding preferred stock (190,816 preferred
shares) to exchange such shares for shares of common stock. A total of 33,000
preferred shares were exchanged for 260,861 common shares as a result of these
privately negotiated exchanges. As a result of the February and March exchanges,
we recorded non-cash dividends of approximately $10.9 million during the first
quarter of 2004. As of March 31, 2004, a total of 157,816 shares of preferred
stock remain outstanding. In order to eliminate the effect of our dividend
arrearages on our capital raising activities, we intend to evaluate and
potentially implement further programs to reduce the number of remaining
preferred shares outstanding, including the possible redemption of shares.
-38-
Holders of our Series B preferred stock are entitled to receive
cumulative cash dividends at the annual rate of $3.50 per share, payable
quarterly, when and if declared by the board of directors. As of January 31,
2002, we had not declared and paid the equivalent of six quarterly dividends,
entitling holders of the preferred stock to elect two directors at our annual
shareholders' meeting. On May 10, 2002, holders of the preferred stock, voting
as a class, elected two additional directors. As of April 1, 2004, we have not
declared or paid $2.1 million of preferred stock dividends.
We are subject to legal proceedings and claims that have not been
finally adjudicated. The ultimate disposition of these matters and various other
pending legal actions and claims is not presently determinable. For information
on legal proceedings and claims, see Note 5 to our Notes to Consolidated
Financial Statements.
For information on hedged positions and derivative instruments, see
Item 3 - "Quantitative and Qualitative Disclosures About Market Risk."
NEW ACCOUNTING PRONOUNCEMENTS
In April 2004, the Financial Accounting Standards Board ("FASB")
ratified Emerging Issues Task Force ("EITF") Issue No. 04-2, which amends
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" to the extent all mineral rights are to be considered tangible
assets for accounting purposes. There has been diversity in practice related to
the application of SFAS No. 141 to certain mineral rights held by mining
entities that are not within the scope of SFAS No. 19 "Financial Accounting and
Reporting by Oil and Gas Producing Companies." The SEC staff's position
previously was entities outside the scope of SFAS No. 19 should account for
mineral rights as intangible assets in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets." We have reclassified the net of our cost of
mineral interests and associated accumulated amortization to property, plant and
equipment as of March 31, 2004 ($5.1 million) and December 31, 2003 ($5.3
million).
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
a revision to this interpretation (FIN 46(r)). FIN 46(r) clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements." FIN 46 clarifies the application of ARB No. 51 to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. We adopted FIN 46(r) in its entirety for the period
ended March 31, 2004, which did not have a material effect on our consolidated
financial statements.
-39-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our risk-management activities includes
forward-looking statements that involve risk and uncertainties, as well as
summarizes the financial instruments and derivative instruments held by us at
March 31, 2004, which are sensitive to changes in interest rates and commodity
prices and are not held for trading purposes. Actual results could differ
materially from those projected in the forward-looking statements. We believe
there has not been a material change in our market risk since the end of our
last fiscal year. In the normal course of business, we also face risks that are
either nonfinancial or nonquantifiable (see Part I, Item 1 - Risk Factors in our
Form 10-K for the year ended December 31, 2003).
INTEREST-RATE RISK MANAGEMENT
The following table presents principal cash flows (in thousands) for
debt outstanding and short-term investments at March 31, 2004, by maturity date
and the related average interest rate. Our outstanding debt is fixed at 13% and
17% as indicated below. Our short-term investments were subject to changes in
market interest rates and were sensitive to those changes.
Expected Maturity Date
----------------------------------------------- Fair
2004 2005 2006 2007 2008 Total Value
---------------------------------------------------------------------
Project financing debt $ 618 $ 1,366 $ 975 -- -- $ 2,959 $ 2,959
Average interest rate 13% 13% 13% -- --
Revolving debt $ 2,396 -- -- -- -- $ 2,396 $ 2,396
Average interest rate 17% -- -- -- --
Short-term investments $25,455 -- -- -- -- $25,455 $25,455
Average interest rate 1.39% -- -- -- --
COMMODITY-PRICE RISK MANAGEMENT
At times, we use commodity forward sales commitments, commodity swap
contracts and commodity put and call option contracts to manage our exposure to
fluctuation in the prices of certain metals which we produce. Contract positions
are designed to ensure that we will receive a defined minimum price for certain
quantities of our production. We use these instruments to reduce risk by
offsetting market exposures. We are 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 us are not leveraged and are held for purposes other than
trading. These contracts meet the criteria to be treated as normal sales in
accordance with SFAS No. 138 and as a result, these contracts are not required
to be accounted for as derivatives under SFAS No. 133.
The following table provides information about our forward sales
contracts at March 31, 2004. The table presents the notional amount in ounces,
the average forward sales price and the total-dollar contract amount expected by
the maturity dates, which will occur over the next nine months.
-40-
Expected Maturity
Date
2004
-----------------
Forward contracts:
Gold sales (ounces) 35,794
Future price (per ounce) $ 288.25
Contract amount (in thousands) $ 10,318
Estimated fair value $ (5,026)
Estimated % of annual production
committed to contracts 21%
In addition to the above contracts, we have a quarterly Gold Lease Rate
Swap at a fixed rate of 1.5% on 22,660 ounces of the above gold forward
contracts. The ounces covered under the swap are adjusted each quarter, in
accordance with the expiration of the gold forward contracts. At March 31, 2004,
the fair market value of the Gold Lease Rate Swap was approximately $106,000,
which represents the amount the counterparty would have to pay us if the
contract was terminated.
-41-
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
our management, including the CEO and CFO, concluded that disclosure controls
and procedures were effective as of March 31, 2004, in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion.
There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
-42-
Part II - Other Information
Hecla Mining Company and Subsidiaries
ITEM 1. LEGAL PROCEEDINGS
For information concerning legal proceedings, refer to Note 5 to our
Notes to Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
The following table describes purchases of shares of Series B
Cumulative Convertible Preferred stock made by us during the first quarter of
2004.
TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF
TOTAL NUMBER PURCHASED AS PART OF SHARES THAT MAY YET
OF SHARES AVERAGE PRICE PAID PUBLICLY ANNOUNCED BE PURCHASED UNDER
PERIOD PURCHASED (1) PER SHARE PLANS OR PROGRAMS THE PLANS OR PROGRAMS
===============================================================================================================
January 1, 2004 - -0- -0- -0-
January 31, 2004
- ---------------------------------------------------------------------------------------------------------------
February 1, 2004 - 273,961 $66.00 in shares of 273,921 (3) -0-
February 29, 2004 common stock (2)
- ---------------------------------------------------------------------------------------------------------------
March 1, 2004 - 33,000 $63.83 in shares of -0-
March 31, 2004 common stock (4)
- ---------------------------------------------------------------------------------------------------------------
(1) The total number of shares purchased includes (i) 273,961
shares purchased pursuant to the exchange offer described in
footnote (3) below and (ii) 33,000 shares purchased pursuant
to privately negotiated exchange agreements.
(2) 2,175,237 shares of common stock were issued in the exchange.
(3) On January 9, 2004, we publicly announced that our Board of
Directors had authorized the company to make an exchange offer
to holders of all shares of Series B Cumulative Convertible
Preferred Stock outstanding on the date of the offer (on the
date of the offer, 464,777 shares were outstanding). The offer
expired on February 20, 2004. (4) 260,861 shares of common
stock were issued in the exchange.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2004, we have not declared or paid $2.1 million of
Series B Convertible Preferred stock dividends.
-43-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the exhibit index to this Form 10-Q for the list of
exhibits.
(b) Reports on Form 8-K filed during the quarter ended March 31,
2004.
Form 8-K dated March 10, 2004, regarding gold production being
withheld from export from Venezuela, pending an administrative
review, in a news release.
ITEMS 4 AND 5 OF PART II ARE NOT APPLICABLE AND ARE OMITTED FROM THIS REPORT.
-44-
Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HECLA MINING COMPANY
(Registrant)
Date: May 5, 2004 By /s/ Phillips S. Baker, Jr.
----------------------------------------
Phillips S. Baker, Jr., President,
Chief Executive Officer and Director
Date: May 5, 2004 By /s/ Lewis E. Walde
----------------------------------------
Lewis E. Walde, Vice President and
Chief Financial Officer
Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-Q - March 31, 2004
Index to Exhibits
3.1 Certificate of Incorporation of the Registrant as amended to
date. Filed as exhibit 3.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 (File No.
1-8491) and incorporated herein by reference.
3.2 By-Laws of the Registrant as amended to date. Filed as exhibit
3(ii) to Registrant's Current Report on Form 8-K dated
November 13, 1998 (File No. 1-8491) and incorporated herein by
reference.
4.1(a) Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock of the Registrant.
Filed as exhibit 4.1(d)(e) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993 (File No.
1-8491) and incorporated herein by reference.
4.1(b) Certificate of Designations, Preferences and Rights of Series
B Cumulative Convertible Preferred Stock of the Registrant.
Filed as exhibit 4.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993 (File No. 1-8491) and
incorporated herein by reference.
4.2 Rights Agreement dated as of May 10, 1996, between Hecla
Mining Company and American Stock Transfer & Trust Company,
which includes the form of Rights Certificate of Designation
setting forth the terms of the Series A Junior Participating
Preferred Stock of Hecla Mining Company as Exhibit A and the
summary of Rights to Purchase Preferred Shares as Exhibit B.
Filed as exhibit 4 to Registrant's Current Report on Form 8-K
dated May 10, 1996 (File No. 1-8491) and incorporated herein
by reference.
4.3 Stock Purchase Agreement dated as of August 27, 2001, between
Hecla Mining Company and Copper Mountain Trust. Filed as
exhibit 4.3 to Registrant's Registration Statement on Form S-1
filed on October 7, 2002 (File No. 333 - 100395) and
incorporated herein by reference.
4.4 Warrant Agreement dated August 2, 2002, between Hecla Mining
Company and Great Basin Gold Ltd. Filed as exhibit 4.4 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
4.5 Registration Rights Agreement dated August 2, 2002, between
Hecla Mining Company and Great Basin Gold Ltd. Filed as
exhibit 4.5 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
Certain instruments defining the rights of holders of
long-term debt of the Registrant and its consolidated
subsidiaries, where the total amount of securities authorized
under any such instrument does not exceed 10% of the
Registrant's consolidated total assets, are not filed herewith
pursuant to Item 601(b)(ii)(A) of Regulation S-K. The
Registrant agrees to furnish a copy of any such instrument to
the Commission upon request.
10.2 Employment agreement dated November 6, 2001, between Hecla
Mining Company and Phillips S. Baker, Jr. (Registrant has
substantially identical agreements with each of Messrs. Thomas
F. Fudge, Jr., Michael H. Callahan, Ronald W. Clayton, Lewis
E. Walde and Ms. Vicki Veltkamp. Such substantially identical
agreements are not included as separate exhibits.) Filed as
exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 (File No. 1-8491) and
incorporated by herein by reference. (1)
10.3(a) 1987 Nonstatutory Stock Option Plan of the Registrant. Filed
as exhibit B to Registrant's Proxy Statement dated March 20,
1987 (File No. 1-8491) and incorporated herein by reference.
(1)
10.3(b) Hecla Mining Company 1995 Stock Incentive Plan, as amended.
Filed as exhibit 99.1 to Registrant's Preliminary Proxy
Statement dated April 8, 2002 (File No. 1-8491) and
incorporated herein by reference. (1)
10.3(c) Hecla Mining Company Stock Plan for Nonemployee Directors, as
amended. Filed as exhibit 99.1 to Registrant's Preliminary
Proxy Statement dated April 8, 2002 (File No. 1-8491) and
incorporated herein by reference. (1)
10.3(d) Hecla Mining Company Key Employee Deferred Compensation Plan.
Filed as exhibit 4.3 to Registrant's Registration Statement on
Form S-8 filed on July 24, 2002 (File No. 333-96995) and
incorporated herein by reference. (1)
10.4(a) Hecla Mining Company Retirement Plan for Employees and
Supplemental Retirement and Death Benefit Plan. Filed as
exhibit 10.11(a) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1985 (File No. 1-8491) and
incorporated herein by reference. (1)
10.4(b) Supplemental Excess Retirement Master Plan Documents. Filed as
exhibit 10.5(b) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference. (1)
10.4(c) Hecla Mining Company Nonqualified Plans Master Trust
Agreement. Filed as exhibit 10.5(c) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 (File
No. 1-8491) and incorporated herein by reference. (1)
10.5 Form of Indemnification Agreement dated May 27, 1987, between
Hecla Mining Company and each of its Directors and Officers.
Filed as exhibit 10.15 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1987 (File No. 1-8491)
and incorporated herein by reference. (1)
10.6 Summary of Short-term Performance Payment Plan. Filed as
exhibit 10.7 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference. (1)
10.7(a) Amended and Restated Golden Eagle Earn-in Agreement between
Echo Bay Mines Ltd. (successor in interest to Newmont Mining
Corp./Santa Fe Pacific Gold Corp.) and Hecla Mining Company
dated September 6, 1996. Filed as exhibit 10.11(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (File No. 1-8491) and incorporated
herein by reference.
10.7(b) Golden Eagle Operating Agreement between Echo Bay Mines Ltd.
(successor in interest to Newmont Mining Corp./Santa Fe
Pacific Gold Corp.) and Hecla Mining Company dated September
6, 1996. Filed as exhibit 10.11(b) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996
(File No. 1-8491) and incorporated herein by reference.
10.7(c) First Amendment to the Amended and Restated Golden Eagle
Earn-in Agreement effective September 5, 2002, by and between
Echo Bay Mines Ltd. and Hecla Mining Company. Filed as exhibit
10.6(c) to Registrant's Registration Statement on Form S-1
filed on October 7, 2002 (File No. 333 - 100395) and
incorporated herein by reference.
10.8 Restated Mining Venture Agreement among Kennecott Greens Creek
Mining Company, Hecla Mining Company and CSX Alaska Mining
Inc. dated May 6, 1994. Filed as exhibit 99.A to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (File No. 1-8491) and incorporated herein by reference.
10.9 Credit Agreement dated as of June 25, 1999, among Monarch
Resources Investments Limited as Borrower, Monarch Minera
Suramericana, C.A. as an additional obligor and Standard Bank
of London Limited as Collateral and Administrative Agent.
Filed as exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999 (File
No. 1-8491) and incorporated herein by reference.
10.10 Subordinated Loan Agreement dated June 29, 2000, among Hecla
Mining Company as Borrower and Standard Bank of London Limited
as Lender. Filed as exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 (File
No. 1-8491) and incorporated herein by reference.
10.11 Subordination Agreement dated June 29, 2000, among Hecla
Mining Company and Standard Bank of London Limited as Senior
Creditor and Subordinated Creditor. Filed as exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 1-8491) and incorporated herein
by reference.
10.12 Stock Purchase Agreement dated February 27, 2001, between
Hecla Mining Company and IMERYS USA, Inc. Filed as exhibit 99
to Registrant's Current Report on Form 8-K dated March 27,
2001 (File No. 1-8491) and incorporated herein by reference.
10.13 Real Estate Purchase and Sale Agreement between Hecla Mining
Company and JDL Enterprises, LLC, dated October 19, 2001.
Filed as exhibit 10.21 to Registrant's Annual Report on Form
10-K for the year ended December 31, 2001 (File No. 1-8491)
and incorporated herein by reference.
10.14 Earn-in Agreement dated August 2, 2002, between Hecla Ventures
Corp. and Rodeo Creek Gold Inc. Filed as exhibit 10.19 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
10.15 Lease Agreement dated September 5, 2002 between Hecla Mining
Company and CVG-Minerven. Filed as exhibit 10.20 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
10.16 Agreement No. C-020 between Minera Hecla Venezolana, C.A. and
Redpath Venezolana, C.A., dated October 31, 2003, for the
construction of the La Camorra mine production shaft facility.
Filed as exhibit 10.23 to Registrant's Annual Report on Form
10-K for the year ended December 31, 2003 (File No. 1-8491)
and incorporated herein by reference.
10.17(a) Preferred Stock Exchange Agreement between Hecla Mining
Company and Langley Partners L.P., dated November 19, 2003.
Filed as exhibit
12(d)(17) to Registrant's Schedule Tender Offer dated January
16, 2004 (File No. 5-35201) and incorporated herein by
reference.
10.17(b) Preferred Stock Exchange Agreement between Hecla Mining
Company and Cohanzick Credit Opportunities Fund Ltd., dated
November 20, 2003. Filed as exhibit 12(d)(18) to Registrant's
Schedule Tender Offer dated January 16, 2004 (File No.
5-35201) and incorporated herein by reference.
10.17(c) Preferred Stock Exchange Agreement between Hecla Mining
Company and Ariel Fund, Ltd., dated November 20, 2003. Filed
as exhibit 12(d)(19) to Registrant's Schedule Tender Offer
dated January 16, 2004 (File No. 5-35201) and incorporated
herein by reference.
10.17(d) Preferred Stock Exchange Agreement between Hecla Mining
Company and Gabriel Capital, L.P., dated November 20, 2003.
Filed as exhibit 12(d)(20) to Registrant's Schedule Tender
Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.17(e) Preferred Stock Exchange Agreement between Hecla Mining
Company and Cohanzick High Yield Partners L.P., dated November
20, 2003. Filed as exhibit 12(d)(21) to Registrant's Schedule
Tender Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.17(f) Preferred Stock Exchange Agreement between Hecla Mining
Company and JMB Capital Partners, L.P., dated December 1,
2003. Filed as exhibit 12(d)(22) to Registrant's Schedule
Tender Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.17(g) Preferred Stock Exchange Agreement between Hecla Mining
Company and Lonestar Partners, L.P., dated December 1, 2003.
Filed as exhibit 12(d)(23) to Registrant's Schedule Tender
Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.17(h) Preferred Stock Exchange Agreement between Hecla Mining
Company and JMB Capital Partners, L.P., dated December 1,
2003. Filed as exhibit 12(d)(24) to Registrant's Schedule
Tender Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.17(i) Preferred Stock Exchange Agreement between Hecla Mining
Company and Generic Trading of Philadelphia, LLC, dated
December 8, 2003. Filed as exhibit 12(d)(25) to Registrant's
Schedule Tender Offer dated January 16, 2004 (File No.
5-35201) and incorporated herein by reference.
10.17(j) Preferred Stock Exchange Agreement between Hecla Mining
Company and Smith Barney Inc., dated December 10, 2003. Filed
as exhibit
12(d)(26) to Registrant's Schedule Tender Offer dated January
16, 2004 (File No. 5-35201) and incorporated herein by
reference.
10.17(k) Preferred Stock Exchange Agreement between Hecla Mining
Company and Maxim Group, dated December 17, 2003. Filed as
exhibit 12(d)(27) to Registrant's Schedule Tender Offer dated
January 16, 2004 (File No. 5-35201) and incorporated herein by
reference.
10.17(l) Preferred Stock Exchange Agreement between Hecla Mining
Company and Generic Trading of Philadelphia, LLC, dated
December 30, 2003. Filed as exhibit 12(d)(28) to Registrant's
Schedule Tender Offer dated January 16, 2004 (File No.
5-35201) and incorporated herein by reference.
10.17(m) Preferred Stock Exchange Agreement between Hecla Mining
Company and JMB Capital Partners, L.P., dated March 19, 2004.*
10.17(n) Preferred Stock Exchange Agreement between Hecla Mining
Company and Langley Partners L.P., dated March 19, 2004.*
10.17(o) Preferred Stock Exchange Agreement between Hecla Mining
Company and Maxim Group, dated March 31, 2004.*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
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(1) Indicates a management contract or compensatory plan or arrangement.
* Filed herewith.