1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 1-8491
HECLA MINING COMPANY
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0126240
- - ------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83814-8788
- - ------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
208-769-4100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for at least the past 90 days. Yes XX . No ____.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding May 11, 1994
- - ------------------------------------------- ----------------------------
Common stock, par value 25c. per share 48,055,447 shares
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HECLA MINING COMPANY and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
I N D E X
Page
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PART I. - Financial Information
Item l - Consolidated Balance Sheets - March 31, 1994
and December 31, 1993 3
- Consolidated Statements of Operations - Three Months
Ended March 31, 1994 and 1993 4
- Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1994 and 1993 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II. - Other Information
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
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PART I - FINANCIAL INFORMATION
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
March 31, December 31,
1994 1993
---------- -----------
(Note 2)
ASSETS
------
Current assets:
Cash and cash equivalents $ 55,826 $ 40,031
Short-term investments 72 27,636
Accounts and notes receivable 26,503 18,841
Inventories (Note 4) 13,812 15,020
Other current assets 2,222 2,003
--------- ---------
Total current assets 98,435 103,531
Investments 6,266 6,565
Properties, plants and equipment, net 226,311 229,055
Other noncurrent assets 6,624 7,002
--------- ---------
Total assets $ 337,636 $ 346,153
========= =========
LIABILITIES
-----------
Current liabilities:
Accounts payable and accrued expenses $ 15,509 $ 17,312
Accrued payroll and related benefits 2,150 2,056
Preferred stock dividends payable 2,013 2,012
Accrued taxes 1,289 928
--------- ---------
Total current liabilities 20,961 22,308
Deferred income taxes 359 359
Deferred revenue 161 36
Long-term debt 51,008 50,009
Accrued reclamation costs 23,597 24,947
Other noncurrent liabilities 3,559 3,822
--------- ---------
Total liabilities 99,645 101,481
--------- ---------
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, 25c. par value,
authorized 5,000,000 shares, issued
and outstanding - 2,300,000,
liquidation preference $117,012 575 575
Common stock, 25c. par value,
authorized 100,000,000 shares;
issued 1994 - 40,587,667;
issued 1993 - 40,320,761 10,147 10,080
Capital surplus 266,704 265,687
Retained deficit (38,437) (30,774)
--------- ---------
238,989 245,568
Foreign currency translation adjustment (100) --
Net unrealized loss on marketable
equity securities (10) (8)
Less common stock reacquired at cost;
1994 - 62,239 shares, 1993 - 62,226 shares (888) (888)
--------- ---------
Total shareholders' equity 237,991 244,672
--------- ---------
Total liabilities and shareholders' equity $ 337,636 $ 346,153
========= =========
The accompanying notes are an integral part of the financial statements.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars and shares in thousands, except for per-share amounts)
Three Months Ended
-------------------------------------
March 31, 1994 March 31, 1993
-------------- --------------
(Note 2)
Sales of products $ 26,340 $ 23,779
--------- ---------
Cost of sales and other direct production costs 24,671 21,177
Depreciation, depletion and amortization 2,620 3,948
--------- ---------
27,291 25,125
--------- ---------
Gross loss (951) (1,346)
--------- ---------
Other operating expenses:
General and administrative 4,559 1,754
Exploration 2,108 1,155
Research - - 19
Depreciation and amortization 182 126
Provision for closed operations and
environmental matters 240 187
--------- ---------
7,089 3,241
--------- ---------
Loss from operations (8,040) (4,587)
--------- ---------
Other income (expense):
Interest and other income 1,314 151
Other expense - - (20)
Gain (loss) on sale of investments 1,328 (69)
Minority interest in net loss of
subsidiaries - - 15
Interest expense:
Total interest cost (1,149) (1,543)
Less amount capitalized 965 665
--------- ---------
2,458 (801)
--------- ---------
Loss before income taxes (5,582) (5,388)
Income tax provision (Note 3) (68) (70)
--------- ---------
Net loss (5,650) (5,458)
Preferred stock dividends (2,013) - -
--------- ---------
Net loss applicable to common shareholders $ (7,663) $ (5,458)
========= =========
Net loss per common share $(0.19) $(0.15)
====== ======
Cash dividends per common share $ - - $ - -
====== ======
Weighted average number of common
shares outstanding 40,341 36,264
====== ======
The accompanying notes are an integral part of the financial statements.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
Three Months Ended
------------------------------------
March 31, 1994 March 31, 1993
-------------- --------------
(Note 2)
Operating activities:
Net loss $ (5,650) $ (5,458)
Noncash elements included in net loss:
Depreciation, depletion and amortization 2,802 4,074
Gain on disposition of properties,
plants and equipment (579) (3)
Gain on sale of investments (1,328) - -
Accretion of interest on long-term debt 999 1,399
Provision for reclamation and closure costs 123 152
Minority interest in net loss of
subsidiaries - - 15
Change in:
Accounts and notes receivable (7,662) (4,007)
Inventories 1,208 95
Other current assets (219) 98
Accounts payable and accrued expenses (1,803) 2,130
Accrued payroll and related benefits 94 (73)
Accrued taxes 361 101
Noncurrent liabilities (263) (828)
--------- ---------
Net cash applied to operating activities (11,917) (2,305)
--------- ---------
Investing activities:
Additions to properties, plants and equipment (11,510) (3,662)
Proceeds from disposition of properties,
plants and equipment 13,381 4
Purchase of investments and increase in cash
surrender value of life insurance (1,191) (124)
Proceeds from maturity of short-term investments
and sale of investments 30,470 - -
Other, net (2,634) 98
--------- ---------
Net cash provided by (applied to) investing activities 28,516 (3,684)
--------- ---------
Financing activities:
Common stock issued under stock option plan 1,084 24
Dividends on preferred stock (2,013) - -
Bank borrowings - - 7,000
Increase in deferred revenue 125 - -
--------- ---------
Net cash provided by (applied to) financing activities (804) 7,024
--------- ---------
Change in cash and cash equivalents:
Net increase in cash and cash equivalents 15,795 1,035
Cash and cash equivalents at beginning of period 40,031 5,426
--------- ---------
Cash and cash equivalents at end of period $ 55,826 $ 6,461
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 85 $ 99
======= =======
Income tax payments $ 182 $ 71
======= =======
The accompanying notes are an integral part of the financial statements.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The notes to the Company's 1993 historical financial statements
included in its Form 10-K filing with the Securities and Exchange
Commission and the notes to the Company's 1993 supplemental
consolidated financial statements, which reflects the pooling of
interests with Equinox Resources Ltd., as set forth in the
Company's Amendment No. 3 to Form S-3 Registration Statement as filed
with the Securities and Exchange Commission on May 4, 1994,
substantially apply to the interim consolidated financial statements
for the three months ended March 31, 1994, and are not repeated here.
Note 2. The financial information given in the accompanying unaudited interim
consolidated financial statements reflect all adjustments which are,
in the opinion of management, necessary to a fair statement of the
results for the interim periods reported. All such adjustments are
of a normal recurring nature. All financial statements presented
herein are unaudited. However, the balance sheet as of December 31,
1993, was derived from the audited supplemental consolidated balance
sheet described in Note 1 above. The balance sheet as of December
31, 1993, the statements of operations and cash flows for the
three-months ended March 31, 1993, as previously reported, have been
restated to give retroactive effect to the acquisition by the Company
of Equinox Resources Ltd. ("Equinox") on March 11, 1994, which has
been accounted for as a pooling of interests.
Separate operating results of the combining entities for the three
month periods ended March 31, 1994 and 1993 are as follows (in
thousands):
March 31,
---------------------------
1994 1993
-------- --------
Sale of products:
Hecla $ 23,704 $ 20,869
Equinox 2,636 2,910
-------- --------
$ 26,340 $ 23,779
======== ========
Net loss applicable to common
shareholders:
Hecla $ 6,603 $ 4,771
Equinox 1,060 687
-------- --------
$ 7,663 $ 5,458
======== ========
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Note 3. The components of the income tax provision for the three months ended
March 31, 1994 and 1993 are as follows (in thousands):
1994 1993
------- -------
Current:
State income taxes $ 68 $ 70
Federal income tax benefit - - - -
------- -------
Total current benefit 68 70
Deferred income tax provision - - - -
------- -------
Total tax provision $ 68 $ 70
======= =======
The Company's income tax provision for the first three months of
1994 and 1993 varies from the amount that would have been
provided by applying the statutory rate to the loss before income
taxes primarily due to the nonutilization of net operating
losses.
Note 4. Inventories consist of the following (in thousands):
March 31, December 31,
1994 1993
-------- ------------
Concentrates and metals in transit
and other products $ 2,153 $ 2,615
Industrial mineral products 4,826 5,260
Materials and supplies 6,833 7,145
-------- --------
$ 13,812 $ 15,020
======== ========
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Note 5. The Company has received notices from the United States Environmental
Protection Agency ("EPA") that it and numerous other parties are
potentially responsible to remediate alleged hazardous substance
releases at several sites under the Comprehensive Environmental
Response Compensation and Liability Act of 1980 ("CERCLA" or
"Superfund"). In addition, in January of 1985, the Company was
named, along with a number of other parties, as a third-party
defendant in a suit initially brought by the State of Colorado
against ASARCO Incorporated ("ASARCO") in December 1983 in Colorado
Federal District Court under CERCLA to recover natural resource
damages allegedly caused by releases of hazardous substances into the
environment from the Yak Tunnel, located near Leadville, Colorado
("Leadville Site"). The third-party complaint seeks contribution
from the third-party defendants for damages which ASARCO may be held
liable for in the primary action. In August 1986, the Company was
named a defendant in a lawsuit brought in Colorado Federal District
Court by the United States of America against the Company and a
number of other parties seeking to recover the United States'
response costs under CERCLA incurred or to be incurred at the
Leadville Site covered by the State of Colorado lawsuit filed
previously. The state and federal government CERCLA litigation
related to the Leadville Site was consolidated into a single lawsuit
on February 2, 1987. In September 1991, the Company entered into an
Order on Consent with the EPA and the Department of Justice pursuant
to which the Company and the federal government agreed to a
three-step process for settling the Company's liability to the
federal government at the Leadville Site. As a step in the
three-step settlement process, on January 6, 1993, the Colorado
Federal District Court entered a Partial Consent Decree between the
United States and the Company which resolves all issues concerning
the Company's alleged liability to the United States for response
costs at the site, except for response costs related to certain mill
tailings impoundments located at the Leadville Site. The Company
paid the United States $450,000 under the decree. The other two
steps in the settlement process at the site related to the Company
finalizing a study of any environmental impacts associated with the
tailings impoundments and implementing the appropriate response
activity to address these impacts. In July 1993, the Company
completed and delivered to EPA the study report analyzing the
environmental impacts associated with the tailings impoundments.
Based on that study report, EPA has selected a response action for
the tailings impoundments which requires capping and providing of
vegetation cover for the tailings impoundments. The Company has
recently finalized the terms of a consent decree with the federal
government providing for the payment by the Company of $516,000 to
cover a portion of EPA's past costs at the site and a portion of the
costs of the selected response action for the tailings impoundments.
The consent decree has been signed by all parties and must be
approved by the Colorado Federal District Court. Upon final approval
of the consent decree, the Company will be released from liability
for response costs for the entire Leadville Site. In November 1991,
the Company finalized a settlement with two primary liability
insurers concerning insurance coverage for the Company's
environmental liability at the Leadville Site. The monies received
in the insurance settlement in November 1991 are sufficient to cover
the Company's CERCLA liability at the site.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
In October 1989, and again in February 1990, the Company was notified
by the EPA that the EPA considered the Company a Potentially
Responsible Party ("PRP") at the Bunker Hill Superfund Site located
at Kellogg, Idaho ("Bunker Hill Site"). The EPA has also notified a
number of other companies involved in mining or smelting activities
in the site area that the EPA has determined they are also PRPs at
the site. The EPA has asserted that all PRPs, including the Company,
are responsible for the EPA's response costs and for remediating the
Bunker Hill Site as a result of the parties' release of hazardous
substances at or into the site. In August 1991, the EPA issued a
Record of Decision regarding the remedial action plan for the
populated areas of the site. During the summers of 1990, 1991, 1992
and 1993, the Company participated, along with a number of other PRPs
at the site, in a number of Orders on Consent pursuant to which the
participating PRPs agreed to undertake certain limited remedial
activities related to the populated areas of the site. The Company
has also participated with Gulf USA Corporation ("Gulf USA"), one of
the PRPs at the site, in an Order on Consent with the EPA pursuant to
which the Company and Gulf USA agreed to undertake certain remedial
activity with regard to the hillsides located within the site. The
EPA's Record of Decision covering the nonpopulated areas of the site
was issued on September 22, 1992. On November 4, 1992, the EPA
issued special notice letters under CERCLA to the Company and a
number of other PRPs at the site demanding reimbursement of the
federal government's past response costs and implementation of the
remedial activity covered by the two previous Records of Decision
issued for the site. In November of 1992, the major PRPs at the
site, including the Company, agreed to an allocation of most of the
future remedial activity at the site under the Records of Decision.
The allocation is between two PRP groups. One PRP group is
principally made up of mining companies who operated upstream from
the site, and the second PRP group is made up of Gulf USA and other
companies who had mining, smelting, or related operations within the
site. The allocation for remedial activity among the two PRP groups
is based upon a number of factors, including each PRP's level of
activity affecting the site and an estimate of the costs to implement
the various portions of the site remediation. On January 11, 1993,
the Company and certain other PRPs, who had received the special
notice letters, submitted to the EPA an offer which the PRPs deemed
should satisfy the government's requirements under CERCLA for a
good-faith offer. Under the terms of the offer, the Company and a
subset of the participating PRPs would assume responsibility for most
residential and commercial soils remediation and other incidental and
related activities. A different PRP sub-group, of which the Company
is not a member but which includes Gulf USA, would be responsible for
implementing most of the remaining site's remedial activities. The
responsibility of each PRP group would be several from the
responsibilities of the other group, but would be joint and several
among the PRPs within each group. The Company estimates most of the
proposed remedial activity at the site will be undertaken over a
period of five to seven years. The PRPs' good faith offer did not
include payment of any of the government's past response costs. In
October 1993, Gulf USA filed voluntary bankruptcy under Chapter 11 of
the United States Bankruptcy Code. Notwithstanding Gulf USA's
bankruptcy filing, the PRP group including the Company has recently
finalized the terms of a consent decree with the federal government
and the State of Idaho generally along the
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
allocation of liability set forth in the PRPs' good faith offer. The
Company and the other PRPs participating in the consent decree agreed
to an allocation of costs to implement the work at the Bunker Hill
Site under the terms of the consent decree. The consent decree at
the Bunker Hill Site has been signed by all parties and is subject to
Idaho Federal District Court approval.
In July 1991, the Coeur d'Alene Indian Tribe (the "Tribe") brought a
lawsuit, under CERCLA, in Idaho Federal District Court against the
Company and a number of other mining companies asserting claims for
damages to natural resources located downstream from the Bunker Hill
Site over which the Tribe alleges some ownership or control. The
Company has answered the Tribe's complaint denying liability for
natural resource damages and asserted a number of defenses to the
Tribe's claims, including a defense that the Tribe has no ownership
or control over the natural resources they assert have been damaged.
In July 1992, the Idaho Federal District Court, in a separate action,
determined that the Tribe does not own the beds, banks and waters of
Lake Coeur d'Alene and the lower portion of its tributaries, the
ownership of which is the primary basis for the natural resource
damage claims asserted by the Tribe against the Company. Based upon
the Tribe's appeal of the July 1992 district court ownership decision
to the 9th Circuit U.S. Court of Appeals, the court in the natural
resource damage litigation issued an order on October 30, 1992,
staying the court proceedings in the natural resource damage
litigation until a final decision is handed down on the question of
the Tribe's title.
In 1991, the Company initiated litigation in the Idaho State District
Court in Kootenai County, Idaho, against a number of insurance
carriers which provided comprehensive general liability insurance
coverage to the Company and its predecessors. The Company believes
that the insurance companies have a duty to defend and indemnify the
Company under their policies of insurance relating to claims asserted
against the Company by the EPA and the Tribe. In two separate
decisions issued in August 1992 and March 1993, the court ruled that
the primary insurance companies had a duty to defend the Company in
the Tribe's lawsuit, but that no carrier had a duty to defend the
Company in the EPA proceeding. The Company has not reduced its
environmental accrual to reflect any anticipated insurance proceeds.
The Records of Decision with respect to both the populated and
nonpopulated areas for the Bunker Hill Site indicate that future
remediation costs total approximately $93.0 million. Additionally,
the federal government has asserted that it has incurred
approximately $17.0 million in past costs at the site. Because
CERCLA assigns joint and several liability among the PRPs, any one of
the PRPs, including the Company, could be assessed the entire cost of
remediation. However, based upon the terms of the consent decrees
and related agreements for the Bunker Hill and Leadville Sites, as
described above, the Company has accrued an amount for the Company's
share of such remediation and other costs that management presently
believes is the most likely amount that the Company will be required
to fund. The total allowance for liability for remedial activity
costs at the Bunker Hill and Leadville Sites is $10.2 million and
$0.5 million, respectively, as of March 31, 1994. Other than
consulting work
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
necessary for the implementation of the Company's allocated portion
of the remedial activity at these sites, the Company's accruals do
not include any future legal or consulting costs. The Company does
not believe that these costs will be material. In addition, the
Company has not included any amounts for unasserted claims at these
or any other sites because the Company's potential liability has not
been asserted or established and amounts, if any, of potential
liability are impossible to determine.
In December 1993, Industrial Constructors Corp. ("ICC") served the
Company with a complaint in Federal District Court for the District
of Idaho alleging that the Company failed to comply with the terms of
the contract between the Company and ICC relating to the earth moving
work contracted to ICC at the Company's Grouse Creek gold project.
ICC has alleged that the Company owes ICC in excess of $5.0 million
not previously paid, including an approximate $1.0 million retention
currently held by the Company under the terms of the contract. The
Company terminated ICC's work at the Grouse Creek gold project
effective November 26, 1993, pursuant to its rights under the
contract and has contracted the second season of work originally
contracted to ICC to a different earth moving contractor. The
Company has answered the complaint denying the allegations of ICC and
has filed a counterclaim against ICC in excess of $2.0 million for
damages incurred by the Company as a result of ICC's failure to
comply with the terms of the contract. The litigation is in the
early stages of discovery, however, the Company hopes to be able to
mediate the dispute with ICC prior to proceeding to trial.
A jury trial commenced in May 1994 in Idaho State District Court with
respect to a lawsuit previously filed against the Company by Star
Phoenix Mining Company ("Star Phoenix"), a former lessee of the Star
Morning Mine, over a dispute between the Company and Star Phoenix
with respect to the Company's November 1990 termination of Star
Phoenix's lease of the Star Morning Mine property. Star Phoenix,
which is in bankruptcy, alleges the Company wrongfully terminated the
lease agreement and interfered with Star Phoenix's contractual
relationship with a major vendor and the purchaser of concentrates
from the Star Phoenix operations. In addition, certain principals of
Star Phoenix who guaranteed a portion of the Star Phoenix obligations
have made similar claims against the Company. The plaintiffs have
asserted that they have incurred damages amounting to approximately
$20 million as a result of the Company's actions. The plaintiffs are
also seeking punitive damages. Although the verdict in the
litigation is subject to the inherent uncertainty of a jury decision,
it is the Company's belief that the plaintiffs' claims are without
merit and that the Company terminated the lease agreement in
accordance with the terms of the agreement. The Company believes it
has sufficient defenses to all the plaintiffs' claims and the Company
will ultimately prevail in this litigation.
The Company is subject to other legal proceedings and claims which
have arisen in the ordinary course of its business and have not been
finally adjudicated. Although the ultimate disposition of these
matters and various other pending legal actions and claims is not
presently determinable, it is the opinion of the Company's
management, based upon the information available at this time, that
the outcome of
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
these suits and proceedings will not have a material adverse effect
on the results of operations and financial condition of the Company
and its subsidiaries.
Note 6. On May 11, 1994, the Company completed a public offering of 7,475,000
shares of its common stock for a price of $9.125 per share. After
underwriting discount totaling $4,111,250 or $0.55 per share, the
proceeds to the Company totaled $64,098,124. The primary use of the
net proceeds will be to redeem Hecla's outstanding Liquid Yield
Option Notes ("LYONs") due 2004. The Company currently intends to
use the remaining proceeds for certain development projects and other
corporate purposes.
On May 11, 1994, the Company called for redemption of all its
outstanding LYONs. As of such date, $109,950,000 principal amount at
maturity of LYONs were outstanding. The LYONs will be redeemed on
June 13, 1994 at a redemption price of $456.29 per $1,000 principal
amount at maturity. As described above, the Company will use
approximately $50.2 million of the net proceeds from its recently
completed common stock offering to fund the redemption of the LYONs.
Pursuant to the terms of the indenture governing the LYONs, if the
LYONs were not redeemed prior to June 14, 1994, on such date holders
of LYONs could require the Company to purchase the LYONs held by them
at a purchase price equal to $456.39 per $1,000 principal amount at
maturity, which purchase price would be payable, at the option of the
Company, in cash, common stock or subordinated extension notes.
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
- - ------- Results of Operations
Introduction
The Company is primarily involved in the exploration, development,
mining and processing of gold, silver, lead, zinc and industrial
minerals. As such, the Company's revenues and profitability are
strongly influenced by world prices of gold, silver, lead and zinc,
which fluctuate widely and are affected by numerous factors beyond
the Company's control, including inflation and worldwide forces of
supply and demand. The aggregate effect of these factors is not
possible to accurately predict. In the instances following the
Company's description of changes that are attributable to more than
one factor, the Company presents each attribute describing the change
in descending order relative to the attribute's importance to the
overall change.
The Company incurred net losses applicable to common shareholders in
the first quarter of 1994 and 1993 totaling $7.7 million and $5.5
million, respectively. If the current market prices of gold, silver
and lead do not increase, and as a result of the Company's preferred
dividend payment requirements, the Company expects to continue to
experience net losses applicable to common shareholders, even with
the planned gold production from the commencement of commercial
production at the Grouse Creek project in late 1994. However, the
Company's operating cash flows are expected to increase subsequent to
the commencement of commercial production at this project even if
metals prices remain at current levels. At present metals prices for
1994, the Company is anticipating a net loss applicable to common
shareholders in the range of $2.9 million to $3.8 million after the
expected dividends to preferred shareholders totaling approximately
$8.0 million for the year ending December 31, 1994. Due to the
volatility of metals prices and the significant impact metals price
changes have on the Company's operations, there can be no assurance
that the actual results of operations for the year ending December
31, 1994 will be within the anticipated range of projected net loss.
The volatility of metals prices requires that the Company, in
assessing the impact of prices on recoverability of its assets,
exercise judgment as to whether price changes are temporary or are
likely to persist. The Company performs a comprehensive evaluation
of the recoverability of its assets on a periodic basis. The
evaluation includes a review of future cash flows against the
carrying value of the asset. Moreover, a review is made on a
quarterly basis to assess the impact of significant changes in market
conditions and other factors. Asset write downs may occur if the
Company determines that the carrying values attributed to individual
assets are not recoverable given reasonable expectations for future
market conditions, although no such write downs are currently
contemplated except as described below under "Financial Condition and
Liquidity".
In 1994, the Company expects to produce approximately 130,000 ounces
of gold, including 52,000 ounces from the La Choya mine, 40,000
ounces from the Republic mine, 32,000 ounces from the American Girl
mine and an additional 6,000 ounces from other sources. Assuming the
timely
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PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
commencement of production at the Grouse Creek project in the fourth
quarter of 1994, the Company's planned 1994 total gold production
could increase by up to 53,000 ounces to 183,000 ounces, based upon
its 80% interest in the project. The Company's expected gold
production increase in 1994 assumes a full year of production at the
La Choya project and the start-up of production at the Grouse Creek
project in the fourth quarter of 1994, which offsets the expected
decrease in gold production at the Republic mine. The Company's
actual level of gold production for 1994 will depend, in significant
part, upon the timely commencement of production at the Grouse Creek
project.
The Company's share of silver production for 1994 is expected to be
2.7 million ounces compared to actual 1993 silver production of 3.0
million ounces. The expected decrease in silver production is
primarily due to the suspension of operations at the Greens Creek
mine in April 1993 by the mine Manager.
The Company's production of industrial minerals is expected to
increase in 1994 to 941,000 tons, principally due to increased
shipments of ball clay and kaolin. Additionally, the Company expects
to ship 515,000 cubic yards of landscape material from its recently
acquired subsidiary, Mountain West Bark Products.
In March 1994, the Company completed its acquisition of Equinox,
which was treated as a pooling of interests for financial statement
reporting and accounting purposes. Two of Equinox's significant
properties are the American Girl and Rosebud properties. The Company
believes that, as a result of the approximately $2.4 million write
down recognized as of December 31, 1993, the American Girl mine, the
interest in which was acquired by Equinox in December 1992, will
operate at a break-even level at current metals prices. In
addition, the Company believes that development of the Rosebud
project offers the Company the opportunity to have a profitable
operation at current metals prices.
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15
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Results of Operations
The Company incurred a net loss of approximately $5.6 million ($0.14
per share) in the first three months of 1994 compared to net loss of
approximately $5.5 million, or $0.15 per share, in the same period of
1993. After $2.0 million in dividends to preferred shareholders of
the Company's Series B Cumulative Convertible Preferred Stock, the
Company's net loss applicable to common shareholders for the first
quarter of 1994 was $7.7 million, or $0.19 per common share. The
first quarter 1994 loss was due to a variety of factors, the most
significant of which are discussed below in descending order of
magnitude.
Sales of the Company's products increased by approximately $2.6
million, or 10.8%, in the first three months of 1994 as compared to
the same period in 1993, principally the result of (1) increased
product sales totaling approximately $4.7 million, most notably from
Mountain West Products (acquired in December 1993), as well as from
other industrial minerals segment operations; and (2) increases in
the average prices of silver, gold, and lead, the impact of which is
estimated to be approximately $4.3 million in the 1994 period
compared to the 1993 period. These two factors were partially offset
by decreased sales in the metals segment, the impact of which is
approximately $5.8 million, attributable to (1) the suspension of
operations at the Greens Creek mine in April 1993; (2) decreased
production of silver, lead and zinc at the Lucky Friday mine in the
1994 period; and (3) decreased gold production in the 1994 period at
the Republic and American Girl mines due to a lower grade ore being
mined and processed.
Comparing the average metal prices for the first quarter of 1993 with
the comparable 1994 period, gold increased by 17% from $329.47 per
ounce to $384.30 per ounce, silver increased by 45% from $3.66 per
ounce to $5.29 per ounce, lead increased by 14% from 19.0c. per pound
to 21.6c. per pound, but zinc decreased by 7% from 47.3c. per pound
to 43.9c. per pound.
Cost of sales and other direct production costs increased
approximately $3.5 million, or 16.5%, from the first three months of
1993 to the comparable 1994 period primarily due to (1) production
costs incurred at Mountain West Products (acquired in December 1993)
totaling approximately $2.5 million; (2) production costs incurred at
the La Choya mine totaling approximately $2.1 million due to the
commencement of operations there in 1994; and (3) increases in
operating costs at various other operations totaling approximately
$2.1 million. These increases in cost of sales and other direct
production costs were partially offset by decreases in operating
costs at other operations totaling $3.2 million, the most notable of
which is the Greens Creek mine where decreased operating costs are
the result of the suspension of operations there in April 1993.
Cost of sales and other direct production costs as a percentage of
sales from products increased from 89% in the first quarter of 1993
to 94% in the comparable 1994 period, primarily due to (1) costs
related to commencement of operations at the La Choya gold mine in
the first quarter of 1994, and (2) the inclusion of costs of
operations at
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16
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Mountain West Bark Products in 1994 which was acquired by the Company
in 1993.
Cash and full production cost per gold ounce increased from $250 and
$322 for the first quarter of 1993 to $373 and $422 for the first
quarter of 1994, respectively. The increase in both the cash and
full production cost per gold ounce is mainly attributed to the
initial startup costs at the La Choya gold mine in Mexico and
decreased gold production from the Republic and American Girl gold
mines.
Cash and full production cost per silver ounce increased from $4.54
and $5.95 in the first quarter of 1993 to $6.52 and $7.79 in the
first quarter of 1994, respectively. The increases in the cost per
silver ounce are due primarily to lower silver, lead and zinc
production from the Lucky Friday mine, resulting from decreased tons
of ore milled and a decrease in the silver grade from 12.02 silver
ounces per ton in the 1993 period to 10.70 silver ounces per ton in
the comparable 1994 period partially offset by an increase in the
average price of lead in the 1994 period. Lead and zinc are
by-products, the revenues from which are netted against production
costs in the calculation of production cost per ounce.
Depreciation, depletion and amortization decreased by approximately
$1.3 million, or 33.6%, from the 1993 period to the 1994 period,
primarily the result of (1) suspended operations at the Greens Creek
mine in April 1993 where significant depreciable assets are
depreciated on a units-of-production basis, the impact of which
reduced depreciation expense in the 1994 period by approximately $0.7
million; and (2) the $2.4 million write down of the American Girl
mine carrying value in the fourth quarter 1993, the impact of which
reduced depreciation expense in the 1994 period by approximately $0.6
million.
Other operating expenses increased by $3.8 million, or 118.7% from
the 1993 period to the 1994 period, due principally to (1) increased
general and administrative costs of $2.8 million attributable
primarily to costs totaling approximately $2.2 million incurred in
connection with the March 11, 1994 acquisition of Equinox; and (2)
increased exploration expenses totaling approximately $1.0 million
relating principally to the Rosebud project and Greens Creek mine.
Other income (expense) reported income of $2.5 million in the 1994
period compared to expense of $0.8 million in the 1993 period
primarily a result of (1) the $1.3 million gain recognized on sale of
the Company's common stock investment in Granduc Mines Ltd. in
January 1994; and (2) increased interest income earned in the first
three months of 1994 on the investment of proceeds from the Company's
June 1993 public offering of the Company's Series B Cumulative
Convertible Preferred Stock.
Financial Condition and Liquidity
A substantial portion of the Company's revenue is derived from the
sale of products, the prices of which are affected by numerous
factors beyond the Company's control. Prices may change dramatically
in short periods of time and such prices have a significant effect on
revenues, profits and liquidity of the Company. The Company is
subject to many
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17
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
of the same inflationary pressures as the U.S. economy in general.
To date, the Company has been successful in implementing cost-cutting
measures which have reduced per unit production costs. Management
believes, however, that the Company may not be able to continue to
offset the impact of inflation over the long-term through cost
reductions alone. However, the market prices for products produced
by the Company have a much greater impact than inflation on the
Company's revenues and profitability. Moreover, the discovery,
development and acquisition of mineral properties are in many
instances unpredictable events. Future metals prices, the success of
exploration programs, changes in legal and regulatory requirements
and other property transactions can have a significant impact on the
need for capital.
At March 31, 1994, assets totaled approximately $337.6 million and
shareholders' equity totaled approximately $238.0 million. Cash and
cash equivalents and short-term investments decreased by $11.8
million to $55.9 million at March 31, 1994 from $67.7 million at the
end of 1993. The major sources of cash were (1) the maturity of
short-term investments totaling approximately $27.7 million; (2)
proceeds totaling approximately $13.3 million from the sale of a 20%
undivided interest in the Grouse Creek project; and (3) proceeds of
$1.1 million from common stock issued under stock option plans. The
primary uses of cash were (1) increases in accounts receivable
principally relating to Colorado Aggregate Company and Mountain West
Products seasonal cycle of sales volume; (2) an $11.5 million
increase in properties, plants and equipment primarily due to ongoing
development of the Grouse Creek project ($9.1 million) and
expenditures at the clay slurry facility in Mexico ($1.1 million);
and (3) preferred dividend payment ($2.0 million).
The Company estimated that the remaining capital expenditures to be
incurred in the balance of 1994 will be approximately $48.9 million,
after giving effect to the sale of 20% of the Company's interest in
the Grouse Creek project, which was completed in February 1994.
These expenditures are expected to consist primarily of (1) the
Company's share of further development expenditures at the Grouse
Creek project totaling approximately $41.4 million; (2) development
expenditures at the Rosebud and Oro Cruz projects totaling
approximately $3.7 million and $1.3 million, respectively; and (3)
expenditures at the Kentucky-Tennessee Clay facilities totaling $1.8
million. The Company intends to finance these capital expenditures
through a combination of (1) existing cash, cash equivalents and
short-term investments; (2) cash flow from operating activities; and
(3) the net proceeds of the recently completed Common Stock offering.
In addition, the Company may borrow additional funds under its
revolving credit facility (described below) which, subject to certain
conditions, provides for borrowings up to a maximum of $30.0 million.
The Company's estimates of its capital expenditures assume with
respect to the Grouse Creek, Greens Creek and Oro Cruz properties,
that the Company's joint venture partners do not default with respect
to their obligations to contribute their respective portions of
development costs and capital expenditures.
The Company's planned environmental and reclamation expenditures for
the balance of 1994 are expected to be approximately $5.9 million,
principally for environmental and reclamation activities at the
Bunker
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18
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
Hill and California Gulch Superfund Sites, at the Yellow Pine,
Escalante and Durita properties and at certain sites acquired in the
Equinox acquisition.
Exploration expenditures for the balance of 1994 are estimated to be
approximately $5.4 million. The Company's exploration strategy is to
focus further exploration at or in the vicinity of its currently
owned properties. Accordingly, 1994 exploration expenditures will be
incurred principally at the Republic, Grouse Creek and La Choya
projects. If no additional gold reserves are developed at the
Republic mine, certain write downs in the Company's carrying value
for the mine may be required.
The Company has a secured reducing credit facility that provides for
credit advances of up to $30.0 million. The availability of advances
under this facility reduce beginning December 31, 1995 and is subject
to certain other limitations, with the balance due at maturity on
December 31, 1996. Borrowings under the facility are secured by the
Company's accounts receivable, inventories, specified marketable
securities and certain cash equivalents. As of March 31, 1994, the
Company had no outstanding borrowings under the revolving credit
facility.
On May 11, 1994, the Company announced its plans to redeem the
outstanding LYONs with a portion of the proceeds received from the
completed public offering of 7,475,000 shares of the Company's Common
Stock as further described in Note 6 of Notes to Consolidated
Financial Statements. Approximately $50.2 million will be required
to redeem the LYONs which is expected to be completed on June 13,
1994.
In March 1994, the Company completed its acquisition of Equinox by
issuing approximately 5.9 million shares of Common Stock, in addition
to 380,406 shares currently issuable upon the exercise of Equinox
warrants and Equinox options. The Company also issued 1,383,770
Hecla Production Notes with a maximum redemption price of Canadian
$1.50 per note. The transaction was treated as a pooling of
interests for financial statement reporting and accounting purposes.
As further described in Note 5 of Notes to Consolidated Financial
Statements, the Company has been notified by the EPA that it has been
designated by the EPA as a potentially responsible party with respect
to several Superfund sites. At March 31, 1994, the Company's
allowance for Superfund site remedial action costs was approximately
$10.7 million, which the Company believes is adequate based on
current estimates of aggregate costs.
In addition, as described in Note 5 of Notes to Consolidated
Financial Statements, the Company is a defendant in two other
significant actions. The first action was filed in November 1990 by
Star Phoenix and certain principals of Star Phoenix asserting that
the Company breached the terms of Star Phoenix's lease agreement for
the Company's Star Morning Mine and that the Company interfered with
certain contractual relationships of Star Phoenix relating to the
Company's 1990 termination of such lease agreement. The plaintiffs
in the Star Phoenix litigation have asserted that they have incurred
damages amounting to approximately $20 million as a result of the
Company's
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19
PART I - FINANCIAL INFORMATION (Continued)
HECLA MINING COMPANY and SUBSIDIARIES
actions. The plaintiffs are also seeking punitive damages. The jury
trial in the litigation commenced in May 1994. Although the verdict
in the litigation is subject to the inherent uncertainties of a jury
decision, it is the Company's belief that it has sufficient defenses
to the plaintiffs' claim and that the Company will ultimately prevail
in the litigation. The second action was filed by Industrial
Constructors Corp. ("ICC") in December 1993 alleging that the Company
failed to comply with the terms of a contract between the Company and
ICC related to the Company's Grouse Creek gold project. ICC is
claiming damages in excess of $5 million including a $1 million
retention held by the Company under the contract. The Company has
answered the complaint denying ICC's allegations and has filed a
counterclaim against ICC asserting damages in excess of $2 million.
Although the ultimate disposition of these matters and various other
pending legal actions and claims is not presently determinable, it is
the opinion of the Company's management, based upon the information
available at this time, that the outcome of these suits and
proceedings will not have a material adverse effect on the results of
operations and financial condition of the Company and its
subsidiaries.
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20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 of Notes to Consolidated Financial
Statements on page 7 of this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Report on Form 8-K dated January 24, 1994, related to the sale
of the Company's holdings in Granduc Mines Limited (Item 5).
Report on Form 8-K dated February 3, 1994, related to fourth
quarter report to shareholders (Item 5).
Report on Form 8-K dated February 8, 1994, related to
Acquisition Agreement with Great Lakes Minerals Inc. (Items 2
and 5).
Report on Form 8-K dated February 16, 1994, related to
information provided to Equinox Resources Ltd. (Item 5).
Report on Form 8-K dated March 11, 1994, related to the
acquisition of Equinox Resources Ltd. as amended by the filing
of Form 8-K/A-1 filed May 2, 1994, Equinox Resources Ltd.
consolidated balance sheets as of December 31, 1993, and 1992,
and the consolidated statements of loss and deficit and changes
in financial position for the year ended December 31, 1993, the
two months ended December 31, 1992, and the years ended October
31, 1992 and 1991. Condensed pro forma combined balance sheet
as of December 31, 1993 and condensed pro forma combined
statements of operations for the years ended December 31, 1993,
1992 and 1991 (Items 2 and 7).
Items 2, 3, 4 and 5 of Part II are omitted from this report as inapplicable.
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21
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 12, 1994 By /s/ ARTHUR BROWN
-----------------------------------
Arthur Brown, Chairman, President
and Chief Executive Officer
Date: May 12, 1994 By /s/ J. T. HEATHERLY
------------------------------------
J. T. Heatherly,
Vice President - Controller
(Chief Accounting Officer)
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