hecla_10k-123112.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

Form 10-K


x
Annual report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2012
 
Commission file No. 1-8491
 
HECLA MINING COMPANY
(Exact name of registrant as specified in its charter)
 
 
Delaware
77–0664171
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
6500 N. Mineral Drive, Suite 200
Coeur d’Alene, Idaho
83815-9408
(Address of principal executive offices)
(Zip Code)
 
208-769-4100
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
 Name of each exchange
on which registered
Common Stock, par value $0.25 per share
 
New York Stock Exchange
 
Series B Cumulative Convertible Preferred
Stock, par value $0.25 per share
 
 
New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ü No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes    No  ü
 
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 the past 90 days.  Yes  ü No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ü No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
  Large Accelerated Filer  ý   Accelerated Filer  o
  Non-Accelerated Filer  o    Smaller reporting company  o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
 
The aggregate market value of the registrant’s voting Common Stock held by non-affiliates was $1,349,610,385 as of June 30, 2012 There were 285,546,859 shares of the registrant’s Common Stock outstanding as of June 30, 2012, and 285,193,224 shares as of February 21, 2013. 
Documents incorporated by reference herein:
 
To the extent herein specifically referenced in Part III, the information contained in the Proxy Statement for the 2013 Annual Meeting of Shareholders of the registrant, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the registrant’s 2012 fiscal year is incorporated herein by reference. See Part III.
 
 
 

 
 
TABLE OF CONTENTS

Special Note on Forward-Looking Statements
1
PART I
1
Item 1. Business
1
Introduction
1
Products and Segments
4
Employees
5
Available Information
5
Item 1A. Risk Factors
6
Item 1B. Unresolved Staff Comments
19
Item 2. Property Descriptions
19
The Greens Creek Unit
19
The Lucky Friday Unit
23
Item 3. Legal Proceedings
26
Item 4. Mine Safety Disclosures
26
PART II
26
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
26
Item 6. Selected Financial Data
30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Overview
32
Results of Operations
34
The Greens Creek Segment
36
The Lucky Friday Segment
39
Corporate Matters
41
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
42
Financial Liquidity and Capital Resources
44
Contractual Obligations and Contingent Liabilities and Commitments
46
Off-Balance Sheet Arrangements
47
Critical Accounting Estimates
47
New Accounting Pronouncements
49
Forward-Looking Statements
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
49
Commodity-Price Risk Management
50
Provisional Sales
50
Item 8. Financial Statements and Supplementary Data
51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
51
Item 9A. Controls and Procedures
51
Disclosure Controls and Procedures
51
Management’s Annual Report on Internal Control over Financial Reporting
52
Attestation Report of Independent Registered Public Accounting Firm
53
Item 9B. Other Information
54
PART III
54
Item 10. Directors, Executive Officers and Corporate Governance
54
Item 11. Executive Compensation
56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
56
Item 13. Certain Relationships and Related Transactions and Director Independence
56
Item 14. Principal Accounting Fees and Services
56
PART IV
57
Item 15. Exhibits, Financial Statement Schedules
57
Signatures
58
Index to Consolidated Financial Statements
F-1
Index to Exhibits
F-40
 
 
i

 
 
Special Note on Forward-Looking Statements
 
Certain statements contained in this report (including information incorporated by reference) are “forward-looking statements” and 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 production, results, performance, prospects and opportunities, including reserves and other mineralization. We have tried to identify these forward-looking statements by using words such as “may,” “might,” “will,” “expect,” “anticipate,” “believe,” “could,” “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 production, results, performance, prospects or opportunities, including reserves and mineralization, 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 1A. Risk Factors and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements.  Projections and other forward-looking statements included in this Form 10-K have been prepared based on assumptions, which we believe to be reasonable, but not in accordance with United States generally accepted accounting principles (“GAAP”) or any guidelines of the Securities and Exchange Commission (“SEC”). Actual results may vary, perhaps materially. You are strongly cautioned not to place undue reliance on such projections and other 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 disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I
 
Item 1. Business
 
For information regarding the organization of our business segments and our significant customers, see Note 11 of Notes to Consolidated Financial Statements.
 
Information set forth in Items 1A, 1B and 2 are incorporated by reference into this Item 1.

Introduction
 
Hecla Mining Company and our subsidiaries have provided precious and base metals to the U.S. economy and worldwide since 1891 (in this report, “we” or “our” or “us” refers to Hecla Mining Company and our affiliates and subsidiaries). We discover, acquire, develop, produce and market silver, gold, lead and zinc.  In doing so, we intend to manage our business activities in a safe, environmentally responsible and cost-effective manner.
 
We produce lead, zinc and bulk concentrates, which we sell to custom smelters, and unrefined gold and silver bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders.  We are organized and managed into two segments that encompass our operating units: the Greens Creek and Lucky Friday units.
 
The map below shows the locations of our operating units and our exploration and pre-development projects, as well as our corporate offices located in Coeur d’Alene,Idaho and Vancouver, British Columbia.
 
 
1

 

 
Our current business strategy is to focus our financial and human resources in the following areas:
 
 
Operating our properties safely, in an environmentally responsible manner, and cost-effectively.

 
Returning our Lucky Friday mine to full production during 2013.  Limited production recommenced at Lucky Friday in the first quarter of 2013 after the temporary suspension of operations in December 2011. We anticipate production will increase to full production levels by approximately mid-2013 (see the Lucky Friday Segment section below for more information);

 
Expanding our proven and probable reserves and production capacity at our operating properties.

 
Maintaining and investing in exploration projects in the vicinities of four mining districts we believe to be under-explored and under-developed:  North Idaho’s Silver Valley in the historic Coeur d’Alene Mining District; our Greens Creek unit on Alaska’s Admiralty Island located near Juneau; the silver producing district near Durango, Mexico; and the Creede district of Southwestern Colorado.

 
Continuing to seek opportunities to acquire and invest in other mining properties and companies.  Examples include our acquisition of the Monte Cristo property in Nevada and investments in  Dolly Varden Silver Corporation and Canamex Resources Corp. in 2012.
 
 
2

 
 
Below is a summary of net income (loss) for each of the last five years (in thousands):

           Year Ended December 31,        
   
2012
   
2011
   
2010
   
2009
   
2008
 
Net income (loss)
  $ 14,954     $ 151,164     $ 48,983     $ 67,826     $ (66,563 )

Our financial results over the last five years have been impacted by:
 
 
Fluctuations in prices of the metals we produce. The high and low daily closing market prices for silver, gold, lead and zinc for each of the last five years are as follows:

   
2012
   
2011
   
2010
   
2009
   
2008
 
Silver (per oz.):
                             
High
  $ 37.23     $ 48.70     $ 30.70     $ 19.18     $ 20.92  
Low
  $ 26.67     $ 26.16     $ 15.14     $ 10.51     $ 8.88  
Gold (per oz.):
                                       
High
  $ 1,791.75     $ 1,895.00     $ 1,421.00     $ 1,212.50     $ 1,011.25  
Low
  $ 1,540.00     $ 1,319.00     $ 1,058.00     $ 810.00     $ 712.50  
Lead (per lb.):
                                       
High
  $ 1.06     $ 1.33     $ 1.18     $ 1.11     $ 1.57  
Low
  $ 0.79     $ 0.81     $ 0.71     $ 0.45     $ 0.40  
Zinc (per lb.):
                                       
High
  $ 0.99     $ 1.15     $ 1.20     $ 1.17     $ 1.28  
Low
  $ 0.80     $ 0.79     $ 0.72     $ 0.48     $ 0.47  
 
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations for a summary of average market and realized prices for each of the three years ended December 31, 2012, 2011 and 2010.   Our results of operations are significantly impacted by fluctuations in the prices of silver, gold, lead and zinc, which are affected by numerous factors beyond our control.  See Item 1A. Risk Factors – Financial Risks – A substantial or extended decline in metals prices would have a material adverse effect on us for information on a number of the various factors that can impact prices of the metals we produce.  Hecla’s average realized prices for silver, lead, and zinc were lower in 2012 compared to 2011, while the average realized price for gold increased.  Average realized prices for all four metals increased in 2011 compared to 2010.  We believe that market metal price trends are a significant factor in our operating and financial performance.  Because we are unable to predict fluctuations in prices for metals and have limited control over the timing of our concentrate shipments, there can be no assurance that our realized prices for silver and gold will exceed or even meet average market metals prices for any future period.    In April 2010, we began utilizing financially-settled forward contracts for lead and zinc with the objective of managing the exposure to changes in prices of lead and zinc contained in our concentrate shipments between the time of sale and final settlement.  See Note 10  of Notes to Consolidated Financial Statements for more information on our base metal forward contract programs.

 
$25.3 million in suspension-related costs at our Lucky Friday unit, including $6.3 million in depreciation, depletion, and amortization in 2012.  Production recommenced at the Lucky Friday in the first quarter of 2013.  See The Lucky Friday Segment section for more information on the temporary suspension of production. 
 
 
Exploration and pre-development expenditures totaling $49.7 million, $31.4 million, $21.6 million, $9.2 million and $22.5 million for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively.   In addition, we also incurred exploration expenditures of $1.2 million  for the year ended December 31, 2008 at our now divested Venezuelan operations.  This amount has been reported in income (loss) from discontinued operations for that period.

 
Provision for closed operations and environmental matters of $4.7 million, $9.7 million, $201.1 million, $7.7 million and $4.3 million, respectively, for the years ended December 31, 2012, 2011, 2010, 2009, and 2008.  The $201.1 provision in 2010 included a $193.2 million adjustment to increase our accrued liability for environmental obligations in Idaho’s Coeur d’Alene Basin as a result of our reaching an agreement with the United States, the Coeur d’Alene Indian Tribe, and the State of Idaho on proposed financial terms to be incorporated into a comprehensive settlement of the Coeur d’Alene Basin environmental litigation and related claims. The settlement was finalized upon entry of the Consent Decree by the Court in September 2011.  See Note 7 of Notes to Consolidated Financial Statements for further discussion.
 
 
3

 
 
 
Net loss on base metal forward contracts of $10.5 million in 2012, a net gain of $38.0 million in 2011, and a net loss of $20.8 million in 2010.  These gains and losses are related to financially-settled forward contracts on forecasted zinc and lead production as part of a risk management program initiated in 2010.  See Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Commodity-Price Risk Management for more information on our derivatives contracts.

 
Variability in prices for diesel fuel and amounts of fuel used, and variability in prices for other consumables, which have impacted production costs at our operations.  See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – The Greens Creek Segment for information on the variability in diesel fuel prices and consumption on production costs for the last three years.

 
Our acquisition of the remaining 70.3% of the Greens Creek mine for $758.5 million in April 2008, a portion of which was funded by a $140.0 million term loan and $220.0 million bridge loan.  We recorded interest expense related to these credit facilities, including amortization of loan fees and interest rate swap adjustments, of $10.1 million and $19.1 million, respectively in 2009 and 2008.  The amount of interest expense in 2009 is net of $1.9 million in capitalized interest.  We also recorded approximately $6.0 million in expense in 2009 for additional debt-related fees.  We completed repayment of the bridge loan balance in February 2009 and repayment of the term loan balance in October 2009.

 
The global financial crisis and recession beginning in 2008, which impacted metals prices, production costs, and our access to capital markets at that time.

 
An increase in the number of shares of our common stock outstanding, which impacts our income per common share.

 
Loss from discontinued operations, net of tax, for the year ended December 31, 2008 of $17.4 million, and a loss on sale of discontinued operations, net of tax, of $12.0 million recognized in 2008.

A comprehensive discussion of our financial results for the years ended December 31, 2012, 2011 and 2010, individual operating unit performance, general corporate expenses and other significant items can be found in Item 7. — Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, as well as the Consolidated Financial Statements and Notes thereto.

Products and Segments

Our segments are differentiated by geographic region. We produce zinc, lead and bulk concentrates at our Greens Creek unit and lead and zinc concentrates at our Lucky Friday unit, which we sell to custom smelters on contract, and unrefined gold and silver bullion bars (doré) at Greens Creek, which are sold directly to customers or further refined before sale to precious metals traders. The concentrates produced at our Greens Creek and Lucky Friday units contain payable silver, zinc and lead, and the concentrates produced at Greens Creek also contain payable gold. Payable metals are those included in our products that can be recovered and sold by smelters and refiners.  Our segments as of December 31, 2012 included:
 
 
The Greens Creek unit, which has been 100%-owned since April of 2008 when we acquired the outstanding 70.3%  from indirect subsidiaries of Rio Tinto, plc. Greens Creek is located on Admiralty Island, near Juneau, Alaska, and has been in production since 1989, with a temporary care and maintenance period from April 1993 through July 1996. During 2012, Greens Creek contributed $320.9 million, or 100%, of our consolidated sales.

 
The Lucky Friday unit located in northern Idaho. Lucky Friday is 100%-owned and has been a producing mine for us since 1958.  Production at the Lucky Friday unit was suspended during 2012 as a result of the mine being placed on temporary care and maintenance (see Item 2. Property DeScription, Operating Properties, The Lucky Friday Unit). Limited production recommenced in the first quarter of 2013, and we expect full production to resume in approximately mid-2013.
 
 
4

 
 
The table below summarizes our production for the years ended December 31, 2012, 2011 and 2010.  Zinc and lead production quantities are presented in short tons (“tons”).
 
   
Year
 
   
2012
   
2011
   
2010
 
Silver (ounces)
    6,394,235       9,483,676       10,566,352  
Gold (ounces)
    55,496       56,818       68,838  
Lead (tons)
    21,074       39,150       46,955  
Zinc (tons)
    64,249       73,355       83,782  
 
 
Licenses, Permits and Concessions
 
We are required to obtain various licenses and permits to operate our mines and conduct exploration and reclamation activities.  The suspension in production at the Lucky Friday unit during 2012 was pursuant to an order from the Federal Mine Safety and Health Administration.  See Item 1A. Risk Factors - Legal, Market and Regulatory Risks - We are required to obtain governmental and lessor approvals and permits in order to conduct mining operations.  In addition, we conduct our exploration activities in Mexico pursuant to concessions granted by the Mexican government, which are subject to certain political risks associated with foreign operations.  See Item 1A. Risk Factors - Operation, Development, Exploration and Acquisition Risks - Our foreign activities are subject to additional inherent risks.

Physical Assets
 
Our business is capital intensive and requires ongoing capital investment for the replacement, modernization or expansion of equipment and facilities and to develop new ore reserves.  At December 31, 2012, the book value of our property, plant, equipment and mineral interests, net of accumulated depreciation, was approximately $996.7 million .  We maintain insurance policies against property loss and business interruption.  However, such insurance contains exclusions and limitations on coverage, and there can be no assurance that claims would be paid under such insurance policies in connection with a particular event.  See Item 1A. Risk Factors - Operation, Development, Exploration and Acquisition Risks - Our operations may be adversely affected by risks and hazards associated with the mining industry that may not be fully covered by insurance.

Employees
 
As of December 31, 2012, we employed 735 people, and we believe relations with our employees are generally good.
 
Many of the employees at our Lucky Friday unit are represented by a union. The current collective bargaining agreement with workers at our Lucky Friday unit expires on April 30, 2016.  As a result of the requirement to remove built-up cementitious material from the Silver Shaft, underground access was limited and  production temporarily suspended at the Lucky Friday, forcing Hecla Limited to lay off 121 employees in January 2012 (approximately 25 of those employees accepted temporary positions at other Hecla operations).   Employment at the Lucky Friday has returned to roughly its level prior to the suspension of production, as the Silver Shaft work is complete.  See Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - The Lucky Friday Segment  section for more information.

In March 2012, Hecla Limited received notice of a complaint filed against it by the United Steel Workers, Local 5114, with the Federal Mine Safety Health Review Commission for compensation for bargaining unit workers at the Lucky Friday mine who were idled as a result of the previously-announced, temporary suspension of production at the mine (see the Other Contingencies section of Note 7 of Notes to Consolidated Financial Statements for more information).

Available Information
 
Hecla Mining Company is a Delaware corporation. Our current holding company structure dates from the incorporation of Hecla Mining Company in 2006 and the renaming of our subsidiary (previously Hecla Mining Company) as Hecla Limited. Our principal executive offices are located at 6500 N. Mineral Drive, Suite 200, Coeur d’Alene, Idaho 83815-9408. Our telephone number is (208) 769-4100. Our web site address is www.hecla-mining.com. We file our annual, quarterly and current reports and any amendments to these reports with the SEC, copies of which are available on our website or from the SEC free of charge (www.sec.gov or 800-SEC-0330 or the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549). Charters of our audit, compensation, corporate governance, and directors’ nominating committees, as well as our Code of Ethics for the Chief Executive Officer and Senior Financial Officers and our Code of Business Conduct and Ethics for Directors, Officers and Employees, are also available on our website. We will provide copies of these materials to shareholders upon request using the above-listed contact information, directed to the attention of Investor Relations, or via e-mail request sent to info@hecla-mining.com.
 
 
5

 
 
We have included the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) certifications regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report. Additionally, we filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding our compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which certification was dated June 6, 2012, and indicated that the CEO was not aware of any violations of the Listing Standards.

Item 1A. Risk Factors
 
The following risks and uncertainties, together with the other information set forth in this Form 10-K, should be carefully considered by those who invest in our securities. Any of the following risks could materially adversely affect our business, financial condition or operating results and could decrease the value of our common and/or preferred stock.
 
FINANCIAL RISKS
 
A substantial or extended decline in metals prices would have a material adverse effect on us.

Our revenue is derived from the sale of concentrates and doré containing 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, including:
 
 
speculative activities;

 
relative exchange rates of the U.S. dollar;

 
global and regional demand and production;

 
political instability;

 
inflation, recession or increased or reduced economic activity; and

 
other political, regulatory and economic conditions.

These factors are largely beyond our control and are difficult to predict. If the market prices for these metals fall below our production or development costs for a sustained period of time, we will experience losses and may have to discontinue exploration, development or operations, or incur asset write-downs at one or more of our properties.

The following table sets forth the average daily closing prices of the following metals for the years ended December 31, 2008 through 2012.

   
2012
   
2011
   
2010
   
2009
   
2008
 
Silver (1) (per oz.)
  $ 31.15     $ 35.11     $ 20.16     $ 14.65     $ 15.02  
Gold (2) (per oz.)
  $ 1,669.00     $ 1,569.00     $ 1,224.66     $ 972.98     $ 871.71  
Lead (3) (per lb.)
  $ 0.94     $ 1.09     $ 0.97     $ 0.78     $ 0.95  
Zinc (4) (per lb.)
  $ 0.88     $ 1.00     $ 0.98     $ 0.75     $ 0.85  


 
(1)
London Fix
 
(2)
London Final
 
(3)
London Metals Exchange — Cash
 
(4)
London Metals Exchange — Special High Grade — Cash

On February 21, 2013, the closing prices for silver, gold, lead and zinc were $28.72 per ounce, $1,577 per ounce, $1.05 per pound and $0.95 per pound, respectively.
 
 
6

 
 
An extended decline in metals prices, an increase in operating or capital costs, mine accidents or closures, increasing environmental obligations, or our inability to convert exploration potential to reserves may cause us to record write-downs, which could negatively impact our results of operations.
 
When events or changes in circumstances indicate that the carrying value of our long-lived assets may not be recoverable, we review the recoverability of the carrying value by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset.  Impairment must be recognized when the carrying value of the asset exceeds these cash flows, and recognizing impairment write-downs could negatively impact our results of operations.  Metal price estimates are a key component used in the analysis of the carrying values of our assets, as the evaluation approach involves comparing carrying values to the average estimated undiscounted cash flows resulting from operating plans using various metals price scenarios.  Our estimates of undiscounted cash flows for our long-lived assets also include an estimate of the market value of the exploration potential beyond the current operating plans.  There were no events or changes in circumstances that caused us to evaluate the carrying values of our long-lived assets as of December 31, 2012.  However, if the prices of silver, gold, zinc and lead decline for an extended period of time, if we fail to control production costs, if regulatory issues increase costs or decrease production, or if we do not realize the mineable ore reserves or exploration potential at our mining properties, we may be required to evaluate the carrying values of our long-lived assets and recognize asset write-downs in the future.    In addition, the perceived market value of the exploration potential of our properties is dependent upon prevailing metals prices as well as our ability to discover economic ore. A decline in metals prices for an extended period of time or our inability to convert exploration potential to reserves could significantly reduce our estimations of the value of the exploration potential at our properties and result in asset write-downs.
 
We have had losses that could reoccur in the future.
 
Although we reported net income for the years ended December 31, 2012, 2011, 2010 and 2009 of $15.0 million, $151.2 million, $49.0 million and $67.8 million, respectively, we reported a net loss for the year ended December 31, 2008 of $66.6 million. A comparison of operating results over the past three years can be found in Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Many of the factors affecting our operating results are beyond our control, including, but not limited to, the volatility of metals prices; smelter terms; rock and soil conditions; seismic events; availability of hydroelectric power; diesel fuel prices; interest rates; global or regional political or economic policies; inflation; availability and cost of labor; economic developments and crises; governmental regulations; continuity of orebodies; ore grades; recoveries; and speculation, purchases and sales by central banks and other holders and producers of gold and silver in response to these factors. We cannot foresee whether our operations will continue to generate sufficient revenue in order for us to generate net cash from operating activities. There can be no assurance that we will not experience net losses in the future.

Commodity risk management activities could expose us to losses.
 
We periodically enter into risk management activities, such as financially-settled forward sales contracts and commodity put and call option contracts, to manage the prices received on the metals we produce. Such activities are utilized to attempt to insulate our operating results from changes in prices for those metals. However, such activities may prevent us from realizing possible revenues in the event that the market price of a metal exceeds the price stated in a forward sale or call option contract. In addition, we may experience losses if a counterparty fails to purchase under a contract when the contract price exceeds the spot price of a commodity.
 
We utilize financially settled forward contract programs to manage the exposure to changes in lead and zinc prices contained in our concentrate shipments between the time of sale and final settlement, and to manage the exposure to changes in the prices of lead and zinc contained in our forecasted future concentrate shipments.  See Note 10 of Notes to Consolidated Financial Statements for more information on these base metals forward contract programs.
 
The financial terms of settlement of the Coeur d’Alene Basin environmental litigation and other claims may materially impact our cash resources and our access to additional financing.
 
On September 8, 2011, a Consent Decree (the “Consent Decree”) settling environmental litigation and related claims involving Hecla Limited pertaining to historic releases of mining wastes in the Coeur d'Alene Basin was approved and entered by the U.S. District Court in Idaho.  The Consent Decree resolved all existing claims of the United States, the Coeur d'Alene Indian Tribe, and the State of Idaho (“Plaintiffs”) against Hecla Limited and its affiliates under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and certain other statutes for past response costs, future environmental remediation costs, and natural resource damages related to historic releases of mining wastes in the Coeur d'Alene River Basin, as well as all remaining obligations of Hecla Limited with respect to the Bunker Hill Superfund Site.   In addition to the approximately $194 million already paid under the Consent Decree in 2011 and 2012, Hecla Limited remains obligated under the Consent Decree to make the following payments:
 
 
$15 million of cash by October 8, 2013; and
 
 
approximately $55.5 million by August 2014, as quarterly payments of the proceeds from the exercise of any outstanding Series 1 and Series 3 warrants (which have an exercise price of between $2.41 and $2.52 per share) during the quarter, with the remaining balance, if any, due in August 2014.
 
 
7

 
 
If additional warrants are not exercised, the requirement to pay $70.5 million (excluding interest) in cash over the next approximately two years would cause us to use a significant portion of either our cash currently on hand, or future cash resources.  Our cash on hand at December 31, 2012 was $191.0 million; however, there can be no assurance that we will have the cash on hand to meet these obligations.
 
Financial terms of settlement also require that Hecla Mining Company or Hecla Limited post third party surety in some form to secure the remaining payments.  Obtaining surety causes us to incur costs, and also to utilize credit capacity which could otherwise be used to fund other areas of our business, including operations and capital expenditures.  Moreover, there is no guarantee that we will be able maintain such surety, in which case we could be in default of the Consent Decree, which could have a material adverse effect on Hecla Limited’s or our results from operations or financial position.

More information about the terms of settlement is set forth in Note 7 of Notes to Consolidated Financial Statements.
 
Our profitability could be affected by the prices of other commodities and services.
 
Our business activities are highly dependent on the costs of commodities and services such as fuel, steel, cement and electricity. The recent prices for such commodities have been volatile and may increase our costs of production and development. A material increase in costs at any of our operating properties could have a significant effect on our profitability. For additional discussion, see Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Our accounting and other estimates may be imprecise.
 
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts and related disclosure of assets, liabilities, revenue and expenses at the date of the consolidated financial statements and reporting periods. The more significant areas requiring the use of management assumptions and estimates relate to:
 
 
mineral reserves, mineralized material, and other resources that are the basis for future income and cash flow estimates and units-of-production depreciation, depletion and amortization calculations;

 
future metals prices;

 
environmental, reclamation and closure obligations;

 
asset impairments;

 
valuation of business combinations;

 
reserves for contingencies and litigation; and

 
deferred tax asset valuation allowance.

Actual results may differ materially from these estimates using different assumptions or conditions. For additional information, see Critical Accounting Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 1  of Notes to Consolidated Financial Statements and the risk factors: “Our development of new orebodies and other capital costs may cost more and provide less return than we estimated,” “Our ore reserve estimates may be imprecise,”  “Our environmental obligations may exceed the provisions we have made,” and We are currently involved in ongoing legal disputes that may materially adversely affect us.”
 
 
8

 
 
Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income

We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized.  Otherwise, a valuation allowance is applied against deferred tax assets reducing the value of such assets.  Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income.  Estimates of future taxable income are based on forecasted income from operations and the application of existing tax laws in each jurisdiction.  Metal price and production estimates are key components used in the determination of our ability to realize the expected future benefit of our deferred tax assets. To the extent that future taxable income differs significantly from estimates as a result of a decline in metals prices or other factors, our ability to realize the deferred tax assets could be impacted.  Additionally, significant future issuances of common stock or common stock equivalents could limit our ability to utilize our net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. Future changes in tax law or changes in ownership structure could limit our ability to utilize our recorded tax assets.  As of December 31, 2010, we removed substantially all deferred tax valuation allowances, with the exception of certain amounts related to foreign net operating loss carryforwards, and our current and non-current deferred tax asset balances as of  December 31, 2012 were $29.4 million and $86.4 million, respectively.   See Note 5 of Notes to Consolidated Financial Statements for further discussion of our deferred tax assets.
 
 Global financial events may have an impact on our business and financial condition in ways that we currently cannot predict.
 
The 2008 credit crisis and related turmoil in the global financial system had an impact on our business and financial position, and a similar financial event in the future could also impact us.  The continuation or re-emergence of the financial crisis may limit our ability to raise capital through credit and equity markets.  The prices of the metals that we produce are affected by a number of factors, and it is unknown how these factors may be impacted by a global financial event.

Returns for Investments in Pension Plans and Pension Plan Funding Requirements Are Uncertain

We maintain defined benefit pension plans for employees, which provide for specified payments after retirement for most employees. The ability of the pension plans to provide the specified benefits depends on our funding of the plans and returns on investments made by the plans. Returns, if any, on investments are subject to fluctuations based on investment choices and market conditions. A sustained period of low returns or losses on investments could require us to fund the pension plans to a greater extent than anticipated.  See Note 8 of Notes to Consolidated Financial Statements for more information on our pension plans.

OPERATION, DEVELOPMENT, EXPLORATION AND ACQUISITION RISKS
 
Mining accidents or other adverse events at an operation could decrease our anticipated production.
 
Production may be reduced below our historical or estimated levels as a result of mining accidents; unfavorable ground conditions; work stoppages or slow-downs; lower than expected ore grades; unexpected regulatory actions; the metallurgical characteristics of the ore that are less economic than anticipated; or because our equipment or facilities fail to operate properly or as expected.  For example, in the second quarter of 2010, mining activities at the Lucky Friday mine stopped for approximately two weeks due to some deterioration of shaft infrastructure at the #2 Shaft, which is the mine's secondary escape way. Upon completion of repairs to #2 Shaft, the mine returned to normal production. In April 2011, a fatal accident occurred at the Lucky Friday mine resulting in a cessation of operations at the mine for approximately 10 days. In November 2011, an accident occurred as part of the construction of the #4 Shaft at the Lucky Friday mine, resulting in the fatality of one contractor employee. In an unrelated incident, in December 2011, a rock burst occurred in a primary access way at the Lucky Friday mine and injured seven employees. Each of these events temporarily suspended operations at the Lucky Friday mine and adversely impacted production.   Other closures or impacts on operations or production may occur at any of our mines at any time, whether related to accidents, changes in conditions, changes to regulatory policy, or as precautionary measures.

At the end of 2011, the Federal Mine Health and Safety Administration ("MSHA") began a special impact inspection at the Lucky Friday mine which resulted in an order closing down the Silver Shaft, the primary access way from surface at the Lucky Friday mine, until we removed built-up cementitious material from the Silver Shaft.  This occurred despite the fact that the Silver Shaft was not involved in any of the accidents at the mine in 2011.   Underground access was limited as the work was performed, and production at the Lucky Friday was suspended until early 2013 as a result.  We  resumed limited production at the Lucky Friday in the first quarter of 2013 after completing work on the Silver Shaft and a bypass of the area impacted by the December 2011 rock burst.
 
For further information, see Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
 
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Recent accidents and other events at our Lucky Friday mine could have additional adverse consequences to us.
 
Hecla Limited may face additional enforcement actions, as well as additional orders from MSHA, as a result of MSHA's inspections and investigations of events at our Lucky Friday mine, including the April 2011 fatal ground fall accident, the rock burst incident in December 2011, and the order closing the Silver Shaft for the removal of built-up cementitious material.  Hecla Limited could also face additional penalties (including monetary penalties) from MSHA or other governmental agencies relating to these incidents and any other orders or citations received by Hecla Limited.  In addition, MSHA periodically notifies certain mines that a potential pattern of violations (“PPOV”) may exist based upon an initial statistical screening of violation history and pattern criteria review by MSHA.  Receipt of notice of a PPOV typically triggers an undertaking by a mine to implement corrective actions, and if certain criteria are not met, MSHA could subsequently issue a Notice of Pattern of Violations (“NPOV”).  Receipt of a NPOV would, among other things, impose certain onerous conditions on the mine, including the requirement to pass an inspection in which no significant and substantial violations of a mandatory health or safety standard are found before termination of the  NPOV.  In November 2012, the Lucky Friday mine received a PPOV notice from MSHA.  The notice indicated that because the Lucky Friday was non-producing at the time, MSHA will postpone action on the matter until further notice. Subsequent to receipt of the PPOV notice, MSHA rules changed and effective as of March 25, 2013, the PPOV notice process will be eliminated and instead MSHA will have the discretion to issue a NPOV immediately.  It is unclear if these new rules will apply to the Lucky Friday mine, but if they do, it could materially impact our operations.  Finally, it is possible that Hecla Limited could face litigation relating to the 2011 incidents at the Lucky Friday mine in addition to the purported class action and related derivative lawsuits filed against us in 2012.  We may not resolve these claims favorably, and each one of the foregoing possibilities could have a material adverse impact on our cash flows, results of operations or financial condition.  See Note 7 of Notes to Consolidated Financial Statements.
 
Our operations may be adversely affected by risks and hazards associated with the mining industry that may not be fully covered by insurance.

Our business is capital intensive, requiring ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. Our mining and milling operations are subject to risks of process upsets and equipment malfunctions.  Equipment and supplies may from time to time be unavailable on a timely basis.   Our business is subject to a number of other risks and hazards including:

 
• 
environmental hazards;

 
• 
unusual or unexpected geologic formations;

 
• 
rock bursts and ground falls;

 
• 
seismic activity;

 
• 
underground fires or floods;

 
• 
explosive rock failures;

 
unanticipated hydrologic conditions, including flooding and periodic interruptions due to inclement or hazardous weather conditions;

 
• 
political and country risks;

 
• 
civil unrest or terrorism;

 
industrial accidents;

 
labor disputes or strikes; and

 
our operating mines have tailing ponds which could fail or leak as a result of seismic activity or for other reasons.

Such risks could result in:

 
• 
personal injury or fatalities;

 
• 
damage to or destruction of mineral properties or producing facilities;

 
• 
environmental damage;

 
• 
delays in exploration, development or mining;

 
• 
monetary losses;

 
• 
legal liability; and

 
• 
temporary or permanent closure of facilities.
 
 
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We maintain insurance to protect against losses that may result from some of these risks, such as property loss and business interruption, in amounts we believe to be reasonably consistent with our historical experience, industry practice and circumstances surrounding each identified risk. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to environmental liability and political risk. We have received some payment for business interruption insurance claims related to the temporary suspension of operations at the Lucky Friday mine and continue to seek further reimbursement (see Mining accidents or other adverse events at an operation could decrease our anticipated production). There can be no assurance that claims would be paid under such insurance policies in connection with a particular event. Insurance specific to environmental risks is generally either unavailable or, we believe, too expensive for us, and we therefore do not maintain environmental insurance. Occurrence of events for which we are not insured may have an adverse effect on our business.
 
Our development of new orebodies and other capital costs may be higher and provide less return than we estimated.
 
Capitalized development projects may cost more and provide less return than we estimate. If we are unable to realize a return on these investments, we may incur a related asset write-down that could adversely affect our financial results or condition.
 
Our ability to sustain or increase our current level of metals production partly depends on our ability to develop new orebodies and/or expand existing mining operations. Before we can begin a development project, we must first determine whether it is economically feasible to do so. This determination is based on estimates of several factors, including:
 
 
ore reserves;

 
expected recovery rates of metals from the ore;

 
future metals prices;

 
facility and equipment costs;

 
availability of adequate staffing;

 
availability of affordable sources of power and adequacy of water supply;

 
exploration and drilling success;

 
capital and operating costs of a development project;

 
environmental considerations and permitting;

 
adequate access to the site, including competing land uses (such as agriculture);

 
applicable tax rates;

 
foreign currency fluctuation and inflation rates; and

 
availability of financing.

These estimates are based on geological and other interpretive data, which may be imprecise. As a result, actual operating and capital costs and returns from a development project may differ substantially from our estimates, and, as such, it may not be economically feasible to continue with a development project.
 
 
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Our ore reserve estimates may be imprecise.
 
Our ore reserve figures and costs are primarily estimates and are not guarantees that we will recover the indicated quantities of these metals. You are strongly cautioned not to place undue reliance on estimates of reserves. Reserves are estimates made by our professional technical personnel, and no assurance can be given that the estimated amount of metal or the indicated level of recovery of these metals will be realized. Reserve estimation is an interpretive process based upon available data and various assumptions. Our reserve estimates may change based on actual production experience. Further, reserves are valued based on estimates of costs and metals prices, which may not be consistent among our properties. The economic value of ore reserves may be adversely affected by:
 
 
declines in the market price of the various metals we mine;

 
increased production or capital costs;

 
reduction in the grade or tonnage of the deposit;

 
increase in the dilution of the ore; and

 
reduced recovery rates.

Short-term operating factors relating to our ore reserves, such as the need to sequentially develop orebodies and the processing of new or different ore grades, may adversely affect our cash flow. If the prices of metals that we produce decline substantially below the levels used to calculate reserves for an extended period, we could experience:
 
 
delays in new project development;

 
net losses;

 
reduced cash flow;

 
reductions in reserves;

 
write-downs of asset values; and

 
mine closure.

Efforts to expand the finite lives of our mines may not be successful or could result in significant demands on our liquidity, which could hinder our growth and decrease the value of our stock.
 
One of the risks we face is that mines are depleting assets. Thus, we must continually replace depleted ore reserves by locating and developing additional ore. Our ability to expand or replace ore reserves primarily depends on the success of our exploration programs. Mineral exploration, particularly for silver and gold, is highly speculative and expensive. It involves many risks and is often non-productive. Even if we believe we have found a valuable mineral deposit, it may be several years before production from that deposit is possible. During that time, it may become no longer feasible to produce those minerals for economic, regulatory, political or other reasons. As a result of high costs and other uncertainties, we may not be able to expand or replace our existing ore reserves as they are depleted, which would adversely affect our business and financial position in the future.
 
The #4 Shaft project, an internal shaft at the Lucky Friday mine, is expected, upon its completion, to provide deeper access in order to increase the mine's production and operational life. We commenced engineering and construction activities on #4 Shaft in late 2008, and our Board of Directors gave its final approval of the project in August 2011.  Work on the project thus far has included: detailed shaft design, excavation of the hoist room and off shaft development access to shaft facilities, hoist installation, placement and receipt of orders for major equipment purchases, 367 feet of vertical shaft excavation, and other construction activities.  The #4 Shaft project, as currently designed, is expected to involve development down to the 8800 foot level and capital expenditures of approximately $200 million, which includes approximately $92 million that has been spent on the project as of December 31, 2012.  At the end of 2011, MSHA began a special impact inspection at the Lucky Friday mine, and as a result MSHA ordered the Silver Shaft to be closed until we removed built-up cementitious material from the shaft. The Silver Shaft is the primary access way from the surface at the Lucky Friday, and the order resulted in a temporary suspension of  most operations at the Lucky Friday, including work on #4 Shaft.   Access to the #4 Shaft project was restored in the first quarter of 2013, and we believe that our current capital resources will allow us to proceed.  However, there are a number of factors that could affect completion of the project as currently designed, including: (i) a significant decline in metals prices, (ii) a reduction in available cash or credit, whether arising from decreased cash flow or other uses of available cash,  (iii) increased regulatory burdens, or (iv) a significant increase in operating or capital costs.  One or more of these factors could potentially require us to suspend the project, defer some of the planned development, or access additional capital through debt financing, the sale of securities, or other external sources.  This additional financing could be costly or unavailable.
 
 
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Our joint development and operating arrangements may not be successful.
 
We have in the past entered into, and may in the future enter into joint venture arrangements in order to share the risks and costs of developing and operating properties. In a typical joint venture arrangement, the partners own proportionate shares of the assets, are entitled to indemnification from each other and are only responsible for any future liabilities in proportion to their interest in the joint venture. If a party fails to perform its obligations under a joint venture agreement, we could incur liabilities and losses in excess of our pro-rata share of the joint venture.  We make investments in exploration and development projects that may have to be written off in the event we do not proceed to a commercially viable mining operation.  See Note 16 of Notes to Consolidated Financial Statements.
 
Our ability to market our metals production may be affected by disruptions or closures of custom smelters and/or refining facilities.
 
We sell substantially all of our metallic concentrates to custom smelters. Our doré bars are sent to refiners for further processing before being sold to metal traders. If our ability to sell concentrates to our contracted smelters becomes unavailable to us, our operations could be adversely affected.  See Note 11 of Notes to Consolidated Financial Statements for more information on the distribution of our sales and our significant customers.

We face inherent risks in acquisitions of other mining companies or properties that may adversely impact our growth strategy.
 
We are actively seeking to expand our mineral reserves by acquiring other mining companies or properties. Although we are pursuing opportunities that we feel are in the best interest of our shareholders, these pursuits are costly and often unproductive. Inherent risks in acquisitions we may undertake in the future could adversely affect our current business and financial condition and our growth.
 
There is a limited supply of desirable mineral properties available in the United States and foreign countries where we would consider conducting exploration and/or production activities, and any acquisition we may undertake is subject to inherent risks. In addition to the risk associated with limited mine lives, we may not realize the value of the companies or properties that are acquired due to a possible decline in metals prices, failure to obtain permits, labor problems, changes in regulatory environment, failure to achieve anticipated synergies, an inability to obtain financing, and other factors previously described. Acquisitions of other mining companies or properties may also expose us to new geographic, political, operating, and geological risks. In addition, we face strong competition for companies and properties from other mining companies, some of which have greater financial resources than we do, and we may be unable to acquire attractive companies and mining properties on terms that we consider acceptable.
 
Our business depends on finding skilled miners and maintaining good relations with our employees.
 
We are dependent upon the ability and experience of our executive officers, managers, employees and other personnel, and there can be no assurance that we will be able to retain such employees. We compete with other companies both in and outside the mining industry in recruiting and retaining qualified employees knowledgeable of the mining business. From time to time, we have encountered, and may in the future encounter, difficulty recruiting skilled mining personnel at acceptable wage and benefit levels in a competitive labor market, and may be required to utilize contractors, which can be more costly.  Temporary or extended lay-offs due to mine closures may exacerbate such issues and result in vacancies or the need to hire less skilled or efficient employees. The loss of these persons or our inability to attract and retain additional highly skilled employees could have an adverse effect on our business and future operations.  The Lucky Friday mine is our only operation subject to a collective bargaining agreement, which expires on April 30, 2016.

In March 2012, Hecla Limited received notice of a complaint filed against it by the United Steel Workers, Local 5114, with the Federal Mine Safety Health Review Commission for compensation for bargaining unit workers at the Lucky Friday mine who were idled as a result of the previously-announced, temporary suspension of production at the mine (see the Other Contingencies section of Note 7 of Notes to Consolidated Financial Statements for more information).

Competition from other mining companies may harm our business.
 
We compete with other mining companies to attract and retain key executives, skilled labor, contractors and other employees. We compete with other mining companies for the services of skilled personnel and contractors and their specialized equipment, components and supplies, such as drill rigs, necessary for exploration and development. We also compete with other mining companies for rights to mine properties. We may be unable to continue to obtain the services of skilled personnel and contractors or specialized equipment or supplies, or to acquire additional rights to mine properties.
 
 
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We may be subject to a number of unanticipated risks related to inadequate infrastructure.

Mining, processing, development and exploration activities depend on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important determinants, which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, other interference in the maintenance or provision of such infrastructure, or government intervention, could adversely affect our mining operations.

 Our foreign activities are subject to additional inherent risks.

We currently conduct exploration and pre-development projects in Mexico and continue to own assets, including real estate and mineral interests there. We anticipate that we will continue to conduct operations in Mexico and possibly other international locations in the future. Because we conduct operations internationally, we are subject to political and economic risks such as:
 
 
the effects of local political, labor and economic developments and unrest;

 
significant or abrupt changes in the applicable regulatory or legal climate;

 
exchange controls and export restrictions;

 
expropriation or nationalization of assets with inadequate compensation;

 
currency fluctuations and repatriation restrictions;

 
invalidation an unavailability of governmental orders, permits or agreements;
 
 
property ownership disputes;
 
 
renegotiation or nullification of existing concessions, licenses, permits and contracts;

 
criminal activity, corruption, demands for improper payments, expropriation, and uncertain legal enforcement and physical security;

 
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations;

 
fuel or other commodity shortages;

 
illegal mining;

 
laws or policies of foreign countries and the United States affecting trade, investment and taxation;

 
civil disturbances, war and terrorist actions; and

 
seizures of assets.

Consequently, our exploration, development and production activities outside of the United States may be substantially affected by factors beyond our control, any of which could materially adversely affect our financial condition or results of operations.
 
LEGAL, REGULATORY AND MARKET RISKS


We are currently involved in ongoing legal disputes that may materially adversely affect us.
 
There are several ongoing legal disputes in which we are involved, including a putative class action lawsuit filed against us, and additional actions may be filed against us.  We may be subject to future claims, including  those relating to environmental damage, safety conditions at our mines, the two fatal accidents that occurred at the Lucky Friday mine in 2011, and other related matters.  The outcomes of these pending and potential claims are uncertain.  We may not resolve these claims favorably. Depending on the outcome, these actions could have adverse financial effects or cause reputational harm to us.  If any of these disputes result in a substantial monetary judgment against us, are settled on terms in excess of our current accruals, or otherwise impact our operations, our financial results or condition could be materially adversely affected. For a description of some of the lawsuits in which we are involved, see Note 7 of Notes to Consolidated Financial Statements.
 
 
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We are required to obtain governmental and lessor approvals and permits in order to conduct mining operations.
 
In the ordinary course of business, mining companies are required to seek governmental and lessor approvals and permits for continuation or expansion of existing operations or for the commencement of new operations. For example, we estimate that our Greens Creek tailings impoundment area has sufficient capacity to meet our needs at least through the end of 2015.  In order to increase the tailings capacity at the mine, a permit is required.  Obtaining the necessary governmental permits is a complex, time-consuming and costly process. The duration and success of our efforts to obtain permits are contingent upon many variables not within our control. Obtaining environmental permits, including the approval of reclamation plans, may increase costs and cause delays or halt the continuation of mining operations depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority.  Interested parties may seek to prevent issuance of permits and intervene in the process or pursue extensive appeal rights.  Past or ongoing violations of government mining laws could provide a basis to revoke existing permits or to deny the issuance of additional permits. In addition, evolving reclamation or environmental concerns may threaten our ability to renew existing permits or obtain new permits in connection with future development, expansions and operations. There can be no assurance that all necessary approvals and permits will be obtained and, if obtained, that the costs involved will not exceed those that we previously estimated. It is possible that the costs and delays associated with the compliance with such standards and regulations could become such that we would not proceed with the development or operation.  We are often required to post surety bonds or cash collateral to secure our reclamation obligations and we may be unable to obtain the required surety bonds or may not have the resources to provide cash collateral.

We face substantial governmental regulation and environmental risk.
 
Our business is subject to extensive U.S. and foreign, federal, state and local laws and regulations governing development, production, labor standards, health and safety, the environment and other matters. For example, in 2012 both of our operating mines received several citations, and the Lucky Friday mine also received multiple orders, under the Mine Safety and Health Act of 1977, as administered by MSHA.  In addition, in November 2012, the Lucky Friday mine received a PPOV notice from MSHA.  See Recent accidents and other events at our Lucky Friday mine could have additional adverse consequences to us. The notice indicated that because the Lucky Friday was in a non-producing status at the time, MSHA will postpone action on the matter until further notice. Further, we have been and are currently involved in lawsuits or disputes in which we have been accused of causing environmental damage, violating environmental laws, or violating environmental permits, and we may be subject to similar lawsuits or disputes in the future.  See risk titled “Our environmental obligations may exceed the provisions we have made.”  

Exposure to these liabilities arises not only from our existing operations, but from operations that have been closed, sold to third parties, or properties we had a leasehold, joint venture, or other interest in. With a history dating back to 1991, our exposure to environmental claims may be greater because of the bankruptcy or dissolution of other mining companies which may have engaged in more significant activities of a mining site but which are no longer available to make claims against or obtain judgments from.

We are required to reclaim properties and specific requirements vary among jurisdictions. In some cases, we may be required to provide financial assurances as security for reclamation costs, which may exceed our estimates for such costs. Our historical operations and the historical operations of entities and properties we have acquired have occasionally been alleged to have generated environmental contamination. We could also be held liable for worker exposure to hazardous substances. There can be no assurances that we will at all times be in compliance with all environmental, health and safety regulations or that steps to achieve compliance would not materially adversely affect our business.
 
In addition to existing regulatory requirements, legislation and regulations may be adopted or permit limits reduced at any time that result in additional exposure to liability, operating expense, capital expenditures or restrictions and delays in the mining, production or development of our properties.  Mining accidents and fatalities, whether or not at our mines or related to silver mining, may increase the likelihood of additional regulation or changes in law.  In addition, enforcement or regulatory tools and methods available to governmental regulators such as the U.S. Environmental Protection Agency which have not been used or seldomly used against us, could in the future be used against us.  Federal or state environmental or mine safety regulatory agencies may order certain of our mines to be temporarily or permanently closed, which may have a material adverse effect on our cash flows, results of operations, or financial condition.
 
Legislative and regulatory measures to address climate change and green house gas emissions are in various phases of consideration.  If adopted, such measures could increase our cost of environmental compliance and also delay or otherwise negatively affect efforts to obtain permits and other regulatory approvals with regard to existing and new facilities.  Proposed measures could also result in increased cost of fuel and other consumables used at our operations, including the diesel generation of electricity at our Greens Creek operation if we are unable to regularly access utility power. Climate change legislation may also affect our smelter customers who burn fossil fuels, resulting in increased costs to us, and may affect the market for the metals we produce with effects on prices that are not possible for us to predict.
 
 
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From time to time, the U.S. Congress considers proposed amendments to the General Mining Law of 1872, as amended, which governs mining claims and related activities on federal lands. The extent of any future changes is not known and the potential impact on us as a result of U.S. Congressional action is difficult to predict. Changes to the General Mining Law, if adopted, could adversely affect our ability to economically develop mineral reserves on federal lands.  Although we are not currently mining on federal land, we do explore and future mining could occur on federal land.

The Clean Water Act requires permits for operations that discharge into waters of the United States.  Such permitting has been a frequent subject of litigation by environmental advocacy groups, which has resulted, and may in the future result, in declines in such permits or extensive delays in receiving them.  This may result in delays in, or in some instances preclude, the commencement or continuation of development or production operations.  Adverse outcomes in lawsuits challenging permits or failure to comply with applicable regulations could result in the suspension, denial, or revocation of required permits, which could have a material adverse impact on our cash flows, results of operations, or financial condition.

 Our environmental obligations may exceed the provisions we have made.
 
We are subject to significant environmental obligations, particularly in northern Idaho through our subsidiary Hecla Limited.  At December 31, 2012, we had accrued $113.2 million as a provision for environmental obligations, including a total of $70.8 million for our remaining obligation for environmental claims with respect to the Coeur d’Alene Basin in northern Idaho. A settlement of  the Coeur d’Alene Basin environmental litigation and related claims was finalized with entry of the Consent Decree by the Court in September 2011.  For information on our potential environmental liabilities, see Note 4 and Note 7 of Notes to Consolidated Financial Statements.

Shipment of our products is subject to regulatory and related risks.
 
Certain of the products we ship to our customers are subject to regulatory requirements regarding packaging, handling and shipping of products that may be considered dangerous to human health or the environment. Although we believe we are currently in compliance with all material regulations applicable to packaging, handling and shipping our products, the chemical properties of our products or existing regulations could change and cause us to fall out of compliance, or force us to incur substantial additional expenditures to maintain compliance with applicable regulations. Further, we do not ship our own products but instead rely on third party carriers to ship our products to our customers. To the extent that any of our carriers are unable or unwilling to ship our products in accordance with applicable regulations, including because of difficulty in obtaining, or increased cost of, insurance, we could be forced to find alternative shipping arrangements, assuming such alternatives would be available. Any such changes to our current shipping arrangements could have a material adverse impact on our operations and financial results.

The titles to some of our properties may be defective or challenged.
 
Unpatented mining claims constitute a significant portion of our undeveloped property holdings, the validity of which could be uncertain and may be contested. Although we have conducted title reviews of our property holdings, title review does not necessarily preclude third parties from challenging our title. In accordance with mining industry practice, we do not generally obtain title opinions until we decide to develop a property. Therefore, while we have attempted to acquire satisfactory title to our undeveloped properties, some titles may be defective.
 
The price of our stock has a history of volatility and could decline in the future.
 
Shares of our common and outstanding preferred stock are listed on the New York Stock Exchange. The market price for our stock has been volatile, often based on:
 
 
changes in metals prices, particularly silver;

 
our results of operations and financial condition as reflected in our public news releases or periodic filings with the SEC;

 
fluctuating proven and probable reserves;

 
factors unrelated to our financial performance or future prospects, such as global economic developments, market perceptions of the attractiveness of particular industries, or the reliability of metals markets;

 
political and regulatory risk;

 
the success of our exploration, pre-development, and capital programs;
 
 
16

 
 
 
ability to meet production estimates;

 
environmental, safety and legal risk;

 
the extent and nature of analytical coverage concerning our business; and

 
the trading volume and general market interest in our securities.

The market price of our stock at any given point in time may not accurately reflect our value, and may prevent shareholders from realizing a profit on their investment.
 
Our Series B Preferred Stock has a liquidation preference of $50 per share or $7.9 million.
 
If we were liquidated, holders of our preferred stock would be entitled to receive approximately $7.9 million (plus any accrued and unpaid dividends) from any liquidation proceeds before holders of our common stock would be entitled to receive any proceeds.
 
We may not be able to pay common or preferred stock dividends in the future.
 
Between July 2005 and the third quarter of 2008 we paid regular quarterly dividends on our Series B Preferred Stock .  Prior to then, except for the fourth quarter of 2004, we had not declared dividends on Series B Preferred Stock since the second quarter of 2000.  We similarly deferred Series B Preferred Stock dividends  for the fourth quarter of 2008 through the third quarter of 2009.  In January 2010 we paid all dividends in arrears. Since then we have paid all regular quarterly dividends on the Series B Preferred Stock.  The annual dividend payable on the Series B Preferred Stock is currently $0.6 million.  However, there can be no assurance that we will continue to pay preferred stock dividends in the future.

Our Board of Directors adopted a common stock dividend policy that has two components:  (1) a dividend that links the amount of dividends on our common stock to our average quarterly realized silver price in the preceding quarter, and (2) a minimum annual dividend of $0.01 per share of common stock, in each case payable quarterly, when declared.  See Note 9 of Notes to Consolidated Financial Statements for more information on potential dividend amounts under the first component of the policy at various silver prices. From the fourth quarter of 2011 through and including the first quarter of 2013, our Board of Directors has declared a common stock dividend under the policy described above (although in some cases only a minimum dividend was declared and none relating to the average realized price of silver due to the prices not meeting the policy threshold). On February 25, 2013, our Board of Directors declared a special common stock dividend of $0.01 per share, in addition to the minimum dividend of $0.0025 per share, even though the average realized silver price during the fourth quarter of 2012 did not meet the policy threshold. The declaration and payment of common stock dividends, whether pursuant to the policy or in addition thereto, is at the sole discretion of our Board of Directors, and there can be no assurance that we will continue to declare and pay common stock dividends in the future.
 
Additional issuances of equity securities by us would dilute the ownership of our existing stockholders and could reduce our earnings per share.
 
We may issue securities in the future in connection with acquisitions, strategic transactions or for other purposes. To the extent we issue any additional equity securities (or securities convertible into equity), the ownership of our existing stockholders would be diluted and our earnings per share could be reduced.  As of December 31, 2012, there were outstanding warrants to purchase 22,332,623 shares of our common stock.  The warrants expire in June and August 2014, and give the holders the right to purchase our common stock at the following prices:  $2.41 (5,200,519 shares), $2.52 (460,976 shares), and $2.46 (16,671,128 shares).  See Note 9 of Notes to Consolidated Financial Statements.

The issuance of additional shares of our preferred stock or common stock in the future could adversely affect holders of common stock.
 
The market price of our common stock may be influenced by any preferred stock we may issue.  Our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of our stockholders.  This includes the power to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over common stock with respect to dividends or upon the liquidation, dissolution or winding up of the business and other terms.  If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.  
  
 
17

 
 
As described in Note 9 of Notes to Consolidated Financial Statements, we issued 18.9 million shares of our common stock in January of 2011 in connection with conversion of our 6.5% Mandatory Convertible Preferred Stock.

If a large number of shares of our common stock are sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.
 
We cannot predict what effect, if any, future issuances by us of our common stock or other equity will have on the market price of our common stock. Any shares that we may issue may not have any resale restrictions, and therefore could be immediately sold by the holders. The market price of our common stock could decline if certain large holders of our common stock, or recipients of our common stock, sell all or a significant portion of their shares of common stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could also impair our ability to raise capital through the sale of additional common stock in the capital markets.
 
The provisions in our certificate of incorporation, our by-laws and Delaware law could delay or deter tender offers or takeover attempts that may offer a premium for our common stock.
 
Certain provisions in our certificate of incorporation, our by-laws and Delaware law could make it more difficult for a third party to acquire control of us, even if that transaction could be beneficial to stockholders. These impediments include:
 
 
the classification of our board of directors into three classes serving staggered three-year terms, which makes it more difficult to quickly replace board members;

 
the ability of our board of directors to issue shares of preferred stock with rights as it deems appropriate without stockholder approval;

 
a provision that special meetings of our board of directors may be called only by our chief executive officer or a majority of our board of directors;

 
a provision that special meetings of stockholders may only be called pursuant to a resolution approved by a majority of our board of directors;

 
a prohibition against action by written consent of our stockholders;

 
a provision that our board members may only be removed for cause and by an affirmative vote of at least 80% of the outstanding voting stock;

 
a provision that our stockholders comply with advance-notice provisions to bring director nominations or other matters before meetings of our stockholders;

 
a prohibition against certain business combinations with an acquirer of 15% or more of our common stock for three years after such acquisition unless the stock acquisition or the business combination is approved by our board prior to the acquisition of the 15% interest, or after such acquisition our board and the holders of two-thirds of the other common stock approve the business combination; and

 
a prohibition against our entering into certain business combinations with interested stockholders without the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of voting stock.

 If we cannot meet the New York Stock Exchange continued listing requirements, the NYSE may delist our common stock.
 
Our common stock is currently listed on the NYSE. In the future, if we are not be able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, our common stock may be delisted. Our closing stock price on February 21, 2013, was $4.90.  
 
If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; decreasing the amount of news and analyst coverage for the Company; and limiting our ability to issue additional securities or obtain additional financing in the future.  In addition, delisting from the NYSE might negatively impact our reputation and, as a consequence, our business.
 
 
18

 
 
Item 1B. Unresolved Staff Comments
 
None.

Item 2. Property Descriptions
 
OPERATING PROPERTIES

The Greens Creek Unit
 
Various of our subsidiaries own 100% of the Greens Creek mine, located on Admiralty Island near Juneau in Southeast Alaska.  Admiralty Island is accessed by boat, float plane, or helicopter.  On the island, the mine site and various surface facilities are accessed by all-weather gravel roads. The Greens Creek mine has been in production since 1989, with a temporary care and maintenance period from April 1993 through July 1996.  Since the start of production, Greens Creek has been owned and operated through various joint venture arrangements.  For approximately 15 years prior to April 16, 2008, our wholly-owned subsidiary, Hecla Alaska LLC, owned an undivided 29.7% joint venture interest in the assets of Greens Creek.  On April 16, 2008, we completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine and which previously operated the mine for approximately $758.5 million.  The acquisition gave various of our subsidiaries control of 100% of the Greens Creek mine.
 
The Greens Creek orebody contains silver, zinc, gold and lead, and lies within the Admiralty Island National Monument, an environmentally sensitive area. The Greens Creek property includes 639 unpatented lode mining claims, 58 patented lode claims and one patented mill site. In addition, the Greens Creek site includes  properties under lease from the U.S. Forest Service ("USFS") for a road right-of-way, mine portal and mill site access, camp site, mine waste area and tailings impoundment. The USFS leases have varying expiration terms. Greens Creek also has title to mineral rights on 7,301 acres of federal land acquired through a land exchange with the USFS.  We are currently exploring, but not mining, on such federal land.

The entire project is accessed by boat and served by 13 miles of road and consists of the mine, an ore concentrating mill, a tailings impoundment area, a ship-loading facility, camp facilities and a ferry dock.  The map below illustrates the location and access to Greens Creek:

 
 
19

 

The Greens Creek deposit is a polymetallic, stratiform, massive sulfide deposit. The host rock consists of predominantly marine sedimentary, and mafic to ultramafic volcanic and plutonic rocks, which have been subjected to multiple periods of deformation. These deformational episodes have imposed intense tectonic fabrics on the rocks. Mineralization occurs most often along the contact between a structural hanging wall of quartz mica carbonate phyllites and a structural footwall of graphitic and calcareous argillite. Major sulfide minerals are pyrite, sphalerite, galena, and tetrahedrite/tennanite.
 
Pursuant to a 1996 land exchange agreement, the joint venture transferred private property equal to a value of $1.0 million to the U.S. Forest Service and received exploration and mining rights to approximately 7,500 acres of land with mining potential surrounding the existing mine. Production from new ore discoveries on the exchanged lands will be subject to federal royalties included in the land exchange agreement. The royalty is only due on production from reserves that are not part of Greens Creek’s extralateral rights. Thus far, there has been no production triggering payment of the royalty. The royalty is 3% if the average value of the ore during a year is greater than $120 per ton of ore, and 0.75% if the value is $120 per ton or less. The benchmark of $120 per ton is adjusted annually according to the Gross Domestic Product (GDP) Implicit Price Deflator until the year 2016, and at December 31, 2012, was at approximately $167 per ton when applying the latest GDP Implicit Price Deflator.

Greens Creek is an underground mine which produces approximately 2,100 to 2,300 tons of ore per day. The primary mining methods are cut and fill and longhole stoping. The Greens Creek ore processing facility includes a SAG/ball mill grinding circuit to grind the run of mine ore to liberate the minerals and produce a slurry suitable for differential flotation of mineral concentrates.  A gravity circuit recovers free gold that exists as electrum, a gold/silver alloy in the ore.  Doré and gravity concentrates are produced from this circuit prior to flotation.  Three flotation concentrates are produced: a lead concentrate which contain most of the silver recovered; a zinc concentrate which is low in precious metals content; and a zinc-rich bulk concentrate that contains gold, silver, zinc, and lead and must be marketed to an imperial smelter.  Process capacity averages between 2,200 and 2,300 tons per day  depending on ore grade and hardness.   In 2012, ore was processed at an average rate of approximately 2,157 tons per day and mill recovery totaled approximately 73% silver, 78% zinc, 68% lead and 61% gold.  The doré is further refined by precious metal refiners and sold to banks, and the three concentrate products are sold to a number of major smelters worldwide.  See Note 11 of Notes to Consolidated Financial Statements for information on the significant customers for Greens Creek’s products. Concentrates are shipped from the Hawk Inlet marine terminal about nine miles from the mill.

Underground exploration activities at the Greens Creek unit during 2012 focused on continued expansion of the 200 South, Gallagher, NWW and Southwest Bench ore zones along trend of already-existing reserves and in new areas such as the Northeast and West contacts.   Definition drilling of the 200 South, 9a and NWW ore zones resulted in additions to reserves. Surface exploration drilling was conducted in 2012 on the Killer Creek and West Gallagher targets near the Greens Creek mine where mineralization was identified. Approximately 25,000 feet of surface drilling is planned at the Greens Creek unit for 2013.
 
Electricity for the Greens Creek unit is provided through the purchase of surplus hydroelectric power from Alaska Electric Light and Power Company (“AEL&P”), to the extent it is available after the power needs of Juneau and the surrounding area are met. When weather conditions are not favorable to maintain lake water levels sufficient for all of the power needs at Greens Creek to be met by available hydroelectric power, the mine relies on power provided by on-site diesel generators .
 
The employees at Greens Creek are employees of Hecla Greens Creek Mining Company, our wholly-owned subsidiary, and are not represented by a bargaining agent. There were 386 employees at the Greens Creek unit at December 31, 2012.
 
As of December 31, 2012, we have recorded a $32.9 million asset retirement obligation for reclamation and closure costs. We maintained a $30 million reclamation bond for Greens Creek as of December 31, 2012.   The net book value of the Greens Creek unit property and its associated plant, equipment and mineral interests was approximately $681 million as of December 31, 2012.
 
 
20

 
 
Based on current ore reserve estimates, the currently known remaining mine life at Greens Creek is 10 years.  Information with respect to production, average costs per ounce of silver produced and proven and probable ore reserves is set forth in the following table.
 
   
Years Ended December 31,
 
Production
 
2012
   
2011
   
2010
 
Ore milled (tons)
    789,569       772,069       800,397  
Silver (ounces)
    6,394,235       6,498,337       7,206,973  
Gold (ounces)
    55,496       56,818       68,838  
Zinc (tons)
    64,249       66,050       74,496  
Lead (tons)
    21,074       21,055       25,336  
Average Cost per Ounce of Silver Produced(1)
                       
Total cash costs
  $ 2.70     $ (1.29 )   $ (3.90 )
Total production costs
  $ 9.68     $ 5.19     $ 3.36  
Proven Ore Reserves(2,3,4,5,6,7)
                       
Total tons
    12,000              
Contained silver (ounces)
    112,500              
Contained gold (ounces)
    1,100              
Contained zinc (tons)
    930              
Contained lead (tons)
    330              
Probable Ore Reserves(2,3,4,5,6,7)
                       
Total tons
    7,845,600       7,991,000       8,243,100  
Silver (ounces per ton)
    12.0       12.3       12.1  
Gold (ounces per ton)
    0.09       0.09       0.09  
Zinc (percent)
    9.0       9.2       9.3  
Lead (percent)
    3.4       3.5       3.5  
Contained silver (ounces)
    94,481,200       98,383,300       99,730,000  
Contained gold (ounces)
    718,400       742,400       757,000  
Contained zinc (tons)
    702,300       733,140       766,500  
Contained lead (tons)
    267,410       281,620       291,300  
Total Proven and Probable Ore Reserves(2,3,4,5,6,7)
                       
Total tons
    7,857,600       7,991,000       8,243,100  
Silver (ounces per ton)
    12.0       12.3       12.1  
Gold (ounces per ton)
    0.09       0.09       0.09  
Zinc (percent)
    9.0       9.2       9.3  
Lead (percent)
    3.4       3.5       3.5  
Contained silver (ounces)
    94,593,700       98,383,300       99,730,000  
Contained gold (ounces)
    719,500       742,400       757,000  
Contained zinc (tons)
    703,230       733,140       766,500  
Contained lead (tons)
    267,740       281,620       291,300  

(1)
Includes by-product credits from gold, lead and zinc production. Cash costs per ounce of silver represents a measurement that is not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provides an indicator of economic performance and efficiency 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 and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Part II, Item 7. — Management's Discussion and Analysis of Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

(2)
Estimates of proven and probable ore reserves for the Greens Creek unit as of December 2012, 2011 and 2010 are calculated and reviewed in-house and are derived from successive generations of reserve and feasibility analyses for different areas of the mine, using a separate assessment of metals prices for each year.  The average prices used for the Greens Creek unit were:
 
 
21

 
 
   
December 31,
 
   
2012
   
2011
   
2010
 
Silver (per ounce)
  $ 26.50     $ 20.00     $ 16.00  
Gold (per ounce)
  $ 1,400     $ 1,100     $ 950  
Lead (per pound)
  $ 0.85     $ 0.85     $ 0.80  
Zinc (per pound)
  $ 0.85     $ 0.85     $ 0.80  
 
(3)
Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Mill recoveries of ore reserve grades differ with ore grades, and the 2012 reserve model assumes average mill recoveries of 73% for silver, 61% for gold, 87% for zinc and 77% for lead.

(4)
The changes in reserves in 2012 versus 2011 are due to continued depletion of the deposit through production, partially offset by the addition of data from new drill holes and development work and increases in tonnage due to higher  metals prices used for planning.  The changes in reserves in 2011 versus 2010 were due to the lower ore grades for gold, zinc, and lead combined with continued depletion of the deposit, partially offset by increases in forecasted metals prices.  

(5)
Probable reserves at the Greens Creek unit are based on average drill spacing of 50 to 100 feet. Proven reserves typically require that mining samples are partly the basis of the ore grade estimates used, while probable reserve grade estimates can be based entirely on drilling results.  The proven reserves reported for Greens Creek for 2012 represents stockpiled ore.  Cutoff grade assumptions vary by orebody and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs. Due to multiple ore metals, and complex combinations of ore types, metal ratios and metallurgical performances at Greens Creek, the cutoff grade is expressed in terms of net smelter return (“NSR”), rather than metal grade. The cutoff grade was $190 per ton NSR.

(6)
Greens Creek ore reserve estimates were prepared by Kerry Lear, Senior Resource Geologist at the Greens Creek unit and reviewed by John Taylor, Senior Resource Geologist at Hecla Limited.

(7)
An independent review by AMEC E&C, Inc. occurred in 2012.  The review included the 2012 model containing a portion, 204,000 tons, of the 200 South zone that is included in reserves.  The final report on the review is pending.
 
 
22

 
 
The Lucky Friday Unit
 
Since 1958, we have owned and operated the Lucky Friday mine, a deep underground silver, lead and zinc mine located in the Coeur d’Alene Mining District in northern Idaho. Lucky Friday is one-quarter mile east of Mullan, Idaho, and is adjacent to U.S. Interstate 90.  The mine site and various surface facilities are accessed by paved roads from U.S. Interstate 90.  Below is a map illustrating the location and access to the Lucky Friday unit:



There have been two ore-bearing structures mined at the Lucky Friday unit.  The first, mined through 2001, was the Lucky Friday vein, a fissure vein typical of many in the Coeur d’Alene Mining District. The ore body is located in the Revett Formation, which is known to provide excellent host rocks for a number of ore bodies in the Coeur d’Alene Mining District. The Lucky Friday vein strikes northeasterly and dips steeply to the south with an average width of six to seven feet. Its principal ore minerals are galena and tetrahedrite with minor amounts of sphalerite and chalcopyrite. The ore occurs as a single continuous ore body in and along the Lucky Friday vein. The major part of the ore body has extended from 1,200 feet to 6,020 feet below surface.
 
The second ore-bearing structure, known as the Lucky Friday Expansion Area, has been mined since 1997 pursuant to an operating agreement with Silver Hunter Mining Company (“Silver Hunter”), our wholly owned subsidiary.  During 1991, we discovered several mineralized structures containing some high-grade silver ores in an area known as the Gold Hunter property, approximately 5,000 feet northwest of the then existing Lucky Friday workings. This discovery led to the development of the Gold Hunter property on the 4900 level. At approximately 4,900 feet below surface, the Gold Hunter veins are hosted in a 200-foot thick siliceous lens within the Wallace Formation that transitions to the St. Regis Formation below 5,900 feet.  The veins are sub-parallel, and are numbered consecutively from the hanging wall of the favorable horizon to the footwall.  The strike of the vein system is west-northwest with a dip of 85 degrees to the south.  The 30-vein, which has demonstrated to contain higher silver grades, represents approximately 79% of our current proven and probable ore reserve tonnages, while the remaining 21% of our reserves are contained in various intermediate veins having lower silver grades than 30-vein. While the veins share many characteristics with the Lucky Friday vein, the Gold Hunter area possesses some mineralogical and rock mechanics differences that make it more favorable to mine at this time.  On November 6, 2008, we, through Silver Hunter, completed the acquisition of substantially all of the assets of Independence Lead Mines Company, which held an interest in the Gold Hunter property.  The acquisition included all future interests or royalty obligations to Independence and the mining claims pertaining to the operating agreement with Hecla Limited that was assigned to Silver Hunter.
 
The principal mining method at the Lucky Friday unit is ramp access, cut and fill. This method utilizes rubber-tired equipment to access the veins through ramps developed outside of the ore body. Once a cut is taken along the strike of the vein, it is backfilled with cemented tailings and the next cut is accessed, either above or below, from the ramp system.
 
Ore at the Lucky Friday is processed using a conventional lead/zinc flotation flow sheet, with process control guided by a real-time on-line analyzer.  Run of mine ore is crushed in a conventional three stage crushing plant consisting of a primary jaw crusher, and a secondary crushing circuit, and tertiary cone crushing stage.  Crushed ore is ground in a ball mill, and the ground slurry reports to the lead flotation circuit.  The lead circuit tailings report to the zinc flotation circuit.  Lead and zinc concentrates are thickened and filtered, and final concentrate products are shipped to smelters for final processing.  Current processing capacity of the Lucky Friday facility is approximately 1,000 tons per day.  As discussed further below, production at Lucky Friday was temporarily suspended during 2012.  In 2011,  ore was processed at an average rate of approximately 905 tons per day. During 2011, mill recovery totaled approximately 93% silver, 93% lead and 87% zinc. All silver-lead and zinc concentrate production during 2011 was shipped to Teck Cominco Limited’s smelter in Trail, British Columbia, Canada.
 
 
23

 
 
Underground exploration activities were suspended at the Lucky Friday unit during 2012 as rehabilitation of the Silver Shaft was completed (discussed below).  During 2012 all the reserves models were converted from 2D to 3D to allow better representation of the ore zones and allow improved mining stope designs.   In-fill drilling in 2013 from 6800 to 7300 Levels is expected to allow for the potential addition of reserves in the western portion of the mine. Exploration drilling has shown the pervasive continuity of mineralization at depth and encouraging results confirmed expansion to the east. In 2013, drilling is expected to evaluate areas to the east from 6400 to 7200 Levels. Surface exploration in the Silver Valley, near the Lucky Friday mine, focused in the Star-Morning area but also evaluated the Noonday, Moffat, You Like and  Tamarack veins. Additional surface exploration drilling is planned for 2013.

Based on current estimates of reserves,  mineralized material, and other resources, the currently expected mine life at the Lucky Friday is approximately 26 years. Information with respect to the Lucky Friday unit’s production, average cost per ounce of silver produced and proven and probable ore reserves for the past three years is set forth in the table below.

   
Years Ended December 31,
 
Production
 
2012
   
2011
   
2010
 
Ore milled (tons)
          298,672       351,074  
Silver (ounces)
          2,985,339       3,359,379  
Lead (tons)
          18,095       21,619  
Zinc (tons)
          7,305       9,286  
                         
Average Cost per Ounce of Silver Produced(1)
                       
Total cash costs
  $     $ 6.47     $ 3.76  
Total production costs
  $     $ 8.50     $ 6.25  
                         
Proven Ore Reserves(2,3,4)
                       
Total tons
    2,206,600       2,345,500       1,642,100  
Silver (ounces per ton)
    12.1       12.6       12.4  
Lead (percent)
    7.4       7.8       7.8  
Zinc (percent)
    2.7       3.0       2.8  
Contained silver (ounces)
    26,778,900       29,573,900       20,387,600  
Contained lead (tons)
    163,350       183,100       128,000  
Contained zinc (tons)
    58,560       70,160       46,000  
                         
Probable Ore Reserves(2,3,4)
                       
Total tons
    1,931,700       1,345,300       1,545,100  
Silver (ounces per ton)
    14.8       14.7       14.2  
Lead (percent)
    8.7       9.3       8.9  
Zinc (percent)
    3.2       3.2       3.0  
Contained silver (ounces)
    28,676,000       19,746,200       21,955,000  
Contained lead (tons)
    167,390       124,720       136,800  
Contained zinc (tons)
    62,300       42,890       46,500  
                         
Total Proven and Probable Ore Reserves(2,3,4,5)
                       
Total tons
    4,138,300       3,690,800       3,187,200  
Silver (ounces per ton)
    13.4       13.4       13.3  
Lead (percent)
    8.0       8.3       8.3  
Zinc (percent)
    2.9       3.1       2.9  
Contained silver (ounces)
    55,454,900       49,320,100       42,342,600  
Contained lead (tons)
    330,740       307,820       264,800  
Contained zinc (tons)
    120,860       113,050       92,500  
 
 
24

 
 
(1)
Includes by-product credits from lead and zinc production. Cash costs per ounce of silver represents a measurement that is not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provides an indicator of economic performance and efficiency 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 and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

(2)
Proven and probable ore reserves are calculated and reviewed in-house and are subject to periodic audit by others, although audits are not performed on an annual basis. Cutoff grade assumptions vary by ore body and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs.  Due to multiple ore metals, and complex combinations of ore types, metal ratios and metallurgical performances at the Lucky Friday, the cutoff grade is expressed in terms of net smelter return (“NSR”), rather than metal grade.  The cutoff grade at the Lucky Friday ranges from $76 per ton NSR to $89 per ton NSR.  Our estimates of proven and probable reserves are based on the following metals prices:

   
December 31,
 
   
2012
   
2011
   
2010
 
Silver (per ounce)
  $ 26.50     $ 20.00     $ 16.00  
Lead (per pound)
  $ 0.85     $ 0.85     $ 0.80  
Zinc (per pound)
  $ 0.85     $ 0.85     $ 0.80  
 
(3)
Reserves are in-place materials that incorporate estimates of the amount of waste that must be mined along with the ore and expected mining recovery. Mill recoveries are expected to be 93% for silver, 93% for lead and 87% for zinc.

(4)
The changes in reserves in 2012 versus 2011 are primarily due to inclusion of additional areas into the mine plan as a result of additional drilling and higher metals prices used for planning.  The changes in reserves in 2011 versus 2010 are due to addition of data from new drill holes and development work, an increase in mining widths in areas utilizing mechanized mining, and increases in forecasted metals prices, which has resulted in the addition of new reserves based on updated estimates, partially offset by depletion due to production.  

(5)
Lucky Friday ore reserve estimates were prepared by Terry DeVoe, Chief Geologist at the Lucky Friday unit and reviewed by John Taylor, Senior Resource Geologist at Hecla Limited.

A number of accidents and other events have recently impacted operations at the Lucky Friday.   In April 2011, a fall of ground caused the fatality of one employee, resulting in cessation of operations for approximately 10 days.  In November 2011, an accident occurred as part of the construction of #4 Shaft and resulted in the fatality of one contractor employee.  In an unrelated incident, in December 2011, a rock burst occurring in a primary access way at the Lucky Friday injured seven employees.  At the end of 2011, MSHA began a special impact inspection at the Lucky Friday which resulted in an order to remove built-up cementitious material from the Silver Shaft, the primary access way from surface at the Lucky Friday mine. In response, we submitted a plan to MSHA and received approval to remove the built-up cementitious material.  In addition, the plan included removal of unused utilities, construction of a water ring to prevent ice from forming in the winter, the installation of a metal brattice, repair of shaft steel, and installation of a new power and fiber optic cable, all of which should improve the shaft's functionality and possibly improve the shaft's hoisting capacity. Once the shaft cleanup was complete down to the 4900 level, work on a haulage way bypassing the area at 5900 level impacted by the December 2011 rock burst commenced.   Work on the Silver Shaft and the haulage way was completed in the first quarter of 2013.   Underground access was temporarily limited as this work was being performed, and production at the Lucky Friday mine was suspended from late 2011 until early 2013 as a result. Limited production commenced in the first quarter of 2013, and we anticipate a ramp-up of mine output during the year as we perform additional rehabilitation and get necessary clearance from MSHA until we return to full production levels at the Lucky Friday by approximately mid-2013.
 
 
25

 
 
During 2008, we initiated engineering, procurement and development activities relating to construction of #4 Shaft at the Lucky Friday mine, which, upon completion, would provide access from the 4900 level down to the 8800 level of the mine. The project was temporarily placed on hold in the fourth quarter of 2008 due to then prevailing metals prices.  However, detailed engineering, long lead time procurement, and other early-stage activities for the internal shaft project resumed in 2009.  Activities in 2010 and 2011 relating to #4 Shaft included engineering, erection of a surface concrete batch plant, detailed shaft design, excavation of the hoist room and off shaft development access to shaft facilities, installation of the hoist and head works, placement and receipt of orders for major equipment purchases, advancement of a geotechnical drill hole, 367 feet of vertical excavation, shaft-sinking set-up, and other construction activities.  Upon completion, #4 Shaft should allow us to mine mineralized material below our current workings and provide deeper platforms for exploration.  Construction of #4 Shaft is expected to take approximately three more years to complete after re-commencement, and capital expenditures for the project are forecast to total approximately $200 million, including approximately $92 million spent on the project through December 31, 2012.  As a result of the requirement to remove built-up cementitious material from the Silver Shaft (discussed above), work on the #4 Shaft project was suspended until completion of the Silver Shaft rehabilitation.  Work on #4 Shaft has re-commenced, and we believe that our current capital resources will allow us to complete the #4 Shaft project as designed.  However, there are a number of factors that could affect completion of the project, including a significant decline in metals prices or a significant increase in operating or capital costs.  An increase in the capital cost could potentially require us to suspend the project or access additional capital though debt financing, the sale of securities, or other external sources.  This additional financing could be costly or unavailable.
 
Reclamation activities are anticipated to include stabilization of tailings ponds and waste rock areas. Reclamation of one of the idle tailings ponds was performed at Lucky Friday in 2012, and at December 31, 2012, an asset retirement obligation of approximately $1.5 million had been recorded for reclamation and closure costs.

The net book value of the Lucky Friday unit property and its associated plant, equipment and mineral interests was approximately $253.0 million as of December 31, 2012. The age of the facilities at Lucky Friday ranges from the 1950s to 2012. The plant is maintained by our employees with assistance from outside contractors as needed.
 
At December 31, 2012, there were 239 employees at the Lucky Friday unit. The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union is the bargaining agent for the Lucky Friday’s 180 hourly employees. The current labor agreement expires on April 30, 2016.  As a result of the requirement to remove built-up cementitious material from the Silver Shaft, which limited underground access and temporarily suspended production at the Lucky Friday, Hecla Limited laid off 121 employees in January 2012, with approximately 25 of those employees accepting temporary positions at other Hecla operations.  The employment level at the Lucky Friday has returned roughly to where it was prior to the suspension of production, with most of the laid off employees returning.
 
Avista Corporation supplies electrical power to the Lucky Friday unit.

Item 3. Legal Proceedings
 
For a discussion of our legal proceedings, see Note 7 of Notes to Consolidated Financial Statements.

Item 4.  Mine Safety Disclosures

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in exhibit 95 to this Annual Report.

PART II


Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Shares of our common stock are traded on the New York Stock Exchange, Inc.  where it trades under the symbol "HL."   As of February 21, 2013, there were 6,573 shareholders of record of our common stock.  Our common stock quarterly high and low sale prices for the past two years were as follows:

     
Fourth
Quarter
   
Third
Quarter
   
Second
Quarter
   
First
Quarter
 
2012
– High
  $ 6.81     $ 6.94     $ 4.96     $ 5.99  
 
– Low
  $ 5.25     $ 4.14     $ 3.70     $ 4.25  
2011
– High
  $ 7.00     $ 8.65     $ 9.95     $ 11.56  
 
– Low
  $ 4.82     $ 5.32     $ 6.87     $ 7.81  
 
Quarterly dividends were paid on our Series B Preferred Stock for 2011 and 2012, and no dividends are in arrears. The final quarterly dividend on our 6.5% Mandatory Convertible Preferred Stock for the fourth quarter of 2010 was paid in January 2011, and no dividends are in arrears.  All outstanding shares of our 6.5% Mandatory Convertible Preferred Stock converted to common stock on January 1, 2011.  
 
 
26

 
 
In September 2011 and February 2012, our Board of Directors adopted a common stock dividend policy that has two components:  (1) a dividend that links the amount of dividends on our common stock to our average quarterly realized silver price in the preceding quarter, and (2) a minimum annual dividend of $0.01 per share of common stock, in each case, payable quarterly, when declared.  See Note 9 of Notes to Consolidated Financial Statements for more information on potential dividend amounts under the first component of the policy at various silver prices. The following table summarizes the common stock dividends declared by our Board of Directors under the policy described above:


   
(A)
   
(B)
    (A+B)          
Declaration date
 
Silver-price-linked component per share
   
Minimum annual component per share
   
Total dividend per share
   
Total dividend amount (in millions)
 
Month of payment
November 8, 2011
  $ 0.02     $ 0     $ 0.02     $ 5.6  
December 2011
February 17, 2012
  $ 0.01     $ 0.0025     $ 0.0125     $ 3.6  
March 2012
May 8, 2012
  $ 0.02     $ 0.0025     $ 0.0225     $ 6.4  
June 2012
August 7, 2012
  $     $ 0.0025     $ 0.0025     $ 0.7  
September 2012
November 2, 2012
  $ 0.02     $ 0.0025     $ 0.0225     $ 6.4  
December 2012
February 25, 2013
  $     $ 0.0025     $ 0.0025     $ 0.7  
anticipated in March 2013

Because the average realized silver price for the second and fourth quarters of 2012 was $27.05 and $29.20 per ounce, respectively, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. However, on February 25, 2013, our Board of Directors declared a special common stock dividend of $0.01 per share, in addition to the minimum dividend of $0.0025 per share, for an aggregate dividend of $3.6 million.  Once declared, it is payable in March 2013.  Prior to 2011, no dividends had been declared on our common stock since 1990. We cannot pay dividends on our common stock if we fail to pay dividends on our Series B Preferred Stock. The declaration and payment of common stock dividends, whether pursuant to the policy or in addition thereto, is at the sole discretion of our Board of Directors, and there can be no assurance that we will continue to declare and pay common stock dividends in the future.

The following table provides information as of December 31, 2012 regarding our compensation plans under which equity securities are authorized for issuance:

   
Number of
Securities To
Be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
   
Weighted-Average
Exercise Price of
Outstanding Options
   
Number of
Securities Remaining
Available For
Future Issuance
Under Equity
Compensation Plans
 
Equity Compensation Plans Approved by Security Holders:
                 
2010 Stock Incentive Plan
          N/A       19,605,740  
1995 Stock Incentive Plan
    938,408       6.23        
Stock Plan for Non-employee Directors
          N/A       622,685  
Key Employee Deferred Compensation Plan
          N/A       1,325,012  
Total
    938,408       6.23       21,553,437  
 
See Note 8 and Note 9 of Notes to Consolidated Financial Statements for information regarding the above plans.
 
We did not issue any unregistered securities in 2012.  On December 12, 2011, we issued  5,395,683 unregistered shares of common stock to the various parties listed in the Purchase and Sale Agreement filed as exhibit 10.1 to our Current Report on Form 8-K filed on December 13, 2011. The shares were not registered under the Securities Act of 1933 in reliance on Section 4(2) of such Act and Regulation D thereunder, as transactions by an issuer not involving any public offering, and were issued for the acquisition of  the remaining 30% interest in the San Juan Silver project (see Note 16 of Notes to Consolidated Financial Statements for information).   We did not issue any unregistered securities in 2010; however, we did issue 604,555 and 631,832 shares of common stock on April 1 and July 1, 2010, respectively, as payment of the quarterly dividend on our formerly outstanding 6.5% Mandatory Convertible Preferred Stock.
 
 
27

 
 
The following performance graph compares the performance of our common stock during the period beginning December 31, 2007 and ending December 31, 2012 to the S&P 500, the S&P 500 Gold Index, a peer group for the year ending December 31, 2012 ("New Peer Group"), and a peer group for the year ending December 31, 2011.  The New Peer Group consists of the following companies:  Alamos Gold Inc., Allied Nevada Gold Corp., Centerra Gold, Inc., Coeur d’Alene Mines Corp., Eldorado Gold Corp., Golden Star Resources Ltd., IAMGOLD Corporation, New Gold Incorporation, Pan American Silver Corp., Stillwater Mining Company.  The Old Peer Group consists of the following companies:  Alamos Gold Inc., Allied Nevada Gold Corp., Aurico Gold Corp., Centerra Gold, Inc., Coeur d’Alene Mines Corp., Eldorado Gold Corp., Golden Star Resources Ltd., IAMGOLD Corporation, New Gold Incorporation, Pan American Silver Corp., Stillwater Mining Company.  The change in our 2012 peer group compared to the 2011 peer group was to add Aurico Gold Corp., to include an additional company that we have determined to be within an acceptable revenue range.  Total graph assumes a $100 investment in our common stock and in each of the indexes and peer groups since the beginning of the period, and a reinvestment of dividends paid on such investments on a quarterly basis throughout the period.

 

Date
 
Hecla Mining
   
S&P 500
   
S&P 500
Gold Index
   
2011 Old
Peer Group
   
2012 New Peer
Group
 
December 2007
  $ 100.00     $ 100.00     $ 100.00     $ 100.00     $ 100.00  
December 2008
  $ 29.95     $ 63.00     $ 84.18     $ 61.88     $ 62.29  
December 2009
  $ 66.10     $ 79.67     $ 98.72     $ 128.43     $ 129.03  
December 2010
  $ 120.43     $ 91.67     $ 129.29     $ 197.87     $ 192.98  
December 2011
  $ 56.11     $ 93.61     $ 128.40     $ 158.58     $ 155.61  
December 2012
  $ 63.29     $ 108.59     $ 102.20     $ 143.52     $ 141.99  
 
 
28

 
 
The stock performance information above is “furnished” and shall not be deemed to be “soliciting material” or subject to Rule 14A, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing, except to the extent that it specifically incorporates the information by reference.

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program ("the program").  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions.  See Note 9 of Notes to Consolidated Financial Statements for more information.  All of the shares in the table below were purchased under the program.  The following table provides information about purchases we made during the quarter ended December 31, 2012 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

Period
 
Total number of shares purchased
   
Average price paid per share
   
Total number of shares purchased as part of publicly announced programs
   
Maximum number of shares that may yet to be purchased under the program as of 12/31/2012
 
10/1/2012 -
10/31/2012
 
   
N/A
   
N/A
   
 
 
11/1/2012 -
11/30/2012
 
100,000
   
$
5.64
   
100,000
   
 
 
12/1/2012 -
12/31/2012
 
190,300
   
$
5.69
   
190,300
   
 
 
Total
 
290,300
   
$
5.67
   
290,300
   
19,649,700
 
 
 
29

 
 
Item 6. Selected Financial Data
 
The following table (in thousands, except per share amounts, common shares issued, shareholders of record, and employees) sets forth selected historical consolidated financial data as of and for each of the years ended December 31, 2008 through 2012, and is derived from our audited financial statements. The data set forth below should be read in conjunction with, and is qualified in its entirety by, our Consolidated Financial Statements and the Notes thereto.
 
   
2012 (7)
   
2011
   
2010
   
2009
   
2008 (4)
 
Sales of products
  $ 321,143     $ 477,634     $ 418,813     $ 312,548     $ 204,665  
Net income (loss) from continuing operations
  $ 14,954     $ 151,164     $ 48,983     $ 67,826     $ (37,173 )
Loss from discontinued operations, net of tax (5)
  $     $     $     $     $ (17,395 )
Loss on disposal of discontinued operations, net of tax (5)
  $     $     $     $     $ (11,995 )
Net income (loss)
  $ 14,954     $ 151,164     $ 48,983     $ 67,826     $ (66,563 )
Preferred stock dividends (2,3)
  $ (552 )   $ (552 )   $ (13,633 )   $ (13,633 )   $ (13,633 )
Income (loss) applicable to common shareholders
  $ 14,402     $ 150,612     $ 35,350     $ 54,193     $ (80,196 )
Basic income (loss) per common share
  $ 0.05     $ 0.54     $ 0.14     $ 0.24     $ (0.57 )
Diluted income (loss) per common share
  $ 0.05     $ 0.51     $ 0.13     $ 0.23     $ (0.57 )
Total assets
  $ 1,378,290     $ 1,396,090     $ 1,382,493     $ 1,046,784     $ 988,791  
Accrued reclamation & closure costs (6)
  $ 113,215     $ 153,811     $ 318,797     $ 131,201     $ 121,347  
Noncurrent portion of debt and capital leases
  $ 11,935     $ 6,265     $ 3,792     $ 3,281     $ 113,649  
Cash dividends paid per common share(1)
  $ 0.06     $ 0.02     $     $     $  
Cash dividends paid per Series B preferred share (2)
  $ 3.50     $ 3.50     $ 7.00     $     $ 3.50  
Cash dividends paid per 6.5% Mandatory Convertible Preferred share (3)
  $     $ 1.62     $ 1.69     $     $ 3.48  
Common shares issued and outstanding
    285,209,848       285,289,924       258,485,666       238,335,526       180,461,371  
6.5% Mandatory Convertible Preferred shares issued and outstanding
                2,012,500       2,012,500       2,012,500  
Series B Preferred shares issued and outstanding
    157,816       157,816       157,816       157,816       157,816  
Shareholders of record
    6,630       6,943       7,388       7,647       7,936  
Employees
    735       735       686       656       742  
 

 
(1)
In September 2011 and February 2012, our Board of Directors adopted a common stock dividend policy that has two components:  (1) a dividend that links the amount of dividends on our common stock to our average quarterly realized silver price in the preceding quarter, and (2) a minimum annual dividend of $0.01 per share of common stock, in each case, payable quarterly, when declared.  See Note 9 of Notes to Consolidated Financial Statements for more information on potential dividend amounts under the first component of the policy at various silver prices. The following table summarizes the common stock dividends declared by our Board of Directors under the policy described above:
 

   
(A)
   
(B)
    (A+B)          
Declaration date
 
Silver-price-linked component per share
   
Minimum annual component per share
   
Total dividend per share
   
Total dividend amount (in millions)
 
Month of payment
November 8, 2011
  $ 0.02     $     $ 0.02     $ 5.6  
December 2011
February 17, 2012
  $ 0.01     $ 0.0025     $ 0.0125     $ 3.6  
March 2012
May 8, 2012
  $ 0.02     $ 0.0025     $ 0.0225     $ 6.4  
June 2012
August 7, 2012
  $     $ 0.0025     $ 0.0025     $ 0.7  
September 2012
November 2, 2012
  $ 0.02     $ 0.0025     $ 0.0225     $ 6.4  
December 2012
February 25, 2013
  $     $ 0.0025     $ 0.0025     $ 0.7  
anticipated in March 2013
 
 
30

 
 
Because the average realized silver price for the second and fourth quarters of 2012 was $27.05 and $29.20 per ounce, respectively, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. However, on February 25, 2013, our Board of Directors declared a special common stock dividend of $0.01 per share, in addition to the minimum dividend of $0.0025 per share, for an aggregate dividend of $3.6 million payable in March 2013.  Prior to 2011, no dividends had been declared on our common stock since 1990. We cannot pay dividends on our common stock if we fail to pay dividends on our Series B Preferred Stock.  The declaration and payment of common stock dividends, whether pursuant to the policy or in addition thereto, is at the sole discretion of our Board of Directors, and there can be no assurance that we will continue to declare and pay common stock dividends in the future.

(2)
During 2007, $0.6 million in Series B preferred dividends were declared and paid.  During 2008, $0.4 million in Series B preferred dividends were declared and paid, while $0.1 million in dividends for the fourth quarter of 2008 were deferred.  Series B preferred dividends for the first three quarters of 2009, which totaled $0.4 million, were also deferred.  In December 2009, we declared all dividends in arrears on our Series B preferred stock of $0.6 million and the scheduled $0.1 million dividend for the fourth quarter of 2009.  These dividends were paid in cash in January 2010.  Therefore, dividends declared on our Series B preferred shares of $0.7 million were included in the determination of income applicable to common shareholders for 2009 with no cash paid for Series B preferred dividends during 2009.  We declared and paid all quarterly dividends on our Series B preferred shares for 2010, 2011 and 2012 totaling $0.6 million for each of those years.

(3)
Cumulative undeclared, unpaid 6.5% Mandatory Convertible Preferred Stock dividends for the period from from December 18, 2007 (the date of issuance) to December 31, 2007 totaled $0.5 million, and are reported in determining income applicable to common shareholders for the year ended December 31, 2007.  The $0.5 million in cumulative undeclared dividends were paid in April 2008.  During 2008, $9.8 million in 6.5% Mandatory Convertible Preferred dividends were declared and paid.  $6.5 million of the dividends declared in 2008 were paid in cash, and are included in the amount reported as cash dividends paid per 6.5% Mandatory Convertible Preferred Share, and $3.3 million of the dividends declared in 2008 were paid in our Common Stock.  Dividends on our 6.5% Mandatory Convertible Preferred Stock totaling $13.1 million for the fourth quarter of 2008 and the first three quarters of 2009 were deferred.  In December 2009, we declared the $13.1 million in dividends in arrears on our 6.5% Mandatory Convertible Preferred Stock and the scheduled $3.3 million dividend for the fourth quarter of 2009.  These dividends were paid in shares of our common stock in January 2010.  Therefore, dividends declared on our 6.5% Mandatory Convertible Preferred Stock of $13.1 million were included in the determination of income applicable to common shareholders for 2009 with no cash paid for 6.5% Mandatory Convertible Preferred Stock dividends in 2009.  We declared and paid all quarterly dividends on our 6.5% Mandatory Convertible Preferred Stock totaling $13.1 million for 2010.  Dividends declared for the first and second quarters of 2010 were paid in shares of our common stock and dividends for the third and fourth quarters of 2010 were paid in cash.  The cash dividend declared for the fourth quarter of 2010, which was paid in January 2011, represents the last dividend to be paid on the 6.5% Mandatory Convertible Preferred Stock, which automatically converted to shares of our common stock on January 1, 2011.

(4)
On April 16, 2008, we completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine for approximately $758.5 million.  The acquisition gave various of our subsidiaries control of 100% of the Greens Creek mine.  Our operating results reflect our 100% ownership of Greens Creek after April 16, 2008 and our 29.7% ownership of Greens Creek prior to that date.

(5)
On July 8, 2008, we completed the sale of all of the outstanding capital stock of El Callao Gold Mining Company and Drake-Bering Holdings B.V., our wholly owned subsidiaries which together owned our business and operations in Venezuela, the “La Camorra unit.” The results of the Venezuelan operations have been reported in discontinued operations for all periods presented.

(6)
In the fourth quarter of 2010, we recorded an accrual of $193.2 million to increase our liability for environmental obligations in Idaho's Coeur d'Alene Basin pursuant to negotiations with the Plaintiffs in the Coeur d'Alene Basin environmental litigation and the State of Idaho on the financial terms of settlement of the litigation and related claims.  The settlement was finalized in September 2011. 

(7)
As a result of an order from MSHA to remove built-up cementitious material from the Silver Shaft, production was temporarily suspended at the Lucky Friday unit during all of 2012.  Limited production resumed in early 2013.  See Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations, The Lucky Friday Segment for more information.

 
31

 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
 
Established in 1891 in northern Idaho’s Silver Valley, we believe we are the oldest still-operating precious metals mining company in the United States and the largest silver producer in the U.S.  Our corporate offices are in Coeur d’Alene, Idaho and Vancouver, British Columbia. Our production profile includes: 
 
 
silver, gold, lead, and zinc contained in concentrates shipped to various smelters; and
 
 
gold doré.

Our operating properties comprise our two business segments for financial reporting purposes:   the Greens Creek operating unit on Admiralty Island in Alaska and the Lucky Friday operating unit in Idaho. Since both of our mines are located in the U.S., we believe they have low political risk, and less economic risk than mines located in other parts of the world. Our exploration interests are located in the United States and Mexico, jurisdictions with low and relatively moderate political and economic risk, respectively, and are located in historically successful mining districts.
 
Our operating and strategic framework is based on expanding our production and locating and developing new resource potential. In 2012, we
 
 
Generated positive cash flows from operations of $69.0 million in spite of the temporary suspension of production at the Lucky Friday mine during 2012, as discussed in the Lucky Friday Segment section below.

 
Completed the work to address the order from MSHA to remove built-up cementitious material from the Silver Shaft (discussed below) and other orders, resulting in MSHA's approval to commence production at the Lucky Friday mine in early 2013.

 
Committed a record level of capital expenditures (including non-cash lease additions) of approximately $129.9 million, including $62.2 million at Greens Creek and $56.0 million at Lucky Friday, which includes $28.2 million for the work to rehabilitate and improve the Silver Shaft.  

 
Increased overall proven and probable silver reserves at December 31, 2012 compared to 2011, with higher silver reserves at Lucky Friday due to inclusion of additional areas into the mine plan brought about by additional drilling and higher metals prices used for planning.  The increase in silver reserves at Lucky Friday was partially offset by a slight decrease in silver reserves at Greens Creek in 2012 due to depletion of the deposit through production, partially offset by an increase in reserves through development drilling and as a result of higher metals prices used for planning.

 
Continued our investment in other mining properties and companies through our acquisition of the Monte Cristo property in Nevada and investments in Dolly Varden Silver Corporation and Canamex Resources Corp.

 
Increased our exploration and pre-development spending during the year by 58% and 130% compared to 2011 and 2010, respectively, drilling targets at each of our four land packages in Alaska, Idaho, Colorado, and Mexico, and advancing pre-development projects at the historic Equity and Bulldog mines in Creede, Colorado, the Star mine in Idaho's Silver Valley, and the San Sebastian mine in Mexico.

 
Paid common stock dividends totaling $17.1 million, or $0.06 per share, under the our recently-adopted common dividend policy.  See Note 9 of Notes to Consolidated Financial Statements.

 
Reduced our balances for accrued reclamation and closure costs by $40.6 million, primarily as a result of making the  scheduled $25.0 million payment pursuant to the terms of settlement of the Coeur d'Alene Basin litigation and advancement of reclamation work at the Grouse Creek site (a non-operating property located in Idaho).

 
Achieved the above milestones utilizing cash flows generated from operations with no external financing required, while maintaining a cash balance of $191.0 million and substantially no debt as of December 31, 2012.
 
 
32

 
 
Silver prices continued to be relatively strong, with an annual average of $31.15 for 2012.  Although this is down from the average price of $35.11 per ounce for 2011, the two year trend is still positive compared to the average price of $20.16 for 2010.  The price of gold, a significant by-product at our Greens Creek mine, has continued on an upward trend over the last three years,  with the annual average gold price increasing from $1,225 in 2010 to $1,569 in 2011, and to $1,669 in 2012.  Average prices of lead increased by 12% in 2011 compared 2010, and then decreased by 14% during 2012. The prices of zinc remained substantially level during 2011, but then decreased by 12% during 2012.  Lead and zinc represent important by-products at both of our operations. The positive performance in precious metals prices allowed us to achieve the milestones discussed above in spite of the temporary suspension of production at Lucky Friday during all of 2012, which resulted in decreased production of silver, lead, and zinc in 2012 compared to 2011.
 
The factors driving metals prices are beyond our control and are difficult to predict. As noted above, prices have been highly volatile in the last three years and could be so in the future. Average prices in 2012 compared to those in 2011 and 2010 are illustrated in the Results of Operations section below.  Moreover, variations in the metal grades of ore mined are impacted by geology and mine planning efficiencies and operations, potentially creating constraints on metals produced.  Ore transportation and smelting schedules also impact the timing of sales and final settlement.

See the Results of Operations section below for a discussion of the factors impacting income applicable to common shareholders for the three years ended December 31, 2012, 2011 and 2010.
 
Key Issues
 
We intend to achieve our long-term strategy of increasing production and expanding our proven and probable reserves through development and exploration, as well as by future acquisitions. Our strategic plan requires that we manage several challenges and risks inherent in conducting mining, development, exploration and metal sales at multiple locations.
 
One such risk involves metals prices, over which we have no control except through derivative and other contracts. As discussed in the Critical Accounting Estimates section below, metals prices are influenced by a number of factors beyond our control.  Average market prices of silver, zinc and lead in 2012 were lower than their levels in 2011, while gold prices were higher, as illustrated by the table in Results of Operations below. We believe current global economic and industrial trends could result in continued demand growth for the metals we produce.  However, prices have been volatile over the last five years and there can be no assurance that higher prices will continue.
 
We make our strategic plans in the context of significant uncertainty about future operational capacity, which may impact new opportunities that require many years and substantial cost from discovery to production. We approach this challenge by investing in exploration and capital in districts with known mineralization.  We significantly increased our exploration and pre-development activity in 2012 compared to 2011 and 2010, and we anticipate a further increase in the coming year at or near our operating mines at Greens Creek and Lucky Friday, as well as at our exploration projects in the past-producing mining districts in Colorado and Mexico.

As further discussed in the Lucky Friday Segment section below, the construction of an internal shaft at the Lucky Friday mine (“#4 Shaft”), which, we believe, will significantly increase production and extend the life of the mine.  The #4 Shaft project will involve significant additional capital costs during the periods leading up to its expected completion date in 2016.  Although we believe that our current capital resources will allow us to complete the #4 Shaft project, there are a number of factors that could affect its completion.

Volatility in global financial markets poses a significant challenge to our ability to access credit and equity markets, should we need to do so, and to predict sales prices for our products.  As discussed in Note 9 of Notes to Consolidated Financials Statements, we have established a common stock dividend policy which includes a component that is linked to our realized silver price.  We utilize forward contracts to manage the potential impacts on our revenues of future declines in zinc and lead prices.  In addition, we have in place a three-year $150 million revolving credit agreement under which there are no outstanding borrowings as of the filing date of this annual report.
 
We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; involving employees in the establishment of safety standards; and participating in the National Mining Association's CORESafety program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness.  See Part I, Item 1A. Risk Factors and the Lucky Friday Segment section below for information on accidents and other events that recently impacted operations at our Lucky Friday unit.  We work with MSHA to address issues outlined in the investigations of these incidents and continue to evaluate our safety practices.
 
 
33

 
 
Another challenge is the risk associated with environmental litigation and ongoing reclamation activities. As described in Risk Factors and Note 7 of Notes to Consolidated Financial Statements, it is possible that our estimate of these liabilities (and our ability to estimate liabilities in general) may change in the future, affecting our strategic plans.  We finalized the terms of settlement with the Plaintiffs in the Coeur d'Alene Basin environmental litigation in 2011, which has assisted our planning efforts by decreasing uncertainty regarding our liability and our liquidity needs relating to our most significant environmental matter.   However, we are involved in other environmental legal matters, and there can be no assurance that the estimate of our environmental liabilities, liquidity needs, or strategic plans will not be significantly impacted as a result of these matters or new matters that may arise.  We strive to ensure that our activities are conducted in compliance with applicable laws and regulations and to attempt to settle environmental litigation.
 
Reserve estimation is a major risk inherent in mining. Our reserve estimates, which drive our mining and investment plans and many of our costs, may change based on economic factors and actual production experience. Until ore is mined and processed, the volumes and grades of our reserves must be considered as estimates. Our reserves are depleted as we mine. Reserves can also change as a result of changes in economic and operating assumptions.
 
As a result of industry-wide fatal accidents in recent years, primarily at underground coal mines, there has been an increase in mine regulation.  In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC was directed to issue new rules regarding the disclosure of mine safety data.  These changes may have a significant negative effect on our future operating costs.   Moreover, because of the incidents in 2011 at the Lucky Friday mine, we expect additional regulatory scrutiny, and our ability to achieve and maintain compliance with MSHA regulations will be a challenge for us; yet, it is very important to our operations and financial performance.  See Part I, Item 1A. Risk Factors - Recent accidents and other events at our Lucky Friday mine could have additional adverse consequences to us and We face substantial governmental regulation and environmental risk.

Results of Operations
 
For the year ended December 31, 2012, we reported income applicable to common shareholders of $14.4 million compared to $150.6 million in 2011 and $35.4 million in 2010. The following factors had a negative impact on results for the year ended December 31, 2012 compared to 2011 and 2010:
 
 
Decreased gross profit at our Greens Creek and Lucky Friday units to $143.5 million in 2012 compared to $265.0 million in 2011 and $194.8 million in 2010.    See the Greens Creek Segment and Lucky Friday Segment sections below for further discussion of operating results.

 
The temporary halt in production and suspension-related costs of $25.3 million incurred at our Lucky Friday unit in 2012 related to maintenance of  surface facilities and mine workings and refurbishing the mill in preparation for the return to production.  See The Lucky Friday Segment section for more information on the temporary suspension of production during 2012.

 
Net mark-to-market losses on base metal forward contracts of $10.5 million in 2012 and $20.8 million in 2010 compared to a net gain of $38.0 million in 2011.  These gains and losses are related to financially-settled forward contracts on forecasted zinc and lead production as part of a risk management program.  The losses in 2012 and 2010 resulted from increases in zinc and lead prices at the end of those periods, with the gains in 2011 due to decreasing prices for those metals.
 
 
Exploration and pre-development expense increased significantly to $49.7 million in 2012 from $31.4 million in 2011 and $21.6 million in 2010 as we continue extensive exploration work at our Greens Creek unit, on our land package near Durango, Mexico, at our San Juan Silver project in the Creede district of Colorado, and in the North Idaho's Coeur d'Alene Mining District near our Lucky Friday unit. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves. Establishing proven and probable reserves would indicate future recovery of these expenses. We have advanced pre-development projects during 2011 and 2012 at the Equity and Bulldog mines in the Creede district and at the Star mine in the Coeur d'Alene district which have given us access to historic workings and underground drill platforms.  We have also initiated pre-development work at the San Sebastian mine in Mexico.

 
Lower average prices for the silver, zinc, and lead produced at our operations in 2012 compared to 2011.  However, gold prices increased in 2012 compared to the prior year.  Average prices for all four metals were higher in 2011 compared to their levels in 2010.  
 
 
34

 
 
     
Average price for the year ended December 31,
 
     
2012
   
2011
   
2010
 
Silver —
London PM Fix ($/ounce)
  $ 31.15     $ 35.11     $ 20.16  
 
Realized price per ounce
  $ 32.11     $ 35.30     $ 22.70  
Gold —
London PM Fix ($/ounce)
  $ 1,669     $ 1,569     $ 1,225  
 
Realized price per ounce
  $ 1,687     $ 1,592     $ 1,271  
Lead —
LME Final Cash Buyer ($/pound)
  $ 0.94     $ 1.09     $ 0.97  
 
Realized price per pound
  $ 0.96     $ 1.05     $ 0.98  
Zinc —
LME Final Cash Buyer ($/pound)
  $ 0.88     $ 1.00     $ 0.98  
 
Realized price per pound
  $ 0.90     $ 1.00     $ 0.96  

Average realized prices differ from average market prices because concentrate sales are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices.  Due to the time elapsed between shipment of concentrates and final settlement with the smelters, we must estimate the prices at which sales of our metals will be settled.  Previously recorded sales are adjusted to estimated settlement metal prices each period through final settlement.  For 2012, we recorded net positive adjustments to provisional settlements of $5.2 million compared to net negative price adjustments to provisional settlements of $9.8 million in 2011 and positive adjustments of $14.9 million in 2010. The price adjustments related to zinc and lead contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals (see Note 10 of Notes to Consolidated Financial Statements for more information).  The gains and losses on these contracts are included in revenues and impact the realized prices for lead and zinc.  We recognized overall net losses on the contracts of $1.3 million in 2012, net gains of $7.1 million in 2011, and net losses of $3.0 million in 2010.  Realized prices are calculated by dividing gross revenues for each metal (which include the price adjustments and gains and losses on the forwards contracts discussed above) by the payable quantities of each metal included in concentrate and doré shipped during the period.

            Other significant variances affecting the comparison of our income applicable to common shareholders for 2012 to results for 2011 and 2010 were as follows:

 
Provision for closed operations and environmental matters decreased to $4.7 million in 2012 from $9.7 million in 2011 and $201.1 million in 2010.  In the fourth quarter of 2010, we recorded an accrual of $193.2 million to increase our liability for environmental obligations in Idaho’s Coeur d’Alene Basin pursuant to negotiations with the Plaintiffs in the Coeur d’Alene Basin environmental litigation and the State of Idaho on the financial terms of settlement of the litigation and related claims.  The settlement was finalized in September 2011. In addition, in 2012, we reached a $3.0 million settlement with an insurance company for our claim for reimbursement of past costs related to the Coeur d'Alene Basin, and we reduced provision for closed operations and environmental matters by that amount in the third quarter of 2012.

 
Income tax provision of $8.9 million in 2012 compared to $82.0 million in 2011, while we recognized an income tax benefit of $123.5 million in 2010.  The lower provision in 2012 compared to 2011 is the result of reduced profits.  The benefit recognized in 2010 is the result of a valuation allowance adjustment to our deferred tax asset balances, which is included in the aggregate income tax benefit for that period.  Our deferred tax asset balances are recorded net of an offsetting valuation allowance to the extent that we estimate that the assets are not realizable through future taxable income. In the fourth quarter of 2010, we removed substantially all of the valuation allowance on our deferred tax assets.  Significant evidence in 2010, including record cash flows from operations and higher metals prices, led us to conclude that our deferred tax assets are more likely than not realizable due to estimated future profitability.  

 
35

 
 
Greens Creek Segment
 

Dollars are in thousands (except per ounce and per ton amounts)
Years Ended December 31,
 
2012
 
2011
 
2010
Sales
$
320,895
   
$
342,906
   
$
313,318
 
Cost of sales and other direct production costs
(134,105
)
 
(113,393
)
 
(116,824
)
Depreciation, depletion and amortization
(43,522
)
 
(41,013
)
 
(51,671
)
Gross Profit
$
143,268
   
$
188,500
   
$
144,823
 
           
Tons of ore milled
789,569
   
772,069
   
800,397
 
Production:
         
Silver (ounces)
6,394,235
   
6,498,337
   
7,206,973
 
Gold (ounces)
55,496
   
56,818
   
68,838
 
Zinc (tons)
64,249
   
66,050
   
74,496
 
Lead (tons)
21,074
   
21,055
   
25,336
 
Payable metal quantities sold:
         
Silver (ounces)
5,430,252
   
5,314,232
   
6,223,967
 
Gold (ounces)
43,133
   
43,942
   
57,386
 
Zinc (tons)
50,895
   
48,436
   
56,001
 
Lead (tons)
15,733
   
16,067
   
20,221
 
Ore grades:
         
Silver ounces per ton
11.13
   
11.49
   
12.30
 
Gold ounces per ton
0.12
   
0.12
   
0.13
 
Zinc percent
9.35
   
9.81
   
10.66
 
Lead percent
3.49
   
3.52
   
4.09
 
Mining cost per ton
$
64.05
   
$
49.31
   
$
43.00
 
Milling cost per ton
$
29.35
   
$
30.69
   
$
24.23
 
Total cash cost per silver ounce (1)
$
2.70
   
$
(1.29
)
 
$
(3.90
)
______________
 
(1)
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Reconciliation of Total Cash Costs to Costs (non-GAAP) of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

The $45.2 million decrease in gross profit for 2012 compared to 2011 was primarily the result of lower average prices for silver, zinc and lead, partially offset by higher gold prices in 2012.  Average prices for silver and gold were higher in 2012 by 55% and 36%, respectively, compared to their levels in 2010.  The impact of higher precious metal prices was offset by lower average zinc and lead prices and higher mining and milling costs, as discussed further below, when comparing gross profit for 2012 to 2010.  Results for 2012 were also impacted by marginally lower silver, zinc, lead, and gold production. Gross profit at Greens Creek was also impacted by positive price adjustments to revenues of $4.9 million in 2012 compared to negative prices adjustments of $6.7 million in 2011 and positive adjustments of $12.8 million in 2010.  Price adjustments to revenues result from changes in metals prices between transfer of title of concentrates to buyers and final settlements during the period.  The impact of positive price adjustments was partially offset by a net loss of $1.3 million on forward contracts related to concentrates shipped during 2012 compared to a gain of $6.2 million in 2011 and a loss of $2.1 million in 2010.

Mining costs per ton increased in 2012 by 30% and 49% compared to 2011 and 2010, respectively.  Milling costs per ton decreased slightly in 2012 by 4% compared to 2011 and increased by 21% compared to 2010.  The higher mining costs were due primarily to increased use of contract miners at Greens Creek, which is more expensive than internal labor; however, the cost of internal labor also increased during 2012. The increase in mining costs in 2012 is also due to higher maintenance costs.  Milling costs are down in 2012 compared to 2011 because we generated less power on-site in 2012 due to higher availability of less expensive hydroelectric power, the result of higher precipitation levels in Southeastern Alaska.  The increase in milling costs in 2012 compared to 2010 is primarily the result of an increase in the cost of diesel fuel from $2.66 in 2010 to $3.66 in 2012.

 
36

 
 
The Greens Creek operation is partially powered by diesel generators, and production costs have historically been significantly affected by fluctuations in fuel prices and utility power availability. Installed infrastructure  allows hydroelectric power to be supplied to Greens Creek by Alaska Electric Light and Power (AEL&P) via a submarine cable from North Douglas Island, near Juneau, to Admiralty Island, where Greens Creek is located. This has reduced production costs at Greens Creek to the extent power has been available.  During 2009 and 2010, the mine began receiving an increased proportion of its power needs from AEL&P; however, in 2011, due to lower precipitation, less hydroelectric power was available.  During 2012, the mine again received an increased proportion of its power needs from AEL&P.  When weather conditions are not favorable to maintain lake water levels, the mine relies on diesel generated power.  Fuel costs represented approximately $6.8 million (6% of total production costs) at Greens Creek in 2012 compared to $12.7 million (13% of production costs) in 2011 and $5.1 million (6% of production costs) in 2010.  The cost of hydroelectric power was $6.8 million (6% of production costs) in 2012, $3.9 million (4% of production costs) in 2011, and $6.2 million (7% of production costs) in 2010.

The chart below illustrates the factors contributing to the variances in total cash costs per silver ounce for 2012 compared to 2011 and 2010:


 

Mining and milling cost per ounce increased in 2012 compared to 2011 and 2010 due to increased use of contract miners, higher maintenance costs in the first half of 2012, and the effect of lower silver production on cost per ounce, partially offset by lower power costs.

Other cash costs per ounce for 2012 were higher compared to 2011 and 2010 due to the effect of lower silver production and higher labor costs, partially offset by lower mine license tax.

Treatment costs were slightly lower in 2012 compared to 2011 as a result of lower zinc concentrate production and lower zinc and lead prices.  Treatment costs include a price participation component that fluctuates with changes in base metal prices.  In 2012, treatment costs were higher compared to 2010 due to an increase in base treatment charges.  In addition, we incurred additional refining charges for shipments sent to China.

By-product credits were lower in 2012 compared to 2011 due to lower lower zinc and lead prices, lower zinc production due to lower ore grades, and lower gold production.  By-product credits were lower in 2012 compared to 2010 due to lower zinc and lead prices and lower production for both metals due to lower ore grades.
 
 
37

 
 
The difference between what we report as "production" and "payable metal quantities sold" is due to the difference between the quantities of metals contained in the concentrate we produce versus the portion of those metals actually paid for by our smelter customers according to the terms of the smelter contracts (not all of the metals contained in our concentrate shipments are physically recovered through the smelting process).  Differences can also arise from inventory changes incidental to shipping schedules.

While revenue from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product of the Greens Creek unit is appropriate because:
 
 
silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;

 
we have historically presented Greens Creek as a producer primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;

 
metallurgical treatment maximizes silver recovery;

 
the Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and

 
in most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery.

We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate.  Because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset operating costs within our cost per ounce calculations.

In the fourth quarter of  2012, we updated our asset retirement obligation ("ARO") at Greens Creek to reflect a preliminary revised reclamation and closure plan having estimated undiscounted costs of approximately $73.9 million, an increase from the $53.4 million in the previous plan. See Note 4 of Notes to Consolidated Financial Statements for more information on the ARO update.  We expect to again update our ARO and revise our closure plan in 2013 for a tailings capacity expansion at Greens Creek which is currently under consideration by the government agencies.  Adjustments to the ARO liability are recorded with corresponding changes to the ARO asset balance, which is included in properties, plants, equipment, and mineral interests, net on our Consolidated Balance Sheets.  As a result, we do not anticipate future updates in the ARO for Greens Creek to have a material impact on our annual results of operations.  As part of the revised closure plan, we may be required to increase our current $30 million reclamation bond for Greens Creek.  Although we do not know the amount of such increase, it likely will be a material amount, and there can be no assurance that this bonding capacity will be available to us at that time.

 
38

 

The Lucky Friday Segment
 

Dollars are in thousands (except per ounce and per ton amounts)
 
Years Ended December 31,
   
2012
   
2011
 
2010
Sales
  $ 248     $ 134,728     $ 105,495  
Cost of sales and other direct production costs
          (52,180 )     (47,159 )
Depreciation, depletion and amortization
          (6,053 )     (8,340 )
Gross profit
  $ 248     $ 76,495     $ 49,996  
                         
Tons of ore milled
          298,672       351,074  
Production:
                       
Silver (ounces)
          2,985,339       3,359,379  
Lead (tons)
          18,095       21,619  
Zinc (tons)
          7,305       9,286  
Payable metal quantities sold:
                       
Silver (ounces)
          2,805,402       3,136,205  
Lead (tons)
          16,983       20,213  
Zinc (tons)
          5,465       6,850  
Ore grades:
                       
Silver ounces per ton
          10.69       10.25  
Lead percent
          6.51       6.60  
Zinc percent
          2.82       3.04  
Mining cost per ton
  $     $ 60.76     $ 54.27  
Milling cost per ton
  $     $ 16.96     $ 14.74  
Total cash cost per silver ounce (1)
  $     $ 6.47     $ 3.76  
______________
 
(1)
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

The decrease in gross profit for 2012 compared to 2011 and 2010 resulted from the suspension of production at the Lucky Friday mine during 2012, as discussed below.  Gross profit for 2011 increased compared to 2010 due to higher average prices for all metals produced at the Lucky Friday (further discussed in Results of Operations above), partially offset by higher costs of sales and other direct production costs due primarily to increased employee profit sharing and taxes resulting from increased profitability.    
 
At the end of 2011, MSHA began a special impact inspection at the Lucky Friday mine which resulted in an order to remove built-up cementitious material from the Silver Shaft, as further discussed in Item 2. Property Descriptions, Operating Properties, The Lucky Friday Unit.   The Silver Shaft is an approximately one-mile deep, 18-foot diameter, concrete-lined shaft from surface.   It is the primary access to the Lucky Friday mine's underground workings.  In response to the MSHA order, we submitted a plan to MSHA and received approval to remove the built-up cementitious material, and that work commenced in the first quarter of 2012. The plan also included removal of unused utilities, construction of a water ring to prevent ice from forming in the winter, the installation of a metal brattice, repair of shaft steel, and installation of a new power cable, all of which should improve the shaft's functionality and possibly improve the shaft's hoisting capacity.  Production was temporarily suspended during all of 2012 as the Silver Shaft rehabilitation work was performed.  During the suspension of production, the smelter contracts related to treatment of Lucky Friday concentrates were suspended based on force majeure. The shaft restoration project and other related work has been completed, with limited production at the Lucky Friday recommencing in early 2013.  We anticipate a ramp-up in mine output during the first half of the year as additional production areas come on line, with a return to full production levels expected in mid-2013.   However, the timing of the return to full production at the Lucky Friday mine may ultimately vary from our current estimates.   Once the Silver Shaft rehabilitation work was completed down to the 4900 level, we commenced construction of a haulage way bypass around an area impacted by a rock burst in December 2011, and completed the bypass in early 2013.  Completion of work on the Silver Shaft to the 4900 level also enabled planning and other preliminary work to resume on the #4 Shaft project (discussed below), and we resumed sinking of #4 Shaft in early 2013 upon completion of the Silver Shaft work.  Care and maintenance costs incurred at the Lucky Friday during the suspension of production totaled $25.3 million, including $6.3 million in depreciation, depletion, and amortization, in 2012.  These costs are included in a separate line item under Other operating expenses on the Consolidated Statement of Operations and Comprehensive Income.

 
39

 
 
Depreciation, depletion, and amortization expense at Lucky Friday of $6.3 million for 2012 was included in Lucky Friday suspension-related costs under Other operating expenses on the Consolidated Statement of Operations and Comprehensive Income. Depreciation, depletion, and amortization expense for 2011 was 27% lower than in 2010 due to reduced units-of-production depreciation.  The majority of the decrease was incidental to an extension of expected mine life at Lucky Friday, resulting in the book value of units-of-production assets being depreciated over a longer duration. The extension of the expected mine life is primarily due to the positive economics of the #4 Shaft project which, when completed, will provide deeper access beyond the current workings (see below for further discussion of the #4 Shaft project). In addition, production was lower in 2011 compared the previous year, primarily due to down-time related to the accidents discussed below.

Mining and milling costs per ton increased in 2011 by 12% and 15%, respectively, compared to 2010 primarily due to lower production and higher costs of fuel, consumable underground materials, reagents, and maintenance supplies.
 
The chart below illustrates the factors contributing to the variances in total cash costs per silver ounce for 2011 and 2010:
 

 
Mining and milling costs per ounce increased in 2011 compared to 2010 due to the higher cost of consumables and supplies.  The higher other cash costs per ounce in 2011 are mainly due to increased profit sharing, as a result of higher silver prices and profits.  Treatment costs increased in 2011 due to higher lead prices, as treatment costs include a price participation component that fluctuates with changes in base metal prices.  The increase in by-product credits in 2011 is also attributable to the higher lead prices, partially offset by lower lead and zinc production in 2011 compared to 2010.

The difference between what we report as “production” and “payable metal quantities sold” is due to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our smelter customers according to the terms of the smelter contracts (not all of the metals contained in our concentrate shipments are physically recovered through the smelting process).  The decrease in payable quantities sold in 2011 compared to 2010 is attributable to a decrease in production due mainly to various down-time periods related to the accidents discussed below.

 
40

 
 
While revenue from lead and zinc is significant at the Lucky Friday, we believe that identification of silver as the primary product, with lead and zinc as by-products, is appropriate because:

 
silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;

 
the Lucky Friday unit is situated in a mining district long associated with silver production; and

 
the Lucky Friday unit generally utilizes selective mining methods to target silver production.

We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. Because we consider lead and zinc to be by-products of our silver production, the values of these metals offset operating costs within our cost per ounce calculations.

The #4 Shaft project, an internal shaft at the Lucky Friday mine, will, upon its completion, provide deeper access in order to expand the mine's operational life.  We commenced engineering and construction activities on #4 Shaft in late 2008, and our Board of Directors gave its final approval of the project in August 2011.  Construction of the #4 Shaft as currently designed is expected to cost approximately $200 million, including approximately $92 million already spent as of December 31, 2012, with completion expected in 2016.  As discussed above, the #4 Shaft sinking activities were temporarily suspended until cleanup work in the Silver Shaft was completed in early 2013.  We believe that our current capital resources will allow us to complete the project.  However, there are a number of factors that could affect completion of the project, including:  (i) a significant decline in metals prices, (ii) a reduction in available cash or credit, whether arising from decreased cash flow or other uses of available cash, (iii) increased regulatory burden, or (iv) a significant increase in operating or capital costs.

Many of the employees at our Lucky Friday unit are represented by a union. The collective bargaining agreement with the union expires on April 30, 2016.   See Item 1. Business, Employees and Item 1A. Risk Factors, Our business depends on finding skilled miners and maintaining good relations with our employees for more information on the status of employment levels and relations at the Lucky Friday unit.

Corporate Matters
 
In addition to the variances discussed in the Results of Operations section above, other significant variances affecting 2012 results compared to 2011 results were as follows:
 
 
Higher general and administrative expense in 2012 by $2.7 million primarily due to increased workforce costs.

 
Lower other operating expense by $3.2 million, primarily as a result of $2.0 million in donations to the Hecla Charitable Foundation in 2011 (see Note 15 of Notes to the Condensed Consolidated Financial Statements).

Other significant variances affecting 2011 results compared to 2010 results were as follows: