hl20160331_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

Commission file number

 

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 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)

  

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes XX .    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 XX .    No___.

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large Accelerated Filer   XX.

 Accelerated Filer     .

Non-Accelerated Filer      .  

 Smaller reporting company    .

(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 Exchange Act).

Yes      .    No XX.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

  

Class

 

Shares Outstanding May 3, 2016

Common stock, par value $0.25 per share

 

384,012,398

 

 

 
 

Table Of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended March 31, 2016

 

INDEX*

 

     

Page

PART I - Financial Information

 
       
   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
       
   

Condensed Consolidated Balance Sheets - March 31, 2016 and December 31, 2015

1

       
   

Condensed Consolidated Statements of Operations and Comprehensive Income - Three Months Ended March 31, 2016 and 2015

2

       
   

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015

3

       
   

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

       
   

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

22

       
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

       
   

Item 4. Controls and Procedures

47

       

PART II - Other Information

 
       
   

Item 1 – Legal Proceedings

48

       
   

Item 1A – Risk Factors

48

       
   

Item 4 – Mine Safety Disclosures

48

       
   

Item 6 – Exhibits

48

       
   

Signatures

49

       
   

Exhibits

50

    Exhibit 31.1  
    Exhibit 31.2  
    Exhibit 32.1  
    Exhibit 32.2  
    Exhibit 95  

*Items 2, 3 and 5 of Part II are omitted as they are not applicable.

 

  

 

 
 

Table Of Contents
 

 

Part I - Financial Information

 

Item 1. Financial Statements

  

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

   

March 31, 2016

   

December 31, 2015

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 134,018     $ 155,209  

Accounts receivable:

               

Trade

    30,127       13,490  

Taxes

    14,648       11,458  

Other, net

    16,786       16,401  

Inventories:

               

Concentrates, doré, and stockpiled ore

    29,199       22,441  

Materials and supplies

    23,619       23,101  

Current deferred income taxes

    15,268       17,980  

Current restricted cash

    3,900        

Other current assets

    9,289       9,453  

Total current assets

    276,854       269,533  

Non-current investments

    2,086       1,515  

Non-current restricted cash and investments

    999       999  

Properties, plants, equipment and mineral interests, net

    1,907,775       1,896,811  

Non-current deferred income taxes

    34,981       36,589  

Reclamation insurance

    13,695       13,695  

Other non-current assets and deferred charges

    2,783       2,783  

Total assets

  $ 2,239,173     $ 2,221,925  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 56,657     $ 51,277  

Accrued payroll and related benefits

    19,873       27,563  

Accrued taxes

    8,958       8,915  

Current portion of capital leases

    8,216       8,735  

Current portion of accrued reclamation and closure costs

    20,989       20,989  

Current portion of debt

    2,057       2,721  

Other current liabilities

    16,068       6,884  

Total current liabilities

    132,818       127,084  

Capital leases

    7,427       8,841  

Accrued reclamation and closure costs

    75,729       74,549  

Long-term debt

    500,531       500,199  

Non-current deferred tax liability

    126,009       119,623  

Non-current pension liability

    45,874       46,513  

Other non-current liabilities

    3,539       6,190  

Total liabilities

    891,927       882,999  

Commitments and contingencies (Notes 2, 4, 7, 9, and 11)

               

STOCKHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

Series B preferred stock, $0.25 par value, 157,816 shares issued and outstanding, liquidation preference — $7,891

    39       39  

Common stock, $0.25 par value, 500,000,000 shares authorized; issued and outstanding 2016 — 381,520,569 shares and 2015 — 378,112,840 shares

    96,215       95,219  

Capital surplus

    1,528,820       1,519,598  

Accumulated deficit

    (234,272

)

    (232,565

)

Accumulated other comprehensive loss

    (31,566

)

    (32,631

)

Less treasury stock, at cost; 2016 - 3,037,154 and 2015 - 2,764,973 shares issued and held in treasury

    (11,990

)

    (10,734

)

Total stockholders’ equity

    1,347,246       1,338,926  

Total liabilities and stockholders’ equity

  $ 2,239,173     $ 2,221,925  

  

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

 
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Table Of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

(Dollars and shares in thousands, except for per-share amounts)

  

   

Three Months Ended

 
   

March 31, 2016

   

March 31, 2015

 

Sales of products

  $ 131,017     $ 119,092  

Cost of sales and other direct production costs

    74,320       73,965  

Depreciation, depletion and amortization

    25,875       25,254  
      100,195       99,219  

Gross profit

    30,822       19,873  

Other operating expenses:

               

General and administrative

    10,214       8,720  

Exploration

    2,950       4,615  

Pre-development

    404       521  

Other operating expense

    640       628  

Provision for closed operations and environmental matters

    1,041       467  
      15,249       14,951  

Income from operations

    15,573       4,922  

Other income (expense):

               

Unrealized loss on investments

    (711

)

    (2,843

)

Gain on derivative contracts

          5,792  

Net foreign exchange (loss) gain

    (8,203

)

    12,274  

Interest and other income

    88       38  

Interest expense, net of amounts capitalized

    (5,711

)

    (6,192

)

      (14,537

)

    9,069  

Income before income taxes

    1,036       13,991  

Income tax provision

    (1,654

)

    (1,439

)

Net (loss) income

    (618

)

    12,552  

Preferred stock dividends

    (138

)

    (138

)

(Loss) income applicable to common stockholders

  $ (756

)

  $ 12,414  

Comprehensive income:

               

Net (loss) income

  $ (618

)

  $ 12,552  

Reclassification of impairment of investments included in net income

    1,000       2,827  

Unrealized holding gains (losses) on investments

    65       (891

)

Comprehensive income

  $ 447     $ 14,488  

Basic (loss) income per common share after preferred dividends

  $     $ 0.03  

Diluted (loss) income per common share after preferred dividends

  $     $ 0.03  

Weighted average number of common shares outstanding - basic

    379,022       368,789  

Weighted average number of common shares outstanding - diluted

    379,022       369,691  

  

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

 
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Table Of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Three Months Ended

 
   

March 31, 2016

   

March 31, 2015

 

Operating activities:

               

Net (loss) income

  $ (618

)

  $ 12,552  

Non-cash elements included in net (loss) income:

               

Depreciation, depletion and amortization

    26,153       25,523  

Unrealized loss on investments

    711       2,843  

(Gain) loss on disposition of properties, plants, equipment, and mineral interests

    (210

)

    74  

Provision for reclamation and closure costs

    999       778  

Stock compensation

    1,231       1,060  

Deferred income taxes

    3,320       555  

Amortization of loan origination fees

    459       454  

Loss (gain) on derivative contracts

    170       (2,970

)

Foreign exchange loss (gain)

    7,989       (11,490

)

Other non-cash gains, net

    6       24  

Change in assets and liabilities:

               

Accounts receivable

    (20,036

)

    (8,210

)

Inventories

    (5,922

)

    3,949  

Other current and non-current assets

    (619

)

    (1,638

)

Accounts payable and accrued liabilities

    10,036       4,037  

Accrued payroll and related benefits

    (2,826

)

    (5,116

)

Accrued taxes

    (37

)

    (263

)

Accrued reclamation and closure costs and other non-current liabilities

    (2,058

)

    (743

)

Cash provided by operating activities

    18,748       21,419  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (34,654

)

    (26,958

)

Proceeds from disposition of properties, plants and equipment

    215       25  

Purchases of investments

          (947

)

Addition to restricted cash for environmental matters

    (3,900

)

     

Net cash used in investing activities

    (38,339

)

    (27,880

)

Financing activities:

               

Proceeds from sale of common stock, net of offering costs

    2,052        

Acquisition of treasury shares

    (1,256

)

    (941

)

Dividends paid to common stockholders

    (952

)

    (924

)

Dividends paid to preferred stockholders

    (138

)

    (138

)

Debt origination fees

    (59

)

    (63

)

Repayments of debt

    (664

)

     

Repayments of capital leases

    (2,118

)

    (2,347

)

Net cash used in financing activities

    (3,135

)

    (4,413

)

Effect of exchange rates on cash

    1,535       (2,560

)

Net decrease in cash and cash equivalents

    (21,191

)

    (13,434

)

Cash and cash equivalents at beginning of period

    155,209       209,665  

Cash and cash equivalents at end of period

  $ 134,018     $ 196,231  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $     $ 1,599  

Payment of accrued compensation in stock

  $ 5,511     $ 3,016  

  

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

 
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Table Of Contents
 

  

Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries ("Hecla" or "the Company" or “we” or “our” or “us”).  See Note 4 for information on adjustments which are nonrecurring contained in the accompanying unaudited interim condensed consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2015, as it may be amended from time to time.

 

The results of operations for the periods presented may not be indicative of those which may be expected for a full year.  The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and the disclosures of contingent liabilities.  Accordingly, ultimate results could differ materially from those estimates.     

  

Note 2.    Investments and Restricted Cash

 

Investments

 

At March 31, 2016 and December 31, 2015, the fair value of our non-current investments was $2.1 million and $1.5 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair market value, and are primarily classified as “available-for-sale.”  The cost basis of our non-current investments was approximately $3.2 million and $4.0 million at March 31, 2016 and December 31, 2015, respectively. During the first quarters of 2016 and 2015, we recognized impairment charges against current earnings of $1.0 million and $2.8 million, respectively, as we determined the impairments to be other-than-temporary.

 

Restricted Cash and Investments

 

Various laws, permits, and covenants require that funds be in place for certain environmental and reclamation obligations and other potential liabilities.  We had a current restricted cash balance of $3.9 million as of March 31, 2016 representing funds deposited in escrow to be applied towards a potential settlement of environmental matters for the South Dakota and Colorado Superfund sites related to CoCa Mines, Inc. (see Note 4 for more information). Our non-current restricted investments are used primarily for reclamation funding or for funding surety bonds, and were $1.0 million at each of March 31, 2016 and December 31, 2015. Non-current restricted investments primarily represent investments in money market funds and certificates of deposit.  

 

 

 
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Note 3.   Income Taxes

 

Major components of our income tax provision for the three months ended March 31, 2016 and 2015 are as follows (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 

Current:

               

Domestic

  $ (2,506

)

  $ 97  

Foreign

    1,015       708  

Total current income tax (benefit) provision

    (1,491

)

    805  
                 

Deferred:

               

Domestic

    588       2,422  

Foreign

    2,557       (1,788

)

Total deferred income tax provision (benefit)

    3,145       634  

Total income tax provision

  $ 1,654     $ 1,439  

  

As of March 31, 2016, we have a net deferred tax asset in the U.S. of $42.3 million, a net deferred tax liability in Canada of $127.1 million, and a net deferred tax asset in Mexico of $7.9 million, for a consolidated worldwide net deferred tax liability of $76.9 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations. For the three months ended March 31, 2016, there were no circumstances that caused us to change our assessment of the ability to generate sufficient future taxable income to realize the currently recognized deferred tax assets.  At March 31, 2016 and December 31, 2015, the balances of the valuation allowances on our deferred tax assets were $113 million and $116 million, respectively, primarily for net operating losses and tax credit carryforwards. The amount of the deferred tax asset considered recoverable, however, could be reduced in the near term if estimates of future taxable income are reduced.

 

The current income tax provisions for the three months ended March 31, 2016 and 2015 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the effects of percentage depletion for all periods presented and the impact of taxation in foreign jurisdictions.

  

Note 4.    Commitments, Contingencies and Obligations

 

General

 

We follow the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") guidance in determining our accruals and disclosures with respect to loss contingencies, and evaluate such accruals and contingencies for each reporting period. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of March 31, 2016, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, has jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of March 31, 2016.

 

 

 

Lucky Friday Water Permit Matters

 

Over the last several years, the Lucky Friday unit has experienced several regulatory issues relating to its water discharge permits and water management more generally. In December 2013, the EPA issued to Hecla Limited a notice of violation (“2013 NOV”) alleging certain storm water reporting violations under Lucky Friday’s Clean Water Act Multi-Sector General Stormwater Permit for Industrial Activities. The alleged violations were resolved. The 2013 NOV also contained a request for information under Section 308 of the Clean Water Act directing Hecla Limited to undertake a comprehensive groundwater investigation of Lucky Friday’s tailings pond no. 3 to evaluate whether the pond is causing the discharge of pollutants via seepage to groundwater that is discharging to surface water.

 

We completed the investigation mandated by the EPA and submitted a draft report to the agency in December 2015. We are waiting for the EPA’s response, and until such time as the process is complete, we cannot predict what the impact of the investigation will be.

 

Hecla Limited strives to maintain its water discharges at the Lucky Friday unit in full compliance with its permits and applicable laws, however, we cannot provide assurance that in the future it will be able to fully comply with the permit limits and other regulatory requirements regarding water management.

 

Johnny M Mine Area near San Mateo, McKinley County, New Mexico

 

In May 2011, the EPA made a formal request to Hecla Mining Company for information regarding the Johnny M Mine Area near San Mateo, McKinley County, New Mexico, and asserted that Hecla Mining Company may be responsible under CERCLA for environmental remediation and past costs the EPA has incurred at the site. Mining at the Johnny M was conducted for a limited period of time by a predecessor of our subsidiary, Hecla Limited. In August 2012, Hecla Limited and the EPA entered into a Settlement Agreement and Administrative Order on Consent for Removal Action (“Consent Order”), pursuant to which Hecla Limited agreed to pay (i) $1.1 million to the EPA for its past response costs at the site and (ii) any future response costs at the site under the Consent Order, in exchange for a covenant not to sue by the EPA. Hecla Limited paid the approximately $1.1 million to the EPA for its past response costs and in December 2014, submitted to EPA the Engineering Evaluation and Cost Analysis (“EE/CA”) for the site. The EE/CA evaluates three alternative response actions: 1) no action, 2) off-site disposal, and 3) on-site disposal. The range in estimated costs of these alternatives is $0 to $221 million. In the EE/CA, Hecla Limited recommended that EPA approve on-site disposal, which is currently estimated to cost $5.6 million, on the basis that it is the most appropriate response action under CERCLA. In June 2015, the EPA approved the EE/CA, with a few minor conditions. The EPA still needs to publish the EE/CA for public notice and comment, and the agency will not make a final decision on the appropriate response action until the public comment process is complete. It is anticipated that Hecla Limited will implement the response action selected by the EPA pursuant to an amendment to the Consent Order or a new order. Based on the foregoing, we believe it is probable that Hecla Limited will incur a liability for remediation at the site, and our best estimate of that liability as of the date of this report is $5.6 million, and we have accrued that amount. There can be no assurance that Hecla Limited’s liability will not be more than $5.6 million, or that its ultimate liability will not have a material adverse effect on Hecla Limited’s or our results of operations or financial position.

 

Carpenter Snow Creek Site, Cascade County, Montana

 

In July 2010, the EPA made a formal request to Hecla Mining Company for information regarding the Carpenter Snow Creek Superfund Site located in Cascade County, Montana. The Carpenter Snow Creek Site is located in a historic mining district, and in the early 1980s Hecla Limited leased 6 mining claims and performed limited exploration activities at the site. Hecla Limited terminated the mining lease in 1988.

 

 

 

In June 2011, the EPA informed Hecla Limited that it believes Hecla Limited, among several other viable companies, may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated in the June 2011 letter that it has incurred approximately $4.5 million in response costs and estimated that total remediation costs may exceed $100 million. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning the site.

 

South Dakota and Colorado Superfund Sites Related to CoCa Mines, Inc.

 

In 1991, Hecla Limited acquired all of the outstanding common stock of CoCa Mines, Inc. (“CoCa”).  CoCa is alleged to have held prior property interests and undertaken exploration activities at the Gilt Edge Mine Superfund site in Lawrence County, South Dakota, and to have been engaged in exploration and mining activities at or near the Nelson Tunnel/Commodore Waste Rock Pile Superfund site in Creede, Colorado.  The United States and the State of South Dakota have alleged that CoCa, along with other parties, is a potentially responsible party (“PRP”) under CERCLA at the Gilt Edge site.  In addition, the United States and the State of Colorado have alleged that CoCa is a PRP at the Nelson Tunnel/Commodore site. The United States, South Dakota and Colorado base their claims of liability on allegations of CoCa’s historical relationship to each site, and that CoCa has succeeded to the liabilities of one or more predecessor entities that may have held certain property interests at the sites or undertaken certain activities.

 

The United States alleges that it has, to date, incurred $118 million, plus interest, in response costs at the Gilt Edge site. At the Nelson Tunnel/Commodore site, the EPA alleges that it has, to date, incurred $10 million, plus interest, in response costs.

 

As a result of ongoing settlement discussions, Consent Decrees were lodged with the United States District Court in Colorado on April 14, 2016, that would settle the Nelson Tunnel/Commodore Waste Rock Pile Superfund site matter, and in South Dakota on April 15, 2016, that would settle the Gilt Edge Superfund site matter.  The Consent Decrees resolve CoCa’s alleged liabilities for past and future response costs with respect to each site, and include combined net payments in the aggregate of $9.9 million by CoCa.  With respect to Gilt Edge, the proposed financial terms require that CoCa pay $3.9 million, as well as up to $700,000 in any proceeds from a lawsuit CoCa has filed against an uncooperative insurer.  The remainder of the settlement amount ($6.4 million) would be paid by insurance companies and another PRP.  With respect to the Nelson Tunnel site, the proposed financial terms require that CoCa pay $6 million.

 

As a result, in the second quarter of 2015 we accrued $9.9 million by recording a liability for the total amount that would be paid by CoCa and an asset for the estimated amount that would be recovered by CoCa from insurers and the other party to the Gilt Edge settlement.

 

The Consent Decrees were published in the Federal Register on April 26, 2016, which began a 30-day public comment period for each Consent Decree.  Upon conclusion of the comment period, the United States will evaluate and respond to any public comments received and then is expected to seek Court approval and entry of each Consent Decree. If each Court enters the respective Consent Decree lodged with it, CoCa will have resolved the claims of (i) the United States and the State of South Dakota with respect to the Gilt Edge site, and (ii) the United States and the State of Colorado with respect to the Nelson Tunnel site, in each case under CERCLA and certain relevant state statutes, for all past and future response costs at each site.

 

There can be no assurance that the Consent Decrees will be entered by the Courts and become final and binding.  Accordingly, in the event these matters are not settled, our accrual could materially change.

 

Senior Notes

 

On April 12, 2013, we completed an offering of $500 million aggregate principal amount of 6.875% Senior Notes due 2021. The net proceeds from the offering of the Senior Notes were used to partially fund the acquisition of Aurizon Mines Ltd. ("Aurizon") and for general corporate purposes, including expenses related to the Aurizon acquisition. In 2014, we completed additional issuances of our Senior Notes in the aggregate principal amount of $6.5 million, which were contributed to one of our pension plans to satisfy the funding requirement for 2014. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. See Note 9 for more information.

 

 

 

Other Commitments

 

Our contractual obligations as of March 31, 2016 included approximately $11.7 million for various costs. In addition, our open purchase orders at March 31, 2016 included approximately $1.0 million, $0.7 million and $0.6 million, respectively, for various capital items at the Lucky Friday, Casa Berardi and Greens Creek units, and approximately $0.5 million, $3.6 million, and $2.4 million, respectively, for various non-capital costs at the Lucky Friday, Casa Berardi and Greens Creek units. We also have total commitments of approximately $16.3 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of March 31, 2016, we had surety bonds totaling $100.5 million in place as financial support for future reclamation and closure costs, self insurance, and employee benefit plans. We also held a $6.5 million restricted deposit at March 31, 2016 as financial support for reclamation of the Troy mine acquired as part of the acquisition of Revett Mining Company, Inc. ("Revett"). The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.

 

Other Contingencies

 

On April 12, 2013, the family of Larry Marek, an employee of Hecla Limited who was fatally injured in an April 2011 accident, filed a lawsuit against us and certain of our officers and employees seeking damages for, among other claims, wrongful death and infliction of emotional distress. No dollar amount of damages is specified in the complaint, which was filed in state court in Idaho (Kootenai County District Court). On April 21, 2015, the judge hearing the case granted Hecla’s motion for summary judgment and dismissed the case. The plaintiffs have appealed the decision to the Idaho Supreme Court. We cannot predict the outcome of this matter, however, we believe the case is without merit and are vigorously defending this lawsuit.

 

On December 11, 2013, four employees of Hecla Limited who were injured in a December 2011 rock burst, filed a lawsuit against us and certain of our employees seeking damages for, among other claims, intentional and willful injury and infliction of emotional distress. The plaintiffs seek damages in excess of $1,000,000, as claimed in the complaint, which was filed in state court in Idaho (Kootenai County District Court). On August 28, 2015, the judge hearing the case granted Hecla’s motion for summary judgment and dismissed the case. The plaintiffs have appealed the decision to the Idaho Supreme Court. We cannot predict the outcome of this matter, however, we believe the case is without merit and intend to vigorously defend this lawsuit.

 

We also have certain other contingencies resulting from litigation, claims, EPA investigations, and other commitments and are subject to a variety of environmental and safety laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows. However, in the future, there may be changes to these contingencies, and additional contingencies may occur as well, any of which might result in an accrual or a change in the estimated accruals recorded by us, and there can be no assurance that their ultimate disposition will not have a material adverse effect on our financial position, results of operations or cash flows.

 

 
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Note 5.    (Loss) Earnings Per Common Share

 

We are authorized to issue 500,000,000 shares of common stock, $0.25 par value per share. At March 31, 2016, there were 384,557,723 shares of our common stock issued and 3,037,154 shares issued and held in treasury, for a net of 381,520,569 shares outstanding.

 

Diluted (loss) income per share for the three months ended March 31, 2016 and 2015 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.

 

For the three months ended March 31, 2016, all outstanding restricted share units and warrants were excluded from the computation of diluted (loss) earnings per share, as our reported net loss for that period would cause their vesting and exercise to have no effect on the calculation of (loss) earnings per share. For the three-month period ended March 31, 2015, options to purchase 244,342 shares of our common stock were excluded from the computation of diluted (loss) earnings per share, as the exercise price of the options exceeded the average price of our stock during that period and therefore would not affect the calculation of (loss) earnings per share. There were no options outstanding as of March 31, 2016.

  

Note 6.    Business Segments

 

We are currently organized and managed in four segments, which represent our operating units: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, and the San Sebastian unit. The San Sebastian unit, a historic operating property for Hecla, resumed commercial production in the fourth quarter of 2015 and was added as a new reporting segment in 2015.

 

General corporate activities not associated with operating units and their various exploration activities, as well as discontinued operations and idle properties, are presented as “other.”  Interest expense, interest income and income taxes are considered general corporate items, and are not allocated to our segments.

 

The following tables present information about reportable segments for the three months ended March 31, 2016 and 2015 (in thousands):

  

   

Three Months Ended

March 31,

 
   

2016

   

2015

 

Net sales to unaffiliated customers:

               

Greens Creek

  $ 53,882     $ 67,355  

Lucky Friday

    21,252       19,891  

Casa Berardi

  $ 32,198     $ 31,846  

San Sebastian

    23,685        
    $ 131,017     $ 119,092  

Income (loss) from operations:

               

Greens Creek

  $ 8,078     $ 14,693  

Lucky Friday

    2,743       3,546  

Casa Berardi

    1,934       (765

)

San Sebastian

    14,912        

Other

    (12,094

)

    (12,552

)

    $ 15,573     $ 4,922  

 

 

  

The following table presents identifiable assets by reportable segment as of March 31, 2016 and December 31, 2015 (in thousands):

 

    March 31, 2016     December 31, 2015  

Identifiable assets:

               

Greens Creek

  $ 698,102     $ 698,265  

Lucky Friday

    420,306       393,338  

Casa Berardi

    782,962       779,423  

San Sebastian

    25,882       22,238  

Other

    311,921       328,661  
    $ 2,239,173     $ 2,221,925  

 

  

Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three months ended March 31, 2016 and 2015 (in thousands):

  

   

Three Months Ended

March 31,

 
   

2016

   

2015

 

Service cost

  $ 1,077     $ 1,054  

Interest cost

    1,307       1,206  

Expected return on plan assets

    (1,325

)

    (1,345

)

Amortization of prior service benefit

    (84

)

    (84

)

Amortization of net loss

    1,093       1,065  

Net periodic benefit cost

  $ 2,068     $ 1,896  

 

In February 2016, we contributed approximately $2.6 million in shares of our common stock and cash to our defined benefit plans, with approximately $2.7 million in additional contributions anticipated in 2016. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2016.

 

 

Note 8.    Stockholders’ Equity

 

Stock-based Compensation Plans

 

We periodically grant restricted stock unit awards and/or shares of common stock to our employees and directors. We measure compensation cost for restricted stock units and stock grants at the closing price of our stock at the time of grant. Restricted stock unit grants vest after a specified period with compensation cost amortized over that period. Although we have no current plans to issue stock options, we may do so in the future.

 

In March 2016, the Board of Directors granted 2,335,196 shares of common stock to employees for payment of annual and long-term incentive compensation for the period ended December 31, 2015. The shares were distributed in March 2016, and $5.5 million in expense related to the stock awards was recognized in the periods prior to March 31, 2016.

 

Stock-based compensation expense for restricted stock unit grants to employees and shares issued to nonemployee directors recorded in the first three months of 2016 totaled $1.2 million, compared to $1.1 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.  As a result, in the first three months of 2016 we withheld 532,157 shares valued at approximately $1.3 million, or approximately $2.36 per share. In the first three months of 2015 we withheld 284,243 shares valued at approximately $0.9 million, or approximately $3.31 per share.

 

 

 

Common Stock Dividends

 

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, if and when declared. For illustrative purposes only, the table below summarizes potential per share dividend amounts at different quarterly average realized price levels according to the first component of the policy:

 

Quarterly average realized silver price per ounce

 

Quarterly dividend per share

 

Annualized dividend per share

$30

 

$0.01

 

$0.04

$35

 

$0.02

 

$0.08

$40

 

$0.03

 

$0.12

$45

 

$0.04

 

$0.16

$50

 

$0.05

 

$0.20

  

On May 4, 2016, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of approximately $1.0 million payable in June 2016. Because the average realized silver price for the first quarter of 2016 was $14.93 per ounce, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.

 

At-The-Market Equity Distribution Agreement

 

Pursuant to an equity distribution agreement dated February 23, 2016, we may issue and sell shares of our common stock from time to time through ordinary broker transactions having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. The terms of sales transactions under the agreement, including trading day(s), number of shares sold in the aggregate, number of shares sold per trading day, and the floor selling price per share, are proposed by us to the sales agent. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information. The agreement can be terminated by us at any time. The shares issued under the equity distribution agreement are registered under the Securities Act of 1933, as amended, pursuant to our shelf registration statement on Form S-3, which was filed with the SEC on February 23, 2016. As of March 31, 2016, we had sold 737,275 shares under the agreement for total proceeds of approximately $2.1 million, net of commissions of approximately $42 thousand.

 

Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase 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, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of March 31, 2016, 934,100 shares have been purchased at an average price of $3.99 per share, leaving approximately 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at May 3, 2016, was $4.05 per share.

 

 

 

Warrants

 

At December 31, 2015, we had 2,249,550 warrants outstanding, with each warrant exercisable for 0.1622 of a share of our common stock at an exercise price of $6.17 per share. All of the warrants expired in March 2016, and there were no warrants outstanding as of March 31, 2016.

  

Note 9.    Senior Notes, Credit Facilities and Capital Leases

 

Senior Notes

 

On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and in 2014, an additional $6.5 million aggregate principal amount of the Senior Notes were issued to one of our pension plans. The Senior Notes were subsequently exchanged for substantially identical Senior Notes registered with the SEC. The Senior Notes are governed by the Indenture, dated as of April 12, 2013, as amended (the "Indenture"), among Hecla Mining Company ("Hecla") and certain of our subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from the initial offering of the Senior Notes ($490 million) were used to partially fund the acquisition of Aurizon and for general corporate purposes, including expenses related to the Aurizon acquisition.

 

The Senior Notes are recorded net of a 2% initial purchaser discount totaling $10 million at the time of the April 2013 issuance and having an unamortized balance of $6.5 million as of March 31, 2016. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. During the three months ended March 31, 2016 and 2015, interest expense related to the Senior Notes and amortization of the initial purchaser discount and fees related to the issuance of the Senior Notes, net of $3.8 million and $3.3 million, respectively, in capitalized interest, totaled $5.2 million and $5.7 million, respectively.

 

The Senior Notes are guaranteed on a senior unsecured basis by certain of our subsidiaries (the "Guarantors").   The Senior Notes and the guarantees are, respectively, Hecla's and the Guarantors' general senior unsecured obligations and are subordinated to all of Hecla's and the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt.  In addition, the Senior Notes are effectively subordinated to all of the liabilities of Hecla's subsidiaries that are not guaranteeing the Senior Notes, to the extent of the assets of those subsidiaries.

 

The Senior Notes became redeemable in whole or in part, at any time and from time to time after May 1, 2016, on the redemption dates and at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.

 

Upon the occurrence of a change of control (as defined in the Indenture), each holder of Senior Notes will have the right to require us to purchase all or a portion of such holder's Senior Notes pursuant to a change of control offer (as defined in the Indenture), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase, subject to the rights of holders of the Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.

 

 

 

Credit Facilities

 

In February 2014, we entered into a $100 million senior secured revolving credit facility, which was amended in November 2014 to extend the maturity date to November 18, 2018. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture.  This credit facility replaced our previous $100 million credit facility which had the same terms of collateral as described above. Below is information on the interest rates, standby fee, and financial covenant terms under our current credit facility:

  

Interest rates:

         

Spread over the London Interbank Offer Rate

  2.25 - 3.25%  

Spread over alternative base rate

  1.25 - 2.25%  

Standby fee per annum on undrawn amounts

    0.50%    

Covenant financial ratios:

         

Senior leverage ratio (debt secured by liens/EBITDA)

 

not more than 2.50:1

 

Leverage ratio (total debt less unencumbered cash/EBITDA)(1)

 

not more than 5.00:1

 

Interest coverage ratio (EBITDA/interest expense)

 

not more than 3.00:1

 

  

(1) The leverage ratio was amended for 2016 to increase to 5.00:1, and will revert back to 4.00:1 in 2017.          

 

We believe we were substantially in compliance with all covenants under the credit agreement and no amounts were outstanding as of March 31, 2016.  We have not drawn funds on the current revolving credit facility as of the filing date of this report.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units, which we have determined to be capital leases.  At March 31, 2016, the total liability associated with the capital leases, including certain purchase option amounts, was $15.6 million, with $8.2 million of the liability classified as current and $7.4 million classified as non-current. At December 31, 2015, the total liability balance associated with capital leases was $17.6 million, with $8.7 million of the liability classified as current and $8.8 million classified as non-current. The total obligation for future minimum lease payments was $16.3 million at March 31, 2016, with $0.7 million attributed to interest.

 

At March 31, 2016, the annual maturities of capital lease commitments, including interest, were (in thousands):

   

Twelve-month period ending March 31,

       

2017

  $ 7,955  

2018

    5,044  

2019

    2,723  

2020

    587  

Total

    16,309  

Less: imputed interest

    (667

)

Net capital lease obligation

  $ 15,642  

 

  

Note 10.    Developments in Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The guidance establishes a new five step principle-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 defers the effective date of the guidance in ASU No. 2014-09 to annual and interim reporting periods beginning after December 15, 2017. We are in the process of evaluating this guidance and our method of adoption.

 

 

 

In April 2015, the FASB issued ASU No. 2015-03 Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. ASU No. 2015-03 has not had a material impact on our consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. The update provides for inventory to be measured at the lower of cost and net realizable value, and is effective for the fiscal years beginning after December 15, 2016. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16 Simplifying the Accounting for Measurement-Period Adjustments (Topic 805) which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. These changes become effective for fiscal years beginning after December 15, 2016, and as such they are not expected to have a material impact on prior periods.

 

In November 2015, the FASB issued ASU No. 2015-17 Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740). The update is designed to reduce complexity of reporting deferred income tax liabilities and assets into current and non-current amounts in a statement of financial position. The FASB has proposed the presentation of deferred income taxes, changes to deferred tax liabilities and assets be classified as non-current in the statement of financial position. The update is effective for fiscal years beginning after December 15, 2016. ASU No. 2015-17 is not expected to have a material impact on our consolidated financial statements. Our current deferred tax asset balance at March 31, 2016 was $15.3 million.

 

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update makes several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. The update is effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the guidance on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update is effective for annual and interim reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the guidance on our consolidated financial statements.

  

Note 11.    Derivative Instruments

 

At times, we may use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in the market. These instruments do, however, expose us to (i) credit risk in the event of non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.

 

 

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, at times we use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments; however, there were no open contracts related to this latter program as of March 31, 2016 or December 31, 2015.  These contracts do not qualify for hedge accounting and are marked-to-market through earnings each period.  At March 31, 2016, we recorded a current liability of $0.5 million on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in other current liabilities.

 

We recognized a $6.1 million net loss during the first three months of 2016 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

The following tables summarize the quantities of metals committed under forward sales contracts at March 31, 2016 and December 31, 2015:

 

March 31, 2016

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2016 settlements

    1,196       4       15,818       9,700     $ 15.29     $ 1,225     $ 0.80     $ 0.77  

  

December 31, 2015

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2016 settlements

    1,368       5       23,755       8,433     $ 14.12     $ 1,076     $ 0.71     $ 0.77  

  

Our concentrate sales are based on a provisional sales price containing an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward price at the time of the sale. The embedded derivative, which results from changes to silver, gold, lead and zinc prices between the time of sale and final settlement, does not qualify for hedge accounting and is marked-to-market through earnings each period prior to final settlement.

 

 

 
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Note 12.    Fair Value Measurement

 

The table below sets forth our assets and liabilities that were accounted for at fair value on a recurring basis and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category (in thousands).

 

Description

 

Balance at

March 31, 2016

   

Balance at

December 31, 2015

 

Input

Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 134,018     $ 155,209  

Level 1

Available for sale securities:

                 

Equity securities – mining industry

    2,086       1,515  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    30,127       13,490  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other bank deposits

    4,899       999  

Level 1

Total assets

  $ 171,130     $ 171,213    
                   

Liabilities:

                 

Derivative contracts:

                 

Metal forward contracts

  $ 453     $ 283  

Level 2

Total Liabilities

  $ 453     $ 283    

  

Cash and cash equivalents consist primarily of money market funds and are valued at cost, which approximates fair value, and a small portion consists of municipal bonds having maturities of less than 90 days, which are recorded at fair value.

 

Current and non-current restricted cash balances consist primarily of escrow deposits, certificates of deposit and U.S. Treasury securities and are valued at cost, which approximates fair value.

 

Our current and non-current investments consist of marketable equity securities which are valued using quoted market prices for each security.

 

Trade accounts receivable include amounts due to us for shipments of concentrates and doré sold to customers.  Revenues and the corresponding accounts receivable for sales of concentrates and doré are recorded when title and risk of loss transfer to the customer (generally at the time of loading on truck or ship).  Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment.  Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals.  We estimate the prices at which sales of our concentrates will be settled due to the time elapsed between shipment and final settlement with the customer.  Receivables for previously recorded concentrate sales are adjusted to reflect estimated forward metals prices at the end of each period until final settlement by the customer.  We obtain the forward metals prices used each period from a pricing service.  Changes in metals prices between shipment and final settlement result in changes to revenues previously recorded upon shipment.  This embedded derivative contained in our concentrate sales is marked-to-market through earnings each period prior to final settlement.

 

We utilize financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments that have not reached final settlement.  We also utilize financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead contained in our forecasted future concentrate shipments. See Note 11 for more information. These contracts do not qualify for hedge accounting, and are marked-to-market through earnings each period.  The fair value of each contract represents the difference between the forward metal price for the contract settlement period as of the measurement date and the contract settlement metal price, multiplied by the quantity of metal involved in the contract.

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $500.5 million, net of unamortized initial purchaser discount at March 31, 2016, had a fair value of $407.1 million at March 31, 2016. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information.

 

 

 
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Table Of Contents
 

    

Note 13.   Guarantor Subsidiaries

 

Presented below are Hecla’s unaudited interim condensed consolidating financial statements as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended, resulting from the guarantees by certain of Hecla's subsidiaries (the "Guarantors") of the Senior Notes (see Note 9 for more information). The Guarantors consist of the following of Hecla's 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; and Hecla Juneau Mining Company. We completed the initial offering of the Senior Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014.

 

The unaudited interim condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited interim consolidated financial statements set forth elsewhere in this Form 10-Q. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate Hecla, the Guarantors, and Non-Guarantors are reflected in the intercompany eliminations column. In the course of preparing consolidated financial statements, we eliminate the effects of various transactions conducted between Hecla and its subsidiaries and among the subsidiaries. While valid at an individual subsidiary level, such activities are eliminated in consolidation because, when taken as a whole, they do not represent business activity with third-party customers, vendors, and other parties. Examples of such eliminations include the following:

 

 

Investments in subsidiaries. The acquisition of a company results in an investment in debt or equity capital on the records of the parent company and a contribution to debt or equity capital on the records of the subsidiary. Such investments and capital contributions are eliminated in consolidation.

 

 

Capital contributions. Certain of Hecla's subsidiaries do not generate cash flow, either at all or sufficient to meet their capital needs, and their cash requirements are routinely met with inter-company advances from their parent companies. On an annual basis, when not otherwise intended as debt, the boards of directors of such parent companies declare contributions of capital to their subsidiary companies, which increase the parents' investment and the subsidiaries' additional paid-in capital. In consolidation, investments in subsidiaries and related additional paid-in capital are eliminated.

 

 

Debt. Inter-company debt agreements have been established between certain of Hecla's subsidiaries and their parents. The related debt liability and receivable balances, accrued interest expense (in any) and income activity (if any), and payments of principal and accrued interest amounts (if any) by the subsidiary companies to their parents are eliminated in consolidation.

 

 

Dividends. Certain of Hecla's subsidiaries which generate cash flow routinely provide cash to their parent companies through inter-company transfers. On an annual basis, the boards of directors of such subsidiary companies declare dividends to their parent companies, which reduces the subsidiaries' retained earnings and increases the parents' dividend income. In consolidation, such activity is eliminated.

 

 

Deferred taxes. Our ability to realize deferred tax assets and liabilities is considered on a consolidated basis for subsidiaries within the United States, with all subsidiaries' estimated future taxable income contributing to the ability to realize all such assets and liabilities. However, when Hecla's subsidiaries are viewed independently, we use the separate return method to assess the realizability of each subsidiary's deferred tax assets and whether a valuation allowance is required against such deferred tax assets. In some instances, a parent company or subsidiary may possess deferred tax assets whose realization depends on the future taxable incomes of other subsidiaries on a consolidated-return basis, but would not be considered realizable if such parent or subsidiary filed on a separate stand-alone basis. In such a situation, a valuation allowance is assessed on that subsidiary's deferred tax assets, with the resulting adjustment reported in the eliminations column of the guarantor and parent's financial statements, as is the case in the unaudited interim financial statements set forth below. The separate return method can result in significant eliminations of deferred tax assets and liabilities and related income tax provisions and benefits. Non-current deferred tax asset balances are included in other non-current assets on the consolidating balance sheets and make up a large portion of that item, particularly for the guarantor balances.

 

 

 

Separate financial statements of the Guarantors are not presented because the guarantees by the Guarantors are joint and several and full and unconditional, except for certain customary release provisions, including: (1) the sale or disposal of all or substantially all of the assets of the Guarantor; (2) the sale or other disposition of the capital stock of the Guarantor; (3) the Guarantor is designated as an unrestricted entity in accordance with the applicable provisions of the indenture; (4) Hecla ceases to be a borrower as defined in the indenture; and (5) upon legal or covenant defeasance or satisfaction and discharge of the indenture.

 

Effective December 31, 2015, Hecla Limited (our wholly owned subsidiary) sold 100% of its ownership of Hecla Alaska LLC (its wholly owned subsidiary) to Hecla Mining Company for consideration totaling approximately $240.8 million.  The consideration consisted of satisfaction of inter-company debt between Hecla Limited and Hecla Mining Company and an obligation by Hecla Mining Company, under certain circumstances, to fund a limited amount of the capital requirements of Hecla Limited for up to five years.  Hecla Alaska LLC owns a 29.7331% interest in the joint venture which owns the Greens Creek mine.

  

Unaudited Interim Condensed Consolidating Balance Sheets

 

   

As of March 31, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 91,039     $ 27,330     $ 15,649     $     $ 134,018  

Other current assets

    23,891       87,718       49,855       (18,628

)

    142,836  

Properties, plants, and equipment - net

    2,178       1,153,465       752,132             1,907,775  

Intercompany receivable (payable)

    556,622       (317,914

)

    (351,338

)

    112,630        

Investments in subsidiaries

    1,249,577                   (1,249,577

)

     

Other non-current assets

    2,112       189,146       2,971       (139,685

)

    54,544  

Total assets

  $ 1,925,419     $ 1,139,745     $ 469,269     $ (1,295,260

)

  $ 2,239,173  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 33,512     $ 81,459     $ 43,170     $ (25,323

)

  $ 132,818  

Long-term debt

    500,042       6,613       1,303             507,958  

Non-current portion of accrued reclamation

          46,167       29,562             75,729  

Non-current deferred tax liability

          11,646       134,723       (20,360

)

    126,009  

Other non-current liabilities

    44,619       5,924       (1,130

)

          49,413  

Stockholders' equity

    1,347,246       987,936       261,641       (1,249,577

)

    1,347,246  

Total liabilities and stockholders' equity

  $ 1,925,419     $ 1,139,745     $ 469,269     $ (1,295,260

)

  $ 2,239,173  

 

 

   

   

As of December 31, 2015

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 94,167     $ 42,692     $ 18,350     $     $ 155,209  

Other current assets

    15,972       58,453       32,273       7,626       114,324  

Properties, plants, and equipment - net

    2,281       1,147,770       746,760             1,896,811  

Intercompany receivable (payable)

    540,665       (301,291

)

    (332,553

)

    93,179        

Investments in subsidiaries

    1,252,191                   (1,252,191

)

     

Other non-current assets

    2,200       165,080       1,781       (113,480

)

    55,581  

Total assets

  $ 1,907,476     $ 1,112,704     $ 466,611     $ (1,264,866

)

  $ 2,221,925  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 21,087     $ 84,559     $ 30,636     $ (9,198

)

  $ 127,084  

Long-term debt

    499,729       6,128       3,183             509,040  

Non-current portion of accrued reclamation

          45,494       29,055             74,549  

Non-current deferred tax liability

          3,264       119,836       (3,477

)

    119,623  

Other non-current liabilities

    47,734       5,834       (865

)

          52,703  

Stockholders' equity

    1,338,926       967,425       284,766       (1,252,191

)

    1,338,926  

Total liabilities and stockholders' equity

  $ 1,907,476     $ 1,112,704     $ 466,611     $ (1,264,866

)

  $ 2,221,925  

 

 

  

Unaudited Interim Condensed Consolidating Statements of Operations

 

   

Three Months Ended March 31, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (6,135

)

  $ 81,269     $ 55,883     $     $ 131,017  

Cost of sales

          (46,753

)

    (27,567

)

          (74,320

)

Depreciation, depletion, amortization

          (16,606

)

    (9,269

)

          (25,875

)

General and administrative

    (5,240

)

    (4,523

)

    (451

)

          (10,214

)

Exploration and pre-development

    (45

)

    (1,287

)

    (2,022

)

          (3,354

)

Gain on derivative contracts

                             

Equity in earnings of subsidiaries

    (20,991

)

                20,991        

Other (expense) income

    31,793       4,336       (35,518

)

    (16,829

)

    (16,218

)

Income (loss) before income taxes

    (618

)

    16,436       (18,944

)

    4,162       1,036  

(Provision) benefit from income taxes

          (4,833

)

    (13,650

)

    16,829       (1,654

)

Net income (loss)

    (618

)

    11,603       (32,594

)

    20,991       (618

)

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    (756

)

    11,603       (32,594

)

    20,991       (756

)

Net income (loss)

    (618

)

    11,603       (32,594

)

    20,991       (618

)

Changes in comprehensive income (loss)

    1,065       8       1,060       (1,068

)

    1,065  

Comprehensive income (loss)

  $ 447     $ 11,611     $ (31,534

)

  $ 19,923     $ 447  

   

   

Three Months Ended March 31, 2015

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ 312     $ 86,934     $ 31,846     $     $ 119,092  

Cost of sales

          (51,437

)

    (22,528

)

          (73,965

)

Depreciation, depletion, amortization

          (16,611

)

    (8,643

)

          (25,254

)

General and administrative

    (4,442

)

    (3,893

)

    (385

)

          (8,720

)

Exploration and pre-development

    (217

)

    (1,134

)

    (3,785

)

          (5,136

)

Gain on derivative contracts

    5,792                         5,792  

Equity in earnings of subsidiaries

    40,042                   (40,042

)

     

Other (expense) income

    (28,935

)

    3,567       31,006       (3,456

)

    2,182  

Income (loss) before income taxes

    12,552       17,426       27,511       (43,498

)

    13,991  

(Provision) benefit from income taxes

          (4,946

)

    51       3,456       (1,439

)

Net income (loss)

    12,552       12,480       27,562       (40,042

)

    12,552  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    12,414       12,480       27,562       (40,042

)

    12,414  

Net income (loss)

    12,552       12,480       27,562       (40,042

)

    12,552  

Changes in comprehensive income (loss)

    1,936       (194

)

    2,051       (1,857

)

    1,936  

Comprehensive income (loss)

  $ 14,488     $ 12,286     $ 29,613     $ (41,899

)

  $ 14,488  

 

 

  

Unaudited Interim Condensed Consolidating Statements of Cash Flows

 

   

Three Months Ended March 31, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

  $ 7,848     $ (21,658

)

  $ (7,884

)

  $ 40,442     $ 18,748  

Cash flows from investing activities:

                                       

Additions to properties, plants, and equipment

    (53

)

    (18,552

)

    (16,049

)

            (34,654

)

Other investing activities, net

          215       (3,900

)

          (3,685

)

Cash flows from financing activities:

                                       

Dividends paid to stockholders

    (1,090

)

                        (1,090

)

Borrowings on debt

                               

Payments on debt

          (2,556

)

    (226

)

            (2,782

)

Other financing activity

    (9,833

)

    27,189       23,823       (40,442

)

    737  

Effect of exchange rate changes on cash

                1,535             1,535  

Changes in cash and cash equivalents

    (3,128

)

    (15,362

)

    (2,701

)

          (21,191

)

Beginning cash and cash equivalents

    94,167       42,692       18,350             155,209  

Ending cash and cash equivalents

  $ 91,039     $ 27,330     $ 15,649     $     $ 134,018  

  

   

Three Months Ended March 31, 2015

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

  $ 15,726     $ 15,823     $ 19,902     $ (30,032

)

  $ 21,419  

Cash flows from investing activities:

                                       

Additions to properties, plants, and equipment

    (424

)

    (18,163

)

    (8,371

)

          (26,958

)

Other investing activities, net

          25       (947

)

          (922

)

Cash flows from financing activities:

                                       

Dividends paid to stockholders

    (1,062

)

                      (1,062

)

Borrowings on debt

                             

Payments on debt

          (1,901

)

    (446

)

          (2,347

)

Other financing activity

    (15,841

)

    6,349       (21,544

)

    30,032       (1,004

)

Effect of exchange rate changes on cash

                (2,560

)

          (2,560

)

Changes in cash and cash equivalents