hl20160630_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 June 30, 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

 

(I.R.S. Employer

 
 

incorporation or organization)

 

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 August 2, 2016

Common stock, par value

$0.25 per share

 

386,439,941

 

 

 
 

Table Of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended June 30, 2016

 

INDEX*

 

     

Page

PART I - Financial Information

 
       
   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
       
   

Condensed Consolidated Balance Sheets - June 30, 2016 and December 31, 2015

3
       
   

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended and Six Months Ended – June 30, 2016 and 2015

4

       
   

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2016 and 2015

5

       
   

Notes to Condensed Consolidated Financial Statements

6

       
   

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

29

       
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

54

       
   

Item 4. Controls and Procedures

57

       

PART II - Other Information

 
       
   

Item 1 – Legal Proceedings

57

       
   

Item 1A – Risk Factors

57

       
   

Item 4 – Mine Safety Disclosures

60

       
   

Item 6 – Exhibits

60

       
   

Signatures

61

       
   

Exhibits

62

       
       

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

 

 

 

 
2

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)

 

   

June 30,

2016

   

December 31,

2015

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 143,613     $ 155,209  

Investments

    15,070        

Accounts receivable:

               

Trade

    25,667       13,490  

Taxes

    12,142       11,458  

Other, net

    32,952       16,401  

Inventories:

               

Concentrates, doré, and stockpiled ore

    28,336       22,441  

Materials and supplies

    23,070       23,101  

Current deferred income taxes

    18,386       17,980  

Current restricted cash

    3,900        

Other current assets

    7,999       9,453  

Total current assets

    311,135       269,533  

Non-current investments

    4,453       1,515  

Non-current restricted cash and investments

    999       999  

Properties, plants, equipment and mineral interests, net

    1,926,158       1,896,811  

Non-current deferred income taxes

    24,427       36,589  

Reclamation insurance asset

          13,695  

Other non-current assets and deferred charges

    3,638       2,783  

Total assets

  $ 2,270,810     $ 2,221,925  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 57,702     $ 51,277  

Accrued payroll and related benefits

    23,712       27,563  

Accrued taxes

    4,344       8,915  

Current portion of capital leases

    7,761       8,735  

Current portion of debt

    1,852       2,721  

Other current liabilities

    10,290       6,884  

Current portion of accrued reclamation and closure costs

    24,127       20,989  

Total current liabilities

    129,788       127,084  

Capital leases

    7,316       8,841  

Accrued reclamation and closure costs

    73,019       74,549  

Long-term debt

    500,354       500,199  

Non-current deferred tax liability

    127,413       119,623  

Non-current pension liability

    47,880       46,513  

Other non-current liabilities

    5,362       6,190  

Total liabilities

    891,132       882,999  

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

               

SHAREHOLDERS’ 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, authorized 500,000,000 shares; issued and outstanding 2016 — 385,066,800 shares and 2015 — 378,112,840 shares

    97,207       95,219  

Capital surplus

    1,538,148       1,519,598  

Accumulated deficit

    (211,258

)

    (232,565

)

Accumulated other comprehensive loss

    (30,327

)

    (32,631

)

Less treasury stock, at cost; 2016 — 3,733,742 shares and 2015 — 2,435,518 shares issued and held in treasury

    (14,131

)

    (10,734

)

Total shareholders’ equity

    1,379,678       1,338,926  

Total liabilities and shareholders’ equity

  $ 2,270,810     $ 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 Income (Loss) (Unaudited)

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2016

   

June 30, 2015

   

June 30, 2016

   

June 30, 2015

 

Sales of products

  $ 171,302     $ 104,197     $ 302,319     $ 223,289  

Cost of sales and other direct production costs

    82,953       67,567       157,273       141,532  

Depreciation, depletion and amortization

    29,897       27,166       55,772       52,420  
      112,850       94,733       213,045       193,952  

Gross profit

    58,452       9,464       89,274       29,337  

Other operating expenses:

                               

General and administrative

    10,359       8,296       20,573       17,016  

Exploration

    3,362       4,592       6,312       9,208  

Pre-development

    521       1,618       925       2,138  

Other operating expense

    622       766       1,262       1,394  

Provision for closed operations and environmental matters

    1,576       9,335       2,617       9,802  

Acquisition costs

    402       2,147       402       2,147  
      16,842       26,754       32,091       41,705  

Income (loss) from operations

    41,610       (17,290

)

    57,183       (12,368

)

Other income (expense):

                               

Loss on disposition of investments

          (166

)

          (166

)

Unrealized gain (loss) on investments

    1,150       (117

)

    439       (2,960

)

(Loss) gain on derivative contracts

    (6

)

    (887

)

    (6

)

    4,905  

Net foreign exchange (loss) gain

    (1,885

)

    (1,833

)

    (10,088

)

    10,441  

Interest and other income

    113       35       201       73  

Interest expense, net of amount capitalized

    (5,370

)

    (6,541

)

    (11,081

)

    (12,733

)

      (5,998

)

    (9,509

)

    (20,535

)

    (440

)

Income (loss) before income taxes

    35,612       (26,799

)

    36,648       (12,808

)

Income tax (provision) benefit

    (11,496

)

    132       (13,150

)

    (1,307

)

Net income (loss)

    24,116       (26,667

)

    23,498       (14,115

)

Preferred stock dividends

    (138

)

    (138

)

    (276

)

    (276

)

Income (loss) applicable to common shareholders

  $ 23,978     $ (26,805

)

  $ 23,222     $ (14,391

)

Comprehensive income (loss):

                               

Net income (loss)

  $ 24,116     $ (26,667

)

  $ 23,498     $ (14,115

)

Change in fair value of derivative contracts designated as hedge transactions

    46             46        

Reclassification of loss on disposition or impairment of marketable securities included in net income (loss)

          166       1,000       2,993  

Unrealized holding (losses) gains on investments

    1,193       (1,321

)

    1,258       (2,212

)

Comprehensive income (loss)

  $ 25,355     $ (27,822

)

  $ 25,802     $ (13,334

)

Basic income (loss) per common share after preferred dividends

  $ 0.06     $ (0.07

)

  $ 0.06     $ (0.04

)

Diluted income (loss) per common share after preferred dividends

  $ 0.06     $ (0.07

)

  $ 0.06     $ (0.04

)

Weighted average number of common shares outstanding - basic

    383,790       371,295       381,389       370,042  

Weighted average number of common shares outstanding - diluted

    387,512       371,295       384,685       370,042  

Cash dividends declared per common share

  $ 0.0025     $ 0.0025     $ 0.0050     $ 0.0050  

  

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

 

 

 
4

Table Of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Six Months Ended

 
   

June 30, 2016

   

June 30, 2015

 

Operating activities:

               

Net income (loss)

  $ 23,498     $ (14,115

)

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

               

Depreciation, depletion and amortization

    56,968       52,966  

(Gain) loss on investments

    (439

)

    3,043  

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

    (311

)

    190  

Provision for reclamation and closure costs

    2,005       10,256  

Stock compensation

    3,467       2,261  

Deferred income taxes

    10,652       (705

)

Amortization of loan origination fees

    926       910  

Loss on derivative contracts

    5,419       7,812  

Foreign exchange loss (gain)

    9,721       (9,672

)

Other non-cash charges, net

    17       25  

Change in assets and liabilities, net of business acquired:

               

Accounts receivable

    (15,910

)

    2,469  

Inventories

    (5,802

)

    (3,417

)

Other current and non-current assets

    268       (3,904

)

Accounts payable and accrued liabilities

    (3,820

)

    (4,210

)

Accrued payroll and related benefits

    3,135       803  

Accrued taxes

    (4,591

)

    (1,938

)

Accrued reclamation and closure costs and other non-current liabilities

    935       9,399  

Cash provided by operating activities

    86,138       52,173  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (76,960

)

    (58,272

)

Acquisition of Revett, net of cash acquired

          (809

)

Proceeds from disposition of properties, plants and equipment

    317       153  

Purchases of investments

    (16,088

)

    (947

)

Maturities of investments

    840        

Changes in restricted cash and investment balances

    (3,900

)

     

Net cash used in investing activities

    (95,791

)

    (59,875

)

Financing activities:

               

Proceeds from sale of common stock, net of offering costs

    8,121        

Acquisition of treasury shares

    (3,384

)

    (941

)

Dividends paid to common shareholders

    (1,914

)

    (1,850

)

Dividends paid to preferred shareholders

    (276

)

    (276

)

Credit availability and debt issuance fees paid

    (83

)

    (123

)

Repayments of debt

    (1,339

)

     

Repayments of capital leases

    (4,356

)

    (4,940

)

Net cash used in financing activities

    (3,231

)

    (8,130

)

Effect of exchange rates on cash

    1,288       (2,259

)

Net decrease in cash and cash equivalents

    (11,596

)

    (18,091

)

Cash and cash equivalents at beginning of period

    155,209       209,665  

Cash and cash equivalents at end of period

  $ 143,613     $ 191,574  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $ 1,631     $ 2,369  

Common stock issued for the acquisition of Revett

  $     $ 19,133  

Payment of accrued compensation in stock

  $ 5,511     $ 3,016  

  

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

 

 

 
5

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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 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 (“we” or “our” or “us”).  See Note 4 and Note 13 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.  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

 

Our current investments, which are classified as "available for sale" and consist of bonds having maturities of greater than 90 days, had a fair value and cost basis of $15.1 million at June 30, 2016. We held no such investments as of December 31, 2015.

 

At June 30, 2016 and December 31, 2015, the fair value of our non-current investments was $4.5 million and $1.5 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair 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 June 30, 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 June 30, 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 June 30, 2016 and December 31, 2015. Non-current restricted investments primarily represent investments in money market funds and certificates of deposit.

 

 

 
6

Table Of Contents
 

 

Note 3.   Income Taxes

 

Major components of our income tax provision (benefit) for the three and six months ended June 30, 2016 and 2015 are as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
    2016     2015     2016     2015  

Current:

                               

Domestic

  $ 2,506     $ 1,768     $     $ 1,865  

Foreign

    1,627       (553

)

    2,642       155  

Total current income tax provision (benefit)

    4,133       1,215       2,642       2,020  
                                 

Deferred:

                               

Domestic

    8,777       1,167       9,365       3,588  

Foreign

    (1,414

)

    (2,514

)

    1,143       (4,301

)

Total deferred income tax benefit

    7,363       (1,347

)

    10,508       (713

)

Total income tax provision (benefit)

  $ 11,496     $ (132

)

  $ 13,150     $ 1,307  

  

As of June 30, 2016, we have a net deferred tax asset in the U.S. of $33.5 million, a net deferred tax liability in Canada of $128.4 million, and a net deferred tax asset in Mexico of $9.3 million, for a consolidated worldwide net deferred tax liability of $85.6 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations. At June 30, 2016 and December 31, 2015, the balances of the valuation allowances on our deferred tax assets were $110 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.

 

During the quarter ended June 30, 2016, there was a change in judgment about the realizability of our deferred tax assets in Mexico. Based on revised projections of future taxable income, tax net operating losses are now projected to be fully utilized. The valuation allowance in Mexico decreased to $1.3 million based on this change in judgment.

 

The current income tax provisions for the three months ended June 30, 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 June 30, 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 June 30, 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.

 

                In August 2016, we learned that an individual filed a lawsuit against Hecla Limited and certain affiliates in state court in New Mexico alleging personal injury claims arising from alleged exposure to contaminants as a result of allegedly living on land adjacent to the Johnny M mine site.  We do not yet have enough information to conclude if Hecla Limited has any liability or to estimate any loss that it may incur.    

 

 

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.  No comments were received and the United States has sought Court approval and entry of each Consent Decree. The Court entered the Nelson Tunnel/Commodore Waste Rock Pile Consent Decree on June 15, 2016, and CoCa is required to pay $6 million by August 12, 2016. The Court has not yet entered the Gilt Edge Consent Decree. If the Court does enter the Gilt Edge Consent Decree, then CoCa will be obligated to pay $3.9 million within 60 days , and at that point 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 Gilt Edge Consent Decree will be entered by the Court and become final and binding.  Accordingly, in the event that matter is 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 June 30, 2016 included approximately $1.2 million for various costs. In addition, our open purchase orders at June 30, 2016 included approximately $1.1 million, $1.9 million and $7.2 million, respectively, for various capital items at the Lucky Friday, Casa Berardi and Greens Creek units, and approximately $0.6 million, $1.2 million, and $2.8 million, respectively, for various non-capital costs at the Lucky Friday, Casa Berardi and Greens Creek units. We also have total commitments of approximately $15.4 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 June 30, 2016, we had surety bonds totaling $111.2 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 June 30, 2016 as financial support for reclamation of the Troy mine acquired as part of the acquisition of Revett Mining Company, Inc.. 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.

 

 

 
10

Table Of Contents
 

  

Note 5.    Income (Loss) Per Common Share

 

We are authorized to issue 500,000,000 shares of common stock, $0.25 par value per share. At June 30, 2016, there were 388,800,542 shares of our common stock issued and 3,733,742 shares issued and held in treasury, for a net of 385,066,800 shares outstanding.

 

For the three-month and six-month periods ended June 30, 2015, all outstanding options, restricted share units, and warrants were excluded from the computation of diluted loss per share, as our reported net losses for those periods would cause their conversion and exercise to have no effect on the calculation of loss per share. For the three-month and six-month periods ended June 30, 2016, 3,515,356 restricted stock units that are unvested or vested in the current period are included in the calculation of diluted income per share. There were no options outstanding as of June 30, 2016.

 

Note 6.    Business Segments

 

We are currently organized and managed in four reporting segments: 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.

 

The following tables present information about reportable segments for the three and six months ended June 30, 2016 and 2015 (in thousands): 

 

   

Three Months Ended
June 30,

   

Six Months Ended

June 30,

 
   

2016

   

2015

   

2016

   

2015

 

Net sales to unaffiliated customers:

                               

Greens Creek

  $ 59,574     $ 54,043     $ 113,456     $ 121,398  

Lucky Friday

    22,760       14,570       44,012       34,460  

Casa Berardi

    53,285       35,584       85,483       67,431  

San Sebastian

    35,683             59,368        
    $ 171,302     $ 104,197     $ 302,319     $ 223,289  

Income (loss) from operations:

                               

Greens Creek

  $ 14,831     $ 9,950     $ 22,909     $ 24,643  

Lucky Friday

    4,047       (585

)

    6,790       2,961  

Casa Berardi

    10,622       (3,200

)

    12,556       (3,964

)

San Sebastian

    25,583             40,495        

Other

    (13,473

)

    (23,455

)

    (25,567

)

    (36,008

)

    $ 41,610     $ (17,290

)

  $ 57,183     $ (12,368

)

 

 

  

The following table presents identifiable assets by reportable segment as of June 30, 2016 and December 31, 2015 (in thousands):

 

   

June 30, 2016

   

December 31, 2015

 

Identifiable assets:

               

Greens Creek

  $ 693,948     $ 698,265  

Lucky Friday

    427,812       393,338  

Casa Berardi

    792,267       779,423  

San Sebastian

    24,483       22,238  

Other

    332,300       328,661  
    $ 2,270,810     $ 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 and six months ended June 30, 2016 and 2015 (in thousands): 

 

   

Three Months Ended

June 30,

 
   

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 cost

    (84

)

    (84

)

Amortization of net (gain) loss

    1,093       1,065  

Net periodic pension cost

  $ 2,068     $ 1,896  

  

   

Six Months Ended

June 30,

 
   

2016

   

2015

 

Service cost

  $ 2,154     $ 2,108  

Interest cost

    2,614       2,412  

Expected return on plan assets

    (2,650

)

    (2,691

)

Amortization of prior service cost

    (168

)

    (169

)

Amortization of net (gain) loss

    2,186       2,130  

Net periodic pension cost

  $ 4,136     $ 3,790  

  

We contributed approximately $2.6 million in shares of our common stock and cash to our defined benefit plans in February 2016, and $6.1 million in shares of our common stock in July 2016, with no additional contributions anticipated in 2016. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2016. 

 

Note 8.    Shareholders’ 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. 

 

In June 2016, the Board of Directors granted the following restricted stock unit awards to employees:

 

 

952,612 restricted stock units, with one third of those vesting in June 2017, one third vesting in June 2018, and one third vesting in June 2019;

 

87,493 restricted stock units, with one half of those vesting in June 2017 and one half vesting in June 2018; and

 

43,187 restricted stock units that vest in June 2017.

 

The $1.8 million in expense related to the unit awards discussed above vesting in 2017 will be recognized on a straight-line basis over the twelve months following the date of the award. The $1.6 million in expense related to the unit awards discussed above vesting in 2018 will be recognized on a straight-line basis over the twenty-four months following the date of the award. The $1.4 million in expense related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the thirty-six month period following the date of the award.

 

In the second quarter of 2016, a total of 185,353 shares of common stock were granted to nonemployee directors. We granted a total of 48,246 shares of common stock to nonemployee directors in the second quarter of 2015.

 

Stock-based compensation expense for restricted stock unit grants to employees and shares issued to nonemployee directors recorded in the first six months of 2016 totaled $3.5 million, compared to $2.3 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 six months of 2016 we withheld 997,678 shares valued at approximately $3.4 million, or approximately $3.40 per share. In the first six 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, when and if 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 August 3, 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 $1.0 million payable in September 2016. Because the average realized silver price for the second quarter of 2016 was $17.26 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 June 30, 2016, we had sold 2,780,087 shares under the agreement for total proceeds of approximately $8.1 million, net of commissions and fees of approximately $166 thousand. Of those amounts, 2,042,812 shares were sold in the second quarter of 2016 for total proceeds of approximately $6.1 million, net of commissions and fees of approximately $124 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 June 30, 2016, 934,100 shares have been purchased at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at August 2, 2016, was $6.55 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 June 30, 2016. 

 

Note 9.    Senior Notes, Credit Facilities, Note Payable 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 $6.1 million as of June 30, 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 six months ended June 30, 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 $7.9 million and $6.6 million, respectively, in capitalized interest, totaled $10.2 million and $11.6 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 May 2016, we entered into a $100 million senior secured revolving credit facility with a three year term. 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 will decrease to 4.00:1 in 2017.          

 

 

 

We are also able to obtain letters of credit under the facility, and for any such letters we are required to pay a participation fee of between 2.25% and 3.25% based on our total leverage ratio, as well as a fronting fee to each issuing bank of 0.20% annually on the average daily dollar amount of any outstanding letters of credit. There were $2.6 million in letters of credit outstanding as of June 30, 2016.

 

We believe we were in compliance with all covenants under the credit agreement and no amounts were outstanding as of June 30, 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 June 30, 2016, the total liability balance associated with capital leases, including certain purchase option amounts, was $15.1 million, with $7.8 million of the liability classified as current and the remaining $7.3 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 $15.4 million at June 30, 2016, with $0.7 million attributed to interest.

 

At June 30, 2016, the annual maturities of capital lease commitments, including interest, are (in thousands): 

 

Twelve-month period ending June 30,

       

2017

  $ 7,325  

2018

    4,906  

2019

    2,482  

2020

    638  

Total

    15,351  

Less: imputed interest

    (661

)

Net capital lease obligation

  $ 14,690  

  

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 June 30, 2016 was $18.4 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.

 

In March 2016, the FASB issued ASU 2016-09 Compensation - Stock Compensation (Topic 718). The objective of the update is to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences and financial statement classification. The update is effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the guidance on our consolidated financial statements.

 

Note 11.    Derivative Instruments

 

Foreign Currency

 

Our wholly-owned subsidiary owning the Casa Berardi mine is a U.S. dollar ("USD")-functional entity which routinely incurs expenses denominated in Canadian dollars ("CAD"), and such expenses expose us to exchange rate fluctuations between the USD and CAD. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. The program utilizes forward contracts to sell CAD, and each contract is designated as a cash flow hedge. As of June 30, 2016, we have 70 forward contracts outstanding to sell CAD$175 million having a notational amount of US$135.9 million. These contracts represent between 20% and 44% of our forecasted cash operating costs at Casa Berardi from 2017 through 2020 and have USD-to-CAD exchange rates ranging between 1.2787 and 1.3031. Our risk management policy provides for up to 75% of our forecasted CAD-denominated operating costs for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

 

 

As of June 30, 2016, we recorded the following balances for the fair value of the contracts:

 

 

a non-current asset of $0.5 million, which is included in other non-current assets;

 

a current liability of $0.1 million, which is included in other current liabilities, and

 

a non-current liability of $0.4 million, which is included in other non-current liabilities.

 

Net unrealized gains of approximately $46,000 related to the effective portion of the hedges were included in accumulated other comprehensive income as of June 30, 2016. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $0.1 million in net unrealized losses included in accumulated other comprehensive income as of June 30, 2016 would be reclassified to current earnings in the next twelve months. Net unrealized losses of approximately $6,000 related to ineffectiveness of the hedges were included in current earnings for the six months ended June 30, 2016.

 

Metals Prices

 

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 June 30, 2016 or December 31, 2015. These contracts are not designated as hedges and are marked-to-market through earnings each period.  At June 30, 2016, we recorded a current liability of $3.4 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 $11.8 million net loss during the first six 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 June 30, 2016 and December 31, 2015: 

 

June 30, 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

    1,523       4       19,731       8,818     $ 17.40     $ 1,271     $ 0.88     $ 0.79  

 

 

  

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 relates to the change in price between sale and settlement, does not qualify for hedge accounting; therefore, it is adjusted to market through earnings each period prior to final settlement.

 

Credit-risk-related Contingent Features

 

We have agreements with certain counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of June 30, 2016, we have not posted any collateral related to these agreements. The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3.9 million as of June 30, 2016. If we had breached any of these provisions at June 30, 2016, we could have been required to settle our obligations under the agreements at their termination value of $3.8 million. 

 

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

June 30, 2016

   

Balance at

December 31, 2015

 

Input

Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 143,613     $ 155,209  

Level 1

Available for sale securities:

                 

Debt securities - municipal and corporate bonds

    15,070        

Level 2

Equity securities – mining industry

    4,453       1,515  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    25,667       13,490  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other deposits

    4,899       999  

Level 1

Derivative contracts:

                 

Foreign exchange contracts

    537        

Level 2

Total assets

  $ 194,239     $ 171,213    
                   

Liabilities:

                 

Derivative contracts:

                 

Foreign exchange contracts

  $ 497     $  

Level 2

Metal forward contracts

    3,401       283  

Level 2

Total Liabilities

  $ 3,898     $ 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 available-for-sale securities consist of municipal and corporate bonds having maturities of more than 90 days, which are recorded at fair value.

 

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

 

Our non-current available for sale securities consist of marketable equity securities of companies in the mining industry which are valued using quoted market prices for each security.

 

Trade accounts receivable include amounts due to us for shipments of concentrates, doré and precipitate sold to customers.  Revenues and the corresponding accounts receivable for sales of metals products 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 metal prices between shipment and final settlement result in changes to revenues previously recorded upon shipment.  The embedded derivative contained in our concentrate sales is adjusted to fair market value through earnings each period prior to final settlement.

 

We use financially-settled forward contracts to manage exposure to changes in the exchange rate between the U.S. Dollar and Canadian Dollar, and the impact on Canadian Dollar-denominated operating costs incurred at our Casa Berardi Unit (see Note 11 for more information). These contracts qualify for hedge accounting, with unrealized gains and losses related to the effective portion of the contracts included in accumulated other comprehensive loss, and unrealized gains and losses related to the ineffective portion of the contracts included in earnings each period. The fair value of each contract represents the present value of the difference between the forward exchange rate for the contract settlement period as of the measurement date and the contract settlement exchange rate.

 

We use 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 use 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 present value of the difference between the forward metal price for the contract settlement period as of the measurement date and the contract settlement metal price.

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $500.4 million, net of unamortized initial purchaser discount at June 30, 2016, had a fair value of $492.6 million at June 30, 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. 

 

 

 
20

Table Of Contents
 

 

Note 13.    Acquisitions

 

Proposed Acquisition of Mines Management, Inc.

 

On May 23, 2016, we and Mines Management, Inc. ("Mines Management") entered into a merger agreement pursuant to which we would acquire all of the issued and outstanding common stock of Mines Management. Mines Management holds 100% ownership of the Montanore project in Northwest Montana, a significant undeveloped silver and copper deposit located approximately ten miles from our Rock Creek project. In the proposed merger, each outstanding common share of Mines Management would be exchanged for 0.2218 of a share of our common stock, which had an estimated value of $0.94 per Mines Management common share based on the closing price of Hecla's common stock of $4.24 per share on May 20, 2016, the last full trading day before the merger agreement was entered into. The actual value of consideration transferred will be based on the market price of Hecla's common stock on the date the merger is consummated. Based on the closing price of Hecla stock of $6.55 per share on August 2, 2016, total consideration would be $59.1 million. A 10% change in the price per share of Hecla stock from its closing price on August 2, 2016 would result in a $5.9 million change in the amount of consideration transferred in the merger. Estimated consideration is based on us issuing approximately 9,030,010 shares of our common stock to Mines Management shareholders in the merger. All consideration given to Mines Management stockholders will be in newly issued Hecla stock. The proposed merger is subject to approval by Mine Management's stockholders. No assurance can be given as to whether the merger will be approved and consummated.

 

In May 2016, we entered into a term loan and security agreement with Mines Management pursuant to which we agreed to provide one or more secured loans to Mines Management in an aggregate amount not to exceed $2.3 million. The loans bear interest at a rate per annum equal to LIBOR plus 5% and will be due and payable the earlier of September 30, 2016, the date the merger is consummated, or the date of other specified events. The loans are secured by substantially all of the assets of Mines Management. The balance of the note as of June 30, 2016 was $1.4 million.

 

Takeover Bid of Dolly Varden Silver Corporation

 

On June 27, 2016, we announced a takeover bid for all of the outstanding shares of Dolly Varden Silver Corporation ("Dolly Varden") not owned by us and our affiliates for cash of CAD$0.69 per share. Dolly Varden owns 100% of the Dolly Varden historic silver property in Northwestern British Columbia, Canada. Our wholly owned subsidiary owns 2,620,291 Dolly Varden shares and warrants to purchase 1,250,000 Dolly Varden shares, representing approximately 19.8% of Dolly Varden's shares outstanding on a partially diluted basis. Based on Dolly Varden's outstanding shares and options and warrants to acquire Dolly Varden shares, and excluding shares and warrants held by us and our affiliates, total consideration would be approximately CAD$13.6 million. In late July 2016, we withdrew the bid due to the failure of a required condition precedent to its consummation. 

 

Note 14.    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 (if 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 June 30, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 102,488     $ 23,720     $ 17,405     $     $ 143,613  

Other current assets

    41,498       95,009       43,534       (12,519

)

    167,522  

Properties, plants, and equipment - net

    2,266       1,167,053       756,839             1,926,158  

Intercompany receivable (payable)

    553,020       (342,822

)

    (329,269

)

    119,071        

Investments in subsidiaries

    1,247,747                   (1,247,747

)

     

Other non-current assets

    2,518       177,907       5,206       (152,114

)

    33,517  

Total assets

  $ 1,949,537     $ 1,120,867     $ 493,715     $ (1,293,309

)

  $ 2,270,810  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 21,820     $ 82,221     $ 50,845     $ (25,098

)

  $ 129,788  

Long-term debt

    500,354       5,079       2,237             507,670  

Non-current portion of accrued reclamation

          43,381       29,638             73,019  

Non-current deferred tax liability

          13,293       134,584       (20,464

)

    127,413  

Other non-current liabilities

    47,685       5,937       (380

)

          53,242  

Stockholders' equity

    1,379,678       970,956       276,791       (1,247,747

)

    1,379,678  

Total liabilities and stockholders' equity

  $ 1,949,537     $ 1,120,867     $ 493,715     $ (1,293,309

)

  $ 2,270,810  

 

 

   

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 June 30, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (5,659

)

  $ 87,992     $ 88,969     $     $ 171,302  

Cost of sales

          (47,203

)

    (35,750

)

          (82,953

)

Depreciation, depletion, amortization

          (15,238

)

    (14,659

)

          (29,897

)

General and administrative

    (6,474

)

    (3,679

)

    (206

)

          (10,359

)

Exploration and pre-development

    (113

)

    (1,360

)

    (2,410

)

          (3,883

)

Loss on derivative contracts

    (6

)

                      (6

)

Acquisition costs

    (394

)

    (8

)

                (402

)

Equity in earnings of subsidiaries

    37,111                   (37,111

)

     

Other (expense) income

    (349

)

    2,623       (8,732

)

    (1,732

)

    (8,190

)

Income (loss) before income taxes

    24,116       23,127       27,212       (38,843

)

    35,612  

(Provision) benefit from income taxes

          (8,386

)

    (4,842

)

    1,732       (11,496

)

Net income (loss)

    24,116       14,741       22,370       (37,111

)

    24,116  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    23,978       14,741       22,370       (37,111

)

    23,978  

Net income (loss)

    24,116       14,741       22,370       (37,111

)

    24,116  

Changes in comprehensive income (loss)

    1,239             1,193       (1,193

)

    1,239  

Comprehensive income (loss)

  $ 25,355     $ 14,741     $ 23,563     $ (38,304

)

  $ 25,355  

 

 

 

   

Six Months Ended June 30, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (11,794

)

  $ 169,261     $ 144,852     $     $ 302,319  

Cost of sales

          (93,956

)

    (63,317

)

          (157,273

)

Depreciation, depletion, amortization

          (31,844

)

    (23,928

)

          (55,772

)

General and administrative

    (11,714

)

    (8,202

)

    (657

)

          (20,573

)

Exploration and pre-development

    (158

)

    (2,647

)

    (4,432

)