FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008

Table of Contents

 
 

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

 

 

Form 10-K

 

 

 

 

x

Annual report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2008

Commission file No. 1-8491

HECLA MINING COMPANY
(Exact name of registrant as specified in its charter)

Delaware

 

77–0664171

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

6500 N. Mineral Drive, Suite 200
Coeur d’Alene, Idaho

 

83815-9408

(Address of principal executive offices)

 

(Zip Code)

208-769-4100
(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Name of each exchange
on which registered

Common Stock, par value $0.25 per share

 

New York Stock Exchange

Series B Cumulative Convertible Preferred
Stock, par value $0.25 per share

 

New York Stock Exchange

6.5% Mandatory Convertible Preferred
Stock, par value $0.25 per share

 

New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act: None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large Accelerated Filer x

Accelerated Filer o

 

Non-Accelerated Filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

          The aggregate market value of the registrant’s voting Common Stock held by nonaffiliates was $1,175,960,634 as of June 30, 2008. There were 127,540,301 shares of the registrant’s Common Stock outstanding as of June 30, 2008, and 217,181,821 shares as of February 27, 2009.


 
 



Documents incorporated by reference herein:

          To the extent herein specifically referenced in Part III, the information contained in the Proxy Statement for the 2009 Annual Meeting of Shareholders of the registrant, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the registrant’s 2008 fiscal year is incorporated herein by reference. See Part III.











TABLE OF CONTENTS

 

 

 

Special Note on Forward-Looking Statements

 

1

PART I

 

1

Item 1. Business

 

1

Introduction

 

1

Products and Segments

 

3

Employees

 

3

Available Information

 

3

Item 1A. Risk Factors

 

4

Item 1B. Unresolved Staff Comments

 

16

Item 2. Property Descriptions

 

17

OPERATING PROPERTIES

 

17

The Greens Creek Unit

 

17

The Lucky Friday Unit

 

19

EXPLORATION PROPERTIES

 

21

The San Sebastian Unit

 

21

Item 3. Legal Proceedings

 

23

Item 4. Submission of Matters to a Vote of Security Holders

 

23

PART II

 

23

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

 

23

Item 6. Selected Financial Data

 

26

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

 

27

Overview

 

27

Results of Operations

 

28

The Greens Creek Segment

 

30

The Lucky Friday Segment

 

31

The San Sebastian Segment

 

32

The La Camorra Segment

 

32

Corporate Matters

 

33

Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)

 

34

Financial Liquidity and Capital Resources

 

35

Contractual Obligations and Contingent Liabilities and Commitments

 

38

Off-Balance Sheet Arrangements

 

38

Critical Accounting Estimates

 

39

New Accounting Pronouncements

 

40

Forward-Looking Statements

 

41

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

41

Short-term Investments

 

41

Commodity-Price Risk Management

 

41

Interest-Rate Risk Management

 

41

Provisional Sales

 

42

Item 8. Financial Statements and Supplementary Data

 

42

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

 

44

Item 9A. Controls and Procedures

 

44

Disclosure Controls and Procedures

 

44

Management’s Annual Report on Internal Control over Financial Reporting

 

44

Attestation Report of Independent Registered Public Accounting Firm

 

45

Changes in Internal Control over Financial Reporting

 

46

Item 9B. Other Information

 

46

PART III

 

46

Item 10. Directors and Executive Officers of the Registrant

 

46

Item 11. Executive Compensation

 

48

Item 12. Security Ownership of Certain Beneficial Owners and Management

 

48

Item 13. Certain Relationships and Related Transactions

 

48

Item 14. Principal Accounting Fees and Services

 

48

PART IV

 

49

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

49

Signatures

 

50

Index to Consolidated Financial Statements

 

F-1

Index to Exhibits

 

F-47

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Special Note on Forward-Looking Statements

          Certain statements contained in this report (including information incorporated by reference) are “forward-looking statements” and are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words such as “may,” “might,” “will,” “expect,” “anticipate,” “believe,” “could,” “intend,” “plan,” “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

          These risks, uncertainties and other factors include, but are not limited to, those set forth under Item 1A. — BusinessRisk Factors. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. Projections included in this Form 10-K have been prepared based on assumptions, which we believe to be reasonable, but not in accordance with United States generally accepted accounting principles (“GAAP”) or any guidelines of the Securities and Exchange Commission (“SEC”). Actual results will vary, perhaps materially, and we undertake no obligation to update the projections at any future date. You are strongly cautioned not to place undue reliance on such projections. All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

          For the sole purpose of implementing a holding company structure, on November 8, 2006, an Agreement and Plan of Reorganization was filed. Under that Plan of Reorganization, Hecla Mining Company, a new Delaware corporation organized on August 7, 2006, and formerly named Hecla Holdings Inc., became the successor issuer to Hecla Limited, formerly named Hecla Mining Company. In addition, Hecla Limited became a wholly-owned subsidiary of Hecla Mining Company.

          For information regarding the organization of our business segments and our significant customers, see Note 12 of Notes to Consolidated Financial Statements.

          Information set forth in Items 1A, 1B and 2 are incorporated by reference into this Item 1.

Introduction

          Hecla Mining Company has provided precious and base metals to the U.S. economy and worldwide since its incorporation in 1891 (in this report, “we” or “our” or “us” refers to Hecla Mining Company and/or our affiliates and subsidiaries). We discover, acquire, develop, produce, and market silver, gold, lead and zinc. In doing so, we intend to manage our business activities in a safe, environmentally responsible and cost-effective manner.

          We produce lead, zinc and bulk concentrates, which we sell to custom smelters, and unrefined silver and gold bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. We are organized and managed into three segments that encompass our operating units and significant exploration interests:

 

 

 

 

The Greens Creek unit;

 

 

 

 

The Lucky Friday unit; and

 

 

 

 

The San Sebastian unit and various exploration activities in Mexico.

          Prior to the second quarter of 2008, we also reported a fourth segment, the La Camorra unit, representing our operations and various exploration activities in Venezuela. On July 8, 2008, we completed the sale of our wholly owned subsidiaries holding our business and operations in Venezuela. Our Venezuelan activities are reported as discontinued operations on the Condensed Consolidated Statement of Operations for all periods presented (see Note 13 of Notes to Consolidated Financial Statements for more information). As a result, we have determined that it is no longer appropriate to present a separate segment representing our operations in Venezuela, and have restated the corresponding information for all periods presented.

          On April 16, 2008, we completed the acquisition of all of the ownership interest of the two indirect Rio Tinto, PLC subsidiaries holding a 70.3% interest in the Greens Creek mine. Our wholly-owned subsidiary, Hecla Alaska LLC,

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previously owned an undivided 29.7% joint venture interest in the assets of Greens Creek. The acquisition gives our various subsidiaries control of 100% of the Greens Creek mine. More information on the acquisition can be found in Note 19 of Notes to Consolidated Financial Statements.

          The map below shows the locations of our operating units and our exploration projects, as well as our corporate offices located in Coeur d’Alene, Idaho and Vancouver, British Columbia.

(MAP)

          Our current business strategy is to focus our financial and human resources in the following areas:

 

 

 

 

Managing our operations in a manner that will facilitate repayment of our credit facilities (see Note 7 and Note 21 of Notes to the Consolidated Financial Statements for further discussion of our credit facilities);

 

 

 

 

Fully integrating our April 2008 acquisition of the remaining 70.3% of the Greens Creek Joint Venture in Alaska, of which we previously held 29.7%, which increases our expected 2009 silver production to between 10 and 11 million ounces and gives our various subsidiaries sole ownership of the world’s fifth largest silver mine;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

Continuing to seek opportunities to acquire and invest in mining properties and companies; and

 

 

 

 

Seeking opportunities for growth both internally and through acquisitions. See the Results of Operations and Financial Liquidity and Capital Resources sections below.

          For the year ended December 31, 2008, we reported a net loss of $66.6 million compared to net income of $53.2 million and $69.1 million for the years ended December 31, 2007 and 2006, respectively, and net losses for the years ended December 31, 2005 and 2004 of $25.4 million and $6.1 million, respectively. Our financial results over the past five years have been impacted by:

 

 

 

 

Exploration and pre-production development expenditures, which totaled $23.7 million, $20.8 million, $28.4 million, $26.2 million and $20.2 million, respectively, for the years ended December 31, 2008, 2007, 2006, 2005 and 2004, including exploration expenditures at our now-divested Venezuelan operations of $1.2 million, $3.9 million, $5.6 million, $8.3 million, and $5.9 million, respectively, for those periods. These amounts also include expenditures for the now-divested Hollister Development Block, as its development progressed until the sale of our interest in the project in April 2007, of $2.2 million, $14.4 million, $9.4 million and $4.2 million, respectively, for the years ended December 31, 2007, 2006, 2005 and 2004. In addition, exploration for the years ended December 31, 2005 and 2004 included $2.2 million and $0.3 million, respectively, for expenditures at the Noche Buena gold exploration property in Mexico, which was sold in April 2006;

 

 

 

 

Provision for closed operations and environmental matters of $4.3 million, $49.2 million, $3.5 million, $1.3 million and $11.2 million, respectively, for the years ended December 31, 2008, 2007, 2006, 2005 and 2004. We recorded an increase of $44.7 million in 2007 to our estimated liabilities for environmental remediation in Idaho’s Coeur d’Alene Basin and the Bunker Hill Superfund Site. Accrual increases of $8.5 million were also recorded in 2004 for estimated future expenditures in the Coeur d’Alene Basin and the Grouse Creek mine;

 

 

 

 

Fluctuations in average prices of the metals we produce, as average prices for silver, gold and lead increased over the four-year period ended December 31, 2007, while average zinc prices increased over the three-year period ended December 31, 2006, with a slight decline during 2007. Average prices for silver and gold continued to increase during the first half of 2008, but declined during the second half of 2008, while average lead and zinc prices decreased during 2008;

 

 

 

 

Spikes in prices for diesel fuel and other consumables, which have impacted production costs at our operations;

 

 

 

 

Our acquisition of the remaining 70.3% of the Greens Creek mine for $758.5 million in April 2008, a portion of which was funded by a $140 million term loan and $220 million bridge loan;

 

 

 

 

The current global financial crisis, which has impacted metals prices, production costs, and our access to capital markets;

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Losses from discontinued operations, net of tax, for the years ended December 31, 2008, 2007 and 2005 of $17.4 million, $15.0 million and $7.4 million, respectively, and income from discontinued operations, net of tax, for the years ended December 31, 2006 and 2004 of $4.3 million and $6.8 million, respectively; and

 

 

 

 

Decreased production, and the eventual suspension of mining operations at the San Sebastian unit in Mexico in the fourth quarter of 2005.

          A comprehensive discussion of our financial results for the years ended December 31, 2008, 2007 and 2006, individual operating unit performance, general corporate expenses and other significant items can be found in Item 7. — Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, as well as the Consolidated Financial Statements and Notes thereto.

          Our results of operations are significantly affected by the prices of silver, gold, lead and zinc, which fluctuate and are affected by numerous factors beyond our control. Over the past five years, we have seen the prices of silver and gold generally rise, which has helped to offset the factors having a negative impact on our net income discussed above. Zinc and lead prices generally increased during the four-year period ended December 31, 2007. However, average zinc and lead prices decreased during 2008.

Products and Segments

          Our segments are differentiated by geographic region and principal products produced. We produce zinc, lead and bulk concentrates at our Greens Creek unit and lead and zinc concentrates at our Lucky Friday unit, which we sell to custom smelters on contract, and unrefined silver and gold bullion bars (doré) at Greens Creek, which are sold directly to customers or further refined before sale to precious metals traders. Our segments as of December 31, 2008 included:

 

 

 

 

The Greens Creek unit, a 100%-owned joint venture arrangement, through our subsidiaries Hecla Alaska LLC, Hecla Greens Creek Mining Company and Hecla Juneau Mining Company. We acquired 70.3% of our ownership of Greens Creek in April 2008 from indirect subsidiaries of Rio Tinto, PLC. Greens Creek is located on Admiralty Island, near Juneau, Alaska, and has been in production since 1989, with a temporary shutdown from April 1993 through July 1996. During 2008, Greens Creek contributed $130.8 million, or 67.9%, to our consolidated sales;

 

 

 

 

The Lucky Friday unit located in northern Idaho. Lucky Friday is, through our subsidiaries Hecla Limited and Silver Hunter Mining Company, 100%-owned and has been a producing mine for us since 1958. During 2008, Lucky Friday contributed $61.9 million, or 32.1%, to our consolidated sales; and

 

 

 

 

The San Sebastian unit, located in the State of Durango, Mexico, has been 100% owned by us through our wholly owned subsidiary, Minera Hecla, S.A. de C.V., since 1999. During 2005, San Sebastian reached the end of its known mine life.

          The table below summarizes our production for the years ended December 31, 2008, 2007 and 2006, which reflects our previous 29.7% ownership of Greens Creek until April 16, 2008, and our 100% ownership thereafter.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

 

 

2008

 

2007

 

2006

 

Silver (ounces)

 

 

8,709,517

 

 

5,642,558

 

 

5,509,746

 

Gold (ounces)

 

 

76,810

 

 

107,708

 

 

179,276

 

Lead (tons)

 

 

35,023

 

 

24,549

 

 

22,899

 

Zinc (tons)

 

 

61,441

 

 

26,621

 

 

24,207

 

          The gold production amounts above include 22,160, 87,490 and 160,563 ounces, respectively, for years ended December 31, 2008, 2007 and 2006 produced at our discontinued Venezuelan operations sold in July 2008.

Employees

          As of December 31, 2008, we employed 742 people, and believe relations with our employees are generally good.

          Many of the employees at our Lucky Friday unit are represented by a union. The collective barginning agreement with workers at our Lucky Friday unit expires on April 30, 2009. We anticipate that we will reach a satisfactory contract with the union, although there can be no assurance that this can be done or that it can be done without disruptions to production. During the past five years, labor strikes and work slow-downs adversely affected our production in Mexico and at our now-divested Venezuelan operations. Similar labor problems could affect our financial results or condition in the future.

Available Information

          We are a Delaware corporation, with our principal executive offices located at 6500 N. Mineral Drive, Suite 200, Coeur d’Alene, Idaho 83815-9408. Our telephone number is (208) 769-4100. Our web site address is www.hecla-

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mining.com. We file our annual, quarterly and current reports and amendments to these reports with the SEC, copies of which are available on our website or from the SEC free of charge (www.sec.gov or 800-SEC-0330 or the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549). Charters of our audit, compensation, corporate governance, and directors’ nominating committees, as well as our Code of Business Conduct and Ethics for Directors, Officers and Employees, are also available on our website. We will provide copies of these materials to shareholders upon request using the above-listed contact information, directed to the attention of Investor Relations.

          We have included the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) certifications regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report. Additionally, we filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding our compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which certification was dated June 3, 2008, and indicated that the CEO was not aware of any violations of the Listing Standards.

Item 1A. Risk Factors

          The following risks and uncertainties, together with the other information set forth in this Form 10-K, should be carefully considered by those who invest in our securities. Any of the following risks could materially adversely affect our business, financial condition or operating results and could decrease the value of our common and/or preferred stock.

FINANCIAL RISKS

We have limited cash resources and may be dependent on accessing additional financing to meet our expected cash needs.

          We have cash requirements both for ongoing operating expenses, capital expenditures, working capital, and general corporate purposes and for required interest and principal payments on our credit facilities. See Financial Risks— The inability to meet the payment obligations of our credit facilities when due could adversely affect our financial results or condition. While we believe that we will be able to obtain the additional sources of financing that will allow us to meet our cash requirements, there can be no assurance we will be successful in such effort. We have retained a chief restructuring officer to assist us with assessing our operations and financial condition. On February 3, 2009, we reached an agreement to amend the terms of our credit facilities to defer all term facility payments due in 2009, totaling $66.7 million, to 2010 and 2011. In addition, on February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2008. See Note 21- Subsequent Events of Notes to Consolidated Financial Statements for more information on the credit facilities amendment and offering. The credit facilities also require us to make mandatory prepayments of our term loan with 75% of our semi-annual excess cash flow and with proceeds we receive from asset sales and the issuance of additional equity and debt, with limited exceptions. This requirement could affect our liquidity. A shortage of liquidity could have a material adverse affect on us.

The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict.

          The continued credit crisis and related turmoil in the global financial system has had and may continue to have an impact on our business and financial position. The financial crisis may limit our ability to raise capital through credit and equity markets, both of which we have utilized recently to finance the acquisition of the 70.3% interest in the Greens Creek mine and meet the related debt obligations. As discussed further below, the prices of the metals that we produce are affected by a number of factors, and it is unknown how these factors will be impacted by a continuation of the financial crisis.

We have had losses that may continue in the future.

          We reported a net loss for the year ended December 31, 2008 of $66.6 million, and net income for the years ended December 31, 2007 and 2006, of $53.2 million and $69.1 million, respectively. A comparison of operating results over the past three years can be found in Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

          Many of the factors affecting our operating results are beyond our control, including the volatility of metals prices; smelter terms; diesel fuel prices; interest rates; global or regional political or economic policies; inflation; developments and crises; governmental regulations; continuity of orebodies; and speculation and sales by central banks and other holders and producers of gold and silver in response to these factors. We cannot foresee whether our operations will continue to generate

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sufficient revenue in order for us to generate net cash from operating activities. There can be no assurance that we will not experience net losses in the future.

Commodity hedging activities could expose us to losses.

          We periodically enter into hedging activities, such as forward sales contracts and commodity put and call option contracts, to manage the prices received on the metals we produce and in an attempt to insulate our operating results from declines in prices for those metals. However, hedging may prevent us from realizing possible revenues in the event that the market price of a metal exceeds the price stated in a forward sale or call option contract. In addition, we may experience losses if a counterparty fails to purchase under a contract when the contract price exceeds the spot price of a commodity. At December 31, 2008, we had no commodity hedging contracts.

Our profitability could be affected by the prices of other commodities.

          Our business activities are highly dependent on the costs of commodities such as fuel, steel and cement. The recent prices for such commodities have been volatile and may increase our costs of production and development. A material increase in costs at any of our operating properties could have a significant effect on our profitability. For additional discussion, see Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our accounting and other estimates may be imprecise.

          Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts and related disclosure of assets, liabilities, revenue and expenses at the date of the consolidated financial statements and reporting periods. The more significant areas requiring the use of management assumptions and estimates relate to:

 

 

 

 

mineral reserves that are the basis for future cash flow estimates and units-of-production depreciation, depletion and amortization calculations;

 

 

 

 

future metals prices;

 

 

 

 

environmental, reclamation and closure obligations;

 

 

 

 

asset impairments, including long-lived assets and investments;

 

 

 

 

reserves for contingencies and litigation; and

 

 

 

 

deferred tax asset valuation allowance.

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

A substantial or extended decline in metals prices would have a material adverse effect on us.

          The majority of our revenue is derived from the sale of silver, gold, lead and zinc and, as a result, our earnings are directly related to the prices of these metals. Silver, gold, lead and zinc prices fluctuate widely and are affected by numerous factors, including:

 

 

 

 

speculative activities;

 

 

 

 

relative exchange rates of the U.S. dollar;

 

 

 

 

global and regional demand and production;

 

 

 

 

recession or reduced economic activity; and

 

 

 

 

other political and economic conditions.

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

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          If the market prices for the metals we produce decline or we fail to control our production or development costs for a sustained period of time, our ability to service our debt obligations may be adversely affected.

          The following table sets forth the average daily closing prices of the following metals for the year ended December 31, 1995, 2001 and each year thereafter through 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

2003

 

2002

 

2001

 

1995

 

Silver (1) (per oz.)

 

$

15.02

 

$

13.39

 

$

11.57

 

$

7.31

 

$

6.66

 

$

4.88

 

$

4.60

 

$

4.37

 

$

5.20

 

Gold (2) (per oz.)

 

$

871.71

 

$

696.66

 

$

604.34

 

$

444.45

 

$

409.21

 

$

363.51

 

$

309.97

 

$

272.00

 

$

384.16

 

Lead (3) (per lb.)

 

$

0.95

 

$

1.17

 

$

0.58

 

$

0.44

 

$

0.40

 

$

0.23

 

$

0.21

 

$

0.22

 

$

0.29

 

Zinc (4) (per lb.)

 

$

0.85

 

$

1.47

 

$

1.49

 

$

0.63

 

$

0.48

 

$

0.38

 

$

0.35

 

$

0.40

 

$

0.47

 

 

 

 

(1)

London Fix

(2)

London Final

(3)

London Metals Exchange — Cash

(4)

London Metals Exchange — Special High Grade — Cash

          On February 27, 2009, the closing prices for silver, gold, lead and zinc were $13.21 per ounce, $952.00 per ounce, $0.48 per pound and $0.51 per pound, respectively.

An extended decline in metals prices may cause us to record write-downs, which could negatively impact our results of operations.

          Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) establishes accounting standards for impairment of the value of long-lived assets such as mining properties. SFAS 144 requires a company to review the recoverability of the cost of its assets by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment, measured by comparing an asset’s carrying value to its fair value, must be recognized when the carrying value of the asset exceeds these cash flows and other variables, and recognizing impairment write-downs could negatively impact our results of operations. Metal price estimates are a key component used in the analysis of the carrying values of our assets. We evaluated the December 31, 2008 carrying values of long-lived assets at our Greens Creek and Lucky Friday segments by comparing them to the average estimated undiscounted cash flows resulting from models using various metals price scenarios. Because the average estimated undiscounted cash flows exceeded the asset carrying values, we did not record impairments as of December 31, 2008. However, if the prices of silver, gold, zinc and lead decline or we fail to control production costs or realize the mineable ore reserves or exploration potential at our mining properties, we may be required to recognize asset write-downs. For example, one model used in our evaluation was based on forward pricing and involved prices for the next seven years ranging from $8.80 to $9.23 per ounce for silver, $776 to $874 per ounce for gold, $0.46 to $0.47 per pound for lead and $0.54 to $0.61 per pound for zinc. This model resulted in estimated undiscounted cash flows that are less than the December 31, 2008 carrying values of long-lived assets at Greens Creek and Lucky Friday. If actual prices for each metal were to fall within these respective ranges for a sustained period of time in the future, we may be required to record write-downs to the carrying value of our long-term assets. We also utilized cash flow models based on the metals prices used in our reserve calculations, consensus metals prices, and historical three-year trailing prices in our review of asset carrying values. These models indicated undiscounted cash flows that exceeded our carry values at December 31, 2008.

The terms of our credit facilities restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions and that, in turn, could impair our ability to meet our obligations.

          Our credit facilities contain various restrictive covenants that limit management’s discretion in operating our business. In particular, these covenants limit our ability to, among other things:

 

 

 

 

incur additional debt;

 

 

 

 

make certain investments or pay dividends or distributions on our capital stock or purchase or redeem or retire capital stock;

 

 

 

 

sell assets, including capital stock of our restricted subsidiaries;

 

 

 

 

restrict dividends or other payments by restricted subsidiaries;

 

 

 

 

create liens;

 

 

 

 

enter into transactions with affiliates; and

 

 

 

 

merge or consolidate with another company.

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          Our credit facilities also require us to satisfy certain financial tests. Our ability to maintain or meet such financial tests may be affected by events beyond our control, including changes in general economic and business conditions, and we cannot provide assurance that we will maintain or meet such tests or that the lenders under our credit facilities will waive any failure to meet such tests.

          These covenants could materially and adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand, to pursue our business strategies, and otherwise to conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot provide assurance that we will be able to comply with them. A breach of these covenants could result in a default under our credit facilities. If there were an event of default under our credit facilities, the affected creditors could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay indebtedness under the credit facilities when it becomes due, the lenders under the credit facilities could proceed against the assets which we have pledged to them as security.

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

          We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. Metal price estimates are a key component used in the determination of our ability to realize the expected future benefit of our deferred tax assets. To the extent that future taxable income differs significantly from estimates as a result of a decline in metals prices or other factors, our ability to realize the deferred tax assets could be impacted. Additionally, future issuances of common stock or common stock equivalents could limit our ability to utilize our net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. Future changes in tax law or changes in ownership structure could limit our ability to obtain future tax benefits. As of December 31, 2008, our current and non-current deferred tax asset balances were $2.5 million and $36.1 million, respectively. See Note 6 of Notes to Condensed Consolidated Financial Statements for further discussion of our deferred tax assets.

The inability to meet the payment obligations of our credit facilities when due could adversely affect our financial results or condition.

          The total outstanding balance of the debt facility at December 31, 2008 was $161.7 million, comprised of $121.7 million for the term facility and $40.0 million related to the bridge facility. On October 16, 2008, the remaining balance of $40 million was extended to February 16, 2009, subject to the requirement that a revised operating plan be submitted to the bank syndicate by November 14, 2008, which revised operating plan was timely submitted. On December 10, 2008, the bank syndicate notified us that the revised operating plan was satisfactory, thereby confirming that the remaining outstanding balance on the bridge loan was due on February 16, 2009. On December 10, 2008, we received a written amendment to the credit facilities from the bank syndicate waiving (for up to $20 million of net proceeds received by us by December 31, 2008) from the requirement that the proceeds of our December 11, 2008 offering of Common Stock Series 1 Warrants and Series 2 Warrants be used for paying down the bridge loan or term loan.

          On December 31, 2008, we announced we had entered into the Third Amendment to the Amended and Restated Credit Agreement (the “Third Amendment”). The Third Amendment moved the $18.3 million quarterly principal payment due on our term facility on December 31, 2008 to February 13, 2009 and also provided us covenant relief for the period ended December 31, 2008, or, in certain instances, February 13, 2009. In exchange for this principal payment deferral and financial covenant relief, we agreed in the Third Amendment to (i) increase the interest rate on our term facility to 6% over LIBOR or 5% over the base rate, (ii) additional reporting requirements, (iii) grant additional security interests on the assets of our domestic subsidiaries with limited exceptions, (iv) have all our domestic subsidiaries guarantee the term facility and bridge facility with limited exceptions, (v) additional limitations on our covenants until February 13, 2009, (vi) keep unencumbered cash on hand in an amount not less than $10 million, (vii) retain a chief restructuring officer and (viii) move the maturity date of the bridge facility from February 16, 2009 to February 13, 2009.

          On February 3, 2009, we announced we had entered into the Fourth Amendment to the Amended and Restated Credit Agreement (the “Fourth Amendment”). The Fourth Amendment deferred all of our scheduled principal payments on our term facility in 2009 so that our next scheduled principal payments are $15 million on March 31, 2010 and on the last day of each calendar quarter thereafter until the maturity date of March 31, 2011 on which the then remaining principal amount is due and payable. In exchange for this principal payment deferral, we agreed in the Fourth Amendment to (i) pay off our bridge facility with funds from an equity or subordinated debt offering of at least $50 million on or before February 12, 2009,

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(ii) pay an additional fee to our lenders upon effectiveness of the Fourth Amendment, and on each subsequent July 1st and January 1st, by issuing to the lenders an aggregate amount of a new Series of 12% Convertible Preferred Stock equal to 3.75% of the aggregate principal amount of the term facility outstanding on such date until the term facility if paid off in full, (iii) revise our financial covenants, including, without limitation, the addition of a liquidity covenant, and extend certain additional limitations on our covenants until the March 31, 2011 maturity date of the term facility, and (iv) make additional mandatory prepayments of our remaining term facility with 75% of our semi-annual excess cash flow and with proceeds we receive from asset sales and the issuance of additional equity and debt, with limited exceptions. The Fourth Amendment became effective upon us meeting certain conditions, including the receipt of net proceeds from an equity offering by February 12, 2009 of at least $50 million and payment of our bridge facility. On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (see Note 21 of Notes to Consolidated Financial Statements for more information).

          As a result of the Fourth Amendment, we will have significant payments due in 2010 and 2011. We may defer some capital investment activities until we secure additional capital, if necessary, to maintain liquidity. We also may pursue additional equity issuances or financing. There can be no assurances that such financing will be available to us. Failure to meet the payment obligations of our credit facilities could cause us to be in default. If there were an event of default under our credit facilities, the affected creditors could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay indebtedness under the credit facilities when it becomes due, the lenders under the credit facilities could proceed against the assets which we have pledged to them as security.

Failure to comply with debt covenants could adversely affect our financial results or condition.

          Our acquisition of the companies owning 70.3% of the Greens Creek mine (see Note 19 of Notes to Consolidated Financial Statements for further discussion) was partially funded by a $380 million debt facility, which included a $140 million three-year term facility and a $240 million bridge facility scheduled to mature in October 2008. We utilized $220 million from the bridge facility at the time of closing the Greens Creek transaction, and the remaining $20 million available balance in September 2008. The total outstanding balance on the credit facilities at December 31, 2008 was $161.7 million, including $40.0 million related to the bridge facility. See “The inability to meet the payment obligations of our credit facilities when due could adversely affect our financial results or condition” above for more information on the status of our credit facilities.

          The credit facilities include various covenants and other limitations related to our indebtedness and investments that require us to maintain certain measures of financial performance. Failure to comply with such provisions could adversely affect our results or financial condition and may limit our ability to obtain financing. See Note 7 of Notes to Consolidated Financial Statements for more information on the debt facility.

Deferral of dividends on our preferred stock may have adverse consequences.

          In December 2008, we announced that we were deferring dividends scheduled for January 1, 2009 on our Series B Preferred Stock and 6.5% Mandatory Convertible Preferred Stock. Failure to pay such dividends will affect our eligibility to file Registration Statements on Form S-3 and our status as a “well-known seasoned issuer” in 2009, which may increase the expense and time associated with both the filing and effectiveness of future Registration Statements and the consummation of future financings. In the event we continue to defer dividends for six dividend periods, our holders of preferred stock will be able to elect two directors.

Returns for Investments in Pension Plans Are Uncertain

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

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OPERATION, DEVELOPMENT, EXPLORATION AND ACQUISITION RISKS

Our foreign operations are subject to additional inherent risks.

          We recently sold our mining operations and assets in Venezuela, but still currently conduct exploration projects in Mexico. Although our exploration activities in Mexico have been curtailed recently to preserve cash, we continue to own assets and real estate and mineral interests in Mexico. We anticipate that we will continue to conduct significant operations in Mexico and possibly other international locations in the future. Because we conduct operations internationally, we are subject to political and economic risks such as:

 

 

 

 

the effects of local political, labor and economic developments and unrest;

 

 

 

 

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

 

 

 

 

exchange controls and export restrictions;

 

 

 

 

expropriation or nationalization of assets with inadequate compensation;

 

 

 

 

currency fluctuations and repatriation restrictions;

 

 

 

 

invalidation of governmental orders, permits or agreements;

 

 

 

 

renegotiation or nullification of existing concessions, licenses, permits and contracts;

 

 

 

 

recurring tax audits and delays in processing tax credits tax credits or refunds;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

fuel or other commodity shortages;

 

 

 

 

illegal mining;

 

 

 

 

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

 

 

 

 

civil disturbances, war and terrorist actions; and

 

 

 

 

seizures of assets.

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

We may be subject to a number of unanticipated risks related to inadequate infrastructure.

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

Our development of new orebodies and other capital costs may cost more and provide less return than we estimated.

          Capitalized development projects may cost more and provide less return than we estimate. If we are unable to realize a return on these investments, we may incur a related asset write-down that could adversely affect our financial results or condition.

          Our ability to sustain or increase our current level of production of metals partly depends on our ability to develop new orebodies and/or expand existing mining operations. Before we can begin a development project, we must first determine whether it is economically feasible to do so. This determination is based on estimates of several factors, including:

 

 

 

 

ore reserves;

 

 

 

 

expected recovery rates of metals from the ore;

 

 

 

 

future metals prices;

 

 

 

 

facility and equipment costs;

 

 

 

 

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

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exploration and drilling success;

 

 

 

 

capital and operating costs of a development project;

 

 

 

 

environmental considerations and permitting;

 

 

 

 

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

 

 

 

 

applicable tax rates;

 

 

 

 

assumptions used in determining the value of our pension plan assets and liabilities;

 

 

 

 

foreign currency fluctuation and inflation rates; and

 

 

 

 

availability of financing.

          These estimates are based on geological and other interpretive data, which may be imprecise. As a result, actual operating and capital costs and returns from a development project may differ substantially from our estimates as a result of which it may not be economically feasible to continue with a development project.

Our ore reserve estimates may be imprecise.

          Our ore reserve figures and costs are primarily estimates and are not guarantees that we will recover the indicated quantities of these metals. You are strongly cautioned not to place undue reliance on estimates of reserves. Reserves are estimates made by our professional technical personnel, and no assurance can be given that the estimated amount of metal or the indicated level of recovery of these metals will be realized. Reserve estimation is an interpretive process based upon available data and various assumptions. Our reserve estimates, particularly those for properties that have not yet started producing, may change based on actual production experience. Further, reserves are valued based on estimates of costs and metals prices, which may not be consistent among our operating and non-operating properties. The economic value of ore reserves may be adversely affected by:

 

 

 

 

declines in the market price of the various metals we mine;

 

 

 

 

increased production or capital costs;

 

 

 

 

reduction in the grade or tonnage of the deposit;

 

 

 

 

increase in the dilution of the ore; and

 

 

 

 

reduced recovery rates.

          Short-term operating factors relating to our ore reserves, such as the need to sequentially develop orebodies and the processing of new or different ore grades, may adversely affect our cash flow. We may use forward sales contracts and other hedging techniques to partially offset the effects of a drop in the market prices of the metals we mine. However, if the prices of metals that we produce decline substantially below the levels used to calculate reserves for an extended period, we could experience:

 

 

 

 

delays in new project development;

 

 

 

 

net losses;

 

 

 

 

reduced cash flow;

 

 

 

 

reductions in reserves; and

 

 

 

 

write-downs of asset values.

Efforts to expand the finite lives of our mines may not be successful, which could hinder our growth and decrease the value of our stock.

          One of the risks we face is that our mines have a relatively small amount of proven and probable reserves, primarily because we have low volume, underground operations. Thus, we must continually replace depleted ore reserves. Our ability to expand or replace ore reserves primarily depends on the success of our exploration programs. Mineral exploration, particularly for silver and gold, is highly speculative and expensive. It involves many risks and is often non-productive. Even if we believe we have found a valuable mineral deposit, it may be several years before production from that deposit is possible. During that time, it may become no longer feasible to produce those minerals for economic, regulatory, political or other reasons. As a result of high costs and other uncertainties, we may not be able to expand or replace our existing ore reserves as they are depleted, which would adversely affect our business and financial position in the future.

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Our joint development and operating arrangements may not be successful.

          We have entered into, and may in the future enter into joint venture arrangements in order to share the risks and costs of developing and operating properties. In a typical joint venture arrangement, the partners own a proportionate share of the assets, are entitled to indemnification from each other and are only responsible for any future liabilities in proportion to their interest in the joint venture. If a party fails to perform its obligations under a joint venture agreement, we could incur liabilities and losses in excess of our pro-rata share of the joint venture. We make investments in exploration and development projects that may have to be written off in the event we do not proceed to a commercially viable mining operation.

          On February 21, 2008, we announced that our wholly-owned subsidiary, Rio Grande Silver Inc., acquired the right to earn into a 70% joint venture interest in an approximately 25-square-mile consolidated land package in the Creede Mining District of Colorado. For more information on the terms of the agreement, see Note 19 of Notes to Consolidated Financial Statements.

Our ability to market our metals production may be affected by disruptions or closures of custom smelters and/or refining facilities.

          We sell substantially all of our metallic concentrates to custom smelters, with our doré bars sent to refiners for further processing before being sold to metal traders. If our ability to sell concentrates to our contracted smelters becomes unavailable to us, it is possible our operations could be adversely affected. See Note 12 of Notes to Consolidated Financial Statements for more information on the distribution of our sales and our significant customers.

Efforts to reduce costs may not be successful or may have adverse consequences.

          In order to improve our cash position, we have taken a number of actions to reduce costs, including staff reductions and delaying or canceling exploration, development, and capital projects. These cost reduction efforts may not significantly reduce costs, particularly in the short term, and may adversely affect our current and future operations, production, reserves, regulatory posture, operating infrastructure, and financial results.

We face inherent risks in acquisitions of other mining companies or properties that may adversely impact our growth strategy.

          Mines have limited lives, which is an inherent risk in acquiring mining properties. We are actively seeking to expand our mineral reserves by acquiring other mining companies or properties. Although we are pursuing opportunities that we feel are in the best interest of our investors, these pursuits are costly and often unproductive. Inherent risks in acquisitions we may undertake in the future could adversely affect our current business and financial condition and our growth.

          There is a limited supply of desirable mineral lands available in the United States and foreign countries where we would consider conducting exploration and/or production activities, and any acquisition we may undertake is subject to inherent risks. In addition to the risk associated with limited mine lives, we may not realize the value of the companies or properties that are acquired due to a possible decline in metals prices, failure to obtain permits, labor problems, changes in regulatory environment, an inability to obtain financing and other factors previously described. Acquisitions of other mining companies or properties may also expose us to new geographic, political, operating, and geological risks. In addition, we face strong competition for companies and properties from other mining companies, some of which have greater financial resources than we do, and we may be unable to acquire attractive companies and mining properties on terms that we consider acceptable.

Our business depends on good relations with our employees.

          We are dependent upon the ability and experience of our executive officers, managers, employees and other personnel, including those residing outside of the U.S., and there can be no assurance that we will be able to retain all of such employees. We compete with other companies both within and outside the mining industry in connection with the recruiting and retention of qualified employees knowledgeable of the mining business. Due to the relatively small size of our management team, the loss of these persons or our inability to attract and retain additional highly skilled employees could have an adverse effect on our business and future operations. Our labor contract with our employees at our Lucky Friday unit expires on April 30, 2009. Although we intend to negotiate a new agreement on a timely basis, there can be no assurance that we will do so or that the terms of any new agreement will be favorable to us.

Mining accidents or other adverse events at an operation could decrease our anticipated production.

          Production may be reduced below our historical or estimated levels as a result of mining accidents; unfavorable ground conditions; work stoppages or slow-downs; lower than expected ore grades; the metallurgical characteristics of the ore are less economical than anticipated; or our equipment or facilities fail to operate properly or as expected.

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Our operations may be adversely affected by risks and hazards associated with the mining industry that may not be fully covered by insurance.

          Our business is subject to a number of risks and hazards including:

 

 

 

 

environmental hazards;

 

 

 

 

political and country risks;

 

 

 

 

civil unrest or terrorism;

 

 

 

 

industrial accidents;

 

 

 

 

labor disputes or strikes;

 

 

 

 

unusual or unexpected geologic formations;

 

 

 

 

cave-ins;

 

 

 

 

explosive rock failures; and

 

 

 

 

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

 

 

 

 

Such risks could result in:

 

 

 

 

personal injury or fatalities;

 

 

 

 

damage to or destruction of mineral properties or producing facilities;

 

 

 

 

environmental damage;

 

 

 

 

delays in exploration, development or mining;

 

 

 

 

monetary losses; and

 

 

 

 

legal liability.

          We maintain insurance to protect against losses that may result from some of these risks at levels consistent with our historical experience, industry practice and circumstances surrounding each identified risk. Insurance against environmental risks is generally either unavailable or, we believe, too expensive for us, and we therefore do not maintain environmental insurance. Occurrence of events for which we are not insured may have an adverse effect on our business.

LEGAL, MARKET AND REGULATORY RISKS

We are currently involved in ongoing legal disputes that may materially adversely affect us.

          There are several ongoing legal disputes in which we are involved. If any of these disputes results in a substantial monetary judgment against us, is settled on unfavorable terms or otherwise impacts our operations, our financial results or condition could be materially adversely affected. For example, we may ultimately incur environmental remediation costs substantially in excess of the amounts we have accrued and the plaintiffs in environmental proceedings may be awarded substantial damages, which costs and damages we may not be able to recover from our insurers. For a description of the lawsuits in which we are involved, see Note 8 of Notes to Consolidated Financial Statements.

We are required to obtain governmental and lessor approvals and permits in order to conduct mining operations.

          In the ordinary course of business, mining companies are required to seek governmental and lessor approvals and permits for expansion of existing operations or for the commencement of new operations. Obtaining the necessary governmental permits is a complex, time-consuming and costly process. The duration and success of our efforts to obtain permits are contingent upon many variables not within our control. Obtaining environmental permits, including the approval of reclamation plans, may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority. There can be no assurance that all necessary approvals and permits will be obtained and, if obtained, that the costs involved will not exceed those that we previously estimated. It is possible that the costs and delays associated with the compliance with such standards and regulations could become such that we would not proceed with the development or operation.

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We face substantial governmental regulation and environmental risk.

          Our business is subject to extensive U.S. and foreign, federal, state and local laws and regulations governing development, production, labor standards, occupational health, waste disposal, use of toxic substances, environmental regulations, mine safety and other matters. See risk titled “Our environmental remediation obligations may exceed the provisions we have made.” We have been and are currently involved in lawsuits or disputes in which we have been accused of causing environmental damage, violating environmental laws, or violating environmental permits, and we may be subject to similar lawsuits or disputes in the future. New legislation and regulations may be adopted or permit lmits reduced at any time that result in additional operating expense, capital expenditures or restrictions and delays in the mining, production or development of our properties.

          From time to time, the U.S. Congress considers proposed amendments to the General Mining Law of 1872, as amended, which governs mining claims and related activities on federal lands. The extent of any future changes is not known and the potential impact on us as a result of U.S. Congressional action is difficult to predict. Although a majority of our existing U.S. mining operations occur on private or patented property, changes to the General Mining Law, if adopted, could adversely affect our ability to economically develop mineral reserves on federal lands.

Our environmental remediation obligations may exceed the provisions we have made.

          We are subject to significant environmental obligations, particularly in northern Idaho. At December 31, 2008, we had accrued $121.3 million as a provision for environmental remediation, $85.1 million of which relates to our various liabilities in Idaho, and there is a significant risk that the costs of remediation could materially exceed this provision. For an overview of our potential environmental liabilities, see Note 8 of Notes to Consolidated Financial Statements.

The titles to some of our properties may be defective or challenged.

          Unpatented mining claims constitute a significant portion of our undeveloped property holdings, the validity of which could be uncertain and may be contested. Although we have conducted title reviews of our property holdings, title review does not necessarily preclude third parties from challenging our title. In accordance with mining industry practice, we do not generally obtain title opinions until we decide to develop a property. Therefore, while we have attempted to acquire satisfactory title to our undeveloped properties, some titles may be defective.

The price of our stock has a history of volatility and could decline in the future.

          Our common and preferred stocks are listed on the New York Stock Exchange. The market price for our stock has been volatile, often based on:

 

 

 

 

fluctuating proven and probable reserves;

 

 

 

 

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

 

 

 

 

changes in metals prices, particularly silver and gold;

 

 

 

 

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

 

 

 

 

political and regulatory risk;

 

 

 

 

the success of our exploration programs;

 

 

 

 

ability to meet production estimates;

 

 

 

 

environmental and legal risk;

 

 

 

 

the extent of analytical coverage concerning our business; and

 

 

 

 

the trading volume and general market interest in our securities.

          The market price of our stock at any given point in time may not accurately reflect our long-term value, and may prevent shareholders from realizing a profit on their investment.

Our Series B Preferred Stock has a liquidation preference of $50 per share or $8.0 million.

          If we were liquidated, holders of our preferred stock would be entitled to receive approximately $8.0 million (plus any accrued and unpaid dividends) from any liquidation proceeds before holders of our Common Stock would be entitled to receive any proceeds. Our Series B Preferred Stock ranks on parity with our Mandatory Convertible Preferred Stock and our new 12% Convertible Preferred Stock.

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Our Mandatory Convertible Preferred Stock has a liquidation preference of $100 per share or $204.5 million.

          If we were liquidated, holders of our preferred stock would be entitled to receive approximately $204.5 million (plus any accrued and unpaid dividends) from any liquidation proceeds before holders of our Common Stock would be entitled to receive any proceeds. Our Mandatory Convertible Preferred Stock ranks on parity with our Series B Preferred Stock and our new 12% Convertible Preferred Stock.

Our 12% Convertible Preferred Stock has a liquidation preference of $100 per share or $4.3 million.

          If we were liquidated, holders of our 12% Convertible Preferred Stock would be entitled to receive approximately $4.3 million (plus any accrued and unpaid dividends) from any liquidation proceeds before holders of Common Stock would be entitled to receive any proceeds. Additional shares of 12% Convertible Preferred Stock may be issued in accordance with the provisions of our credit facilities. Our 12% Convertible Preferred Stock ranks on parity with our Series B Preferred Stock and our Mandatory Convertible Preferred Stock. See Note 21 of Notes to Consolidated Financial Statements for more information on our 12% Convertible Preferred Stock.

We may not be able to pay preferred stock dividends in the future.

          Since July 2005, we have continued to pay regular quarterly dividends on our Series B Cumulative Convertible Preferred Stock through the third quarter of 2008. The annual dividend payable on the Series B preferred stock is currently $0.6 million. Prior to the fourth quarter of 2004, we had not declared preferred dividends on Series B preferred stock since the second quarter of 2000. In December 2007, we issued 6.5% Mandatory Convertible Preferred Stock with an annual dividend of $13.1 million, each of which quarterly dividend payments have been made through the third quarter of 2008. Series B and Mandatory Convertible preferred stock dividends due on January 1, 2009 for the fourth quarter of 2008 were deferred. Failure to pay such dividends for six dividend periods will enable our holders of preferred stock to elect two directors. There can be no assurance that we will continue to pay dividends in the future.

Additional issuances of equity securities by us would dilute the ownership of our existing stockholders and could reduce our earnings per share.

          We may issue equity in the future in connection with acquisitions, strategic transactions or for other purposes. Any such acquisition could be material to us and could significantly increase the size and scope of our business, including our market capitalization. We may also be required to issue Common Stock upon the conversion of our Mandatory Convertible Preferred Stock and may pay dividends on our Mandatory Convertible Preferred Stock in shares of our Common Stock. To the extent we issue any additional equity securities, the ownership of our existing stockholders would be diluted and our earnings per share could be reduced.

          On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (see Note 21 of Notes to Consolidated Financial Statements for more information).

The issuance of additional shares of our preferred stock or common stock in the future could adversely affect holders of Common Stock.

          The market price of our Common Stock is likely to be influenced by our preferred stock. For example, the market price of our Common Stock could become more volatile and could be depressed by:

 

 

 

 

investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our Common Stock received upon conversion of the Mandatory Convertible Preferred Stock or as dividends thereon; and

 

 

 

 

our failure to pay dividends on our currently outstanding Series B Preferred Stock or Mandatory Convertible Preferred Stock, which would prevent us from paying dividends to holders of our Common Stock.

          In addition, our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of our stockholders. This includes the power to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over Common Stock with respect to dividends or upon the liquidation, dissolution or winding up of the business and other terms. If we issue preferred stock in the future that has preference over our Common Stock with respect to the payment of dividends or upon liquidation,

14


Table of Contents

dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Common Stock, the rights of holders of the Common Stock or the market price of the Common Stock could be adversely affected.

          On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, our term loan was also reduced by approximately $8 million in February 2009 (see Note 21 of Notes to Consolidated Financial Statements for more information).

If a large number of shares of our Common Stock is sold in the public market, the sales could reduce the trading price of our Common Stock and impede our ability to raise future capital.

          We cannot predict what effect, if any, future issuances by us of our Common Stock or other equity will have on the market price of our Common Stock. In addition, shares of our Common Stock that we issue in connection with an acquisition may not be subject to resale restrictions. We may issue substantial additional shares of Common Stock or other securities in connection with material acquisition transactions. The market price of our Common Stock could decline if certain large holders of our Common Stock, or recipients of our Common Stock in connection with an acquisition, sell all or a significant portion of their shares of Common Stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could also impair our ability to raise capital through the sale of additional Common Stock in the capital markets.

          On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units comprised for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (see Note 21 of Notes to Consolidated Financial Statements for more information).

Common Stock issued pursuant to subsequent offerings or eligible for future issuance or sale may cause the Common Stock price to decline, which may negatively impact your investment.

          We may issue substantial additional shares of Common Stock or other securities in connection with acquisition transactions or for other purposes, to the extent permitted by our credit facilities. Any such acquisition could be material to us and could significantly increase the size and scope of our business. Issuances or sales of substantial amounts of additional Common Stock or the perception that such issuances or sales could occur, may cause prevailing market prices for our Common Stock to decline and could result in dilution to our stockholders. See Legal, Market and Regulatory Risks — Additional issuances of equity securities by us would dilute the ownership of our existing stockholders and could reduce our earnings per share and If a large number of shares of our Common Stock is sold in the public market, the sales could reduce the trading price of our Common Stock and impede our ability to raise future capital.

          On February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (see Note 21 of Notes to Consolidated Financial Statements for more information).

The provisions in our certificate of incorporation, our by-laws and Delaware law could delay or deter tender offers or takeover attempts that may offer a premium for our Common Stock.

          The provisions in our certificate of incorporation, our by-laws and Delaware law could make it more difficult for a third party to acquire control of us, even if that transaction would be beneficial to stockholders. These impediments include:

 

 

 

 

the classification of our board of directors into three classes serving staggered three-year terms, which makes it more difficult to quickly replace board members;

 

 

 

 

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

 

 

 

 

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

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Table of Contents

 

 

 

 

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

 

 

 

 

a prohibition against action by written consent of our stockholders;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

          The existence of these provisions may deprive stockholders of an opportunity to sell our stock at a premium over prevailing prices. The potential inability of our stockholders to obtain a control premium could adversely affect the market price for our Common Stock.

If we cannot meet the New York Stock Exchange continued listing requirements, the NYSE may delist our Common Stock.

          Our Common Stock is currently listed on the NYSE. In the future, we may not be able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days. Our closing stock price on February 27, 2008 was $1.52.

          If we are unable to satisfy the NYSE criteria for continued listing, our Common Stock would be subject to delisting. A delisting of our Common Stock could negatively impact us by, among other things, reducing the liquidity and market price of our Common Stock; reducing the number of investors willing to hold or acquire our Common Stock, which could negatively impact our ability to raise equity financing; decreasing the amount of news and analyst coverage for the Company; and limiting our ability to issue additional securities or obtain additional financing in the future. In addition, delisting from the NYSE might negatively impact our reputation and, as a consequence, our business.

Item 1B. Unresolved Staff Comments

          None.

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Table of Contents

Item 2. Property Descriptions

OPERATING PROPERTIES

The Greens Creek Unit

          On April 16, 2008, we completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine for approximately $750 million. The acquisition gives our various subsidiaries control of 100% of the Greens Creek mine, as our wholly-owned subsidiary, Hecla Alaska LLC, owned an undivided 29.7% joint venture interest in the assets of Greens Creek prior to our acquisition of the remaining 70.3% interest.

          The Greens Creek orebody contains silver, zinc, gold and lead, and lies adjacent to the Admiralty Island National Monument, an environmentally sensitive area. The Greens Creek property includes 17 patented lode claims and one patented mill site claim, in addition to property leased from the U.S. Forest Service. Greens Creek also has title to mineral rights on 7,500 acres of federal land adjacent to the properties. The entire project is accessed by boat and served by 13 miles of road and consists of the mine, an ore concentrating mill, a tailings impoundment area, a ship-loading facility, camp facilities and a ferry dock. The map below illustrates the location and access to Greens Creek:

(MAP)

          The Greens Creek deposit is a polymetallic, stratiform, massive sulfide deposit. The host rock consists of predominantly marine sedimentary, and mafic to ultramafic volcanic and plutonic rocks, which have been subjected to multiple periods of deformation. These deformational episodes have imposed intense tectonic fabrics on the rocks. Mineralization occurs discontinuously along the contact between a structural hanging wall of quartz mica carbonate phyllites and a structural footwall of graphitic and calcareous argillite. Major sulfide minerals are pyrite, sphalerite, galena, and tetrahedrite/tennanite.

          Pursuant to a 1996 land exchange agreement, the joint venture transferred private property equal to a value of $1.0 million to the U.S. Forest Service and received exploration and mining rights to approximately 7,500 acres of land with mining potential surrounding the existing mine. Production from new ore discoveries on the exchanged lands will be subject to federal royalties included in the land exchange agreement. The royalty is only due on production from reserves that are not part of Greens Creek’s extralateral rights. Thus far, there has been no discovery triggering payment of the royalty. The royalty is 3% if the average value of the ore during a year is greater than $120 per ton of ore, and 0.75% if the value is $120 per ton or less. The benchmark of $120 per ton is adjusted annually according to the Gross Domestic Product (GDP) Implicit Price Deflator until the year 2016, and at December 31, 2008, was at approximately $157 per ton when applying the latest GDP Implicit Price Deflator observation.

          Greens Creek is an underground mine which produces approximately 2,100 tons of ore per day. The primary mining methods are cut and fill and longhole stoping. The ore is processed on site at a mill, which produces lead, zinc and bulk concentrates, as well as doré containing silver and gold. In 2008, ore was processed at an average rate of approximately 2,008 tons per day. During 2008, mill recovery totaled approximately 73% silver, 87% zinc, 78% lead and 64% gold. The doré is sold to a precious metal refiner and on the open market and the three concentrate products are sold to a number of major smelters worldwide. Concentrates are shipped from a marine terminal located on Admiralty Island about nine miles from the mine site.

          The Greens Creek unit has historically been powered completely by diesel generators located on site. However, an agreement was reached during 2005 to purchase excess hydroelectric power from the local power company. Installation of the necessary infrastructure was completed in 2006, and use of hydroelectric power commenced during the third quarter of 2006. Low lake levels and increased demand in the Juneau area have combined to decrease power available to Greens Creek, and it is unlikely that Greens Creek will obtain significant utility power until 2010.

          The employees at Greens Creek are employees of our Hecla Greens Creek Mining Company, our wholly-owned subsidiary, and are not represented by a bargaining agent. There were 336 employees at the Greens Creek unit at December 31, 2008. All equipment, infrastructure and facilities, including camp and concentrate storage facilities, are in good condition.

          As of December 31, 2008, we have recorded a $30.0 million asset retirement obligation for reclamation and closure costs. In August 2008, we obtained the release of our trust fund balance of $30.4 million previously held for future reclamation at Greens Creek, replacing it with a $30 million bond secured by the restricted cash balance of $7.6 million. The net book value of the Greens Creek unit property and its associated plant, equipment and mineral interests was approximately $738.4 million as of December 31, 2008.

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Table of Contents

          For 2007 and 2006, prior to our acquisition of the remaining 70.3% interest in Greens Creek, Kennecott Greens Creek Mining Company’s geology and engineering staff computed the estimated ore reserves, and provided the weighted average metals prices used in the reserve estimates, for the Greens Creek unit, with our technical support. We reviewed the geologic interpretation and reserve methodology, but the reserve compilations for those periods were not independently confirmed by us in their entirety. Information with respect to production, average costs per ounce of silver produced and proven and probable ore reserves is set forth in the following table, and represents our 100% ownership of Greens Creek after April 16, 2008, and our previous 29.7% ownership prior to that date.

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

Production (6)

 

2008

 

2007

 

2006

 

Ore milled (tons)

 

 

598,931

 

 

217,691

 

 

217,676

 

Silver (ounces)

 

 

5,829,253

 

 

2,570,701

 

 

2,636,083

 

Gold (ounces)

 

 

54,650

 

 

20,218

 

 

18,713

 

Zinc (tons)

 

 

52,055

 

 

18,612

 

 

17,670

 

Lead (tons)

 

 

16,630

 

 

6,252

 

 

6,242

 

 

 

 

 

 

 

 

 

 

 

 

Average Cost per Ounce of Silver Produced (1)

 

 

 

 

 

 

 

 

 

 

Total cash costs

 

$

3.29

 

$

(5.27

)

$

(3.47

)

Total production costs

 

$

8.52

 

$

(1.93

)

$

(0.30

)

 

 

 

 

 

 

 

 

 

 

 

Probable Ore Reserves (2,3,4,5,6,7)

 

 

 

 

 

 

 

 

 

 

Total tons

 

 

8,064,700

 

 

2,513,700

 

 

2,282,574

 

Silver (ounces per ton)

 

 

13.7

 

 

13.7

 

 

14.4

 

Gold (ounces per ton)

 

 

0.11

 

 

0.11

 

 

0.11

 

Zinc (percent)

 

 

10.5

 

 

10.2

 

 

10.4

 

Lead (percent)

 

 

3.8

 

 

3.8

 

 

4.0

 

Contained silver (ounces)

 

 

110,583,200

 

 

34,497,800

 

 

32,913,002

 

Contained gold (ounces)

 

 

870,100

 

 

270,000

 

 

257,101

 

Contained zinc (tons)

 

 

850,700

 

 

255,900

 

 

237,187

 

Contained lead (tons)

 

 

308,700

 

 

95,300

 

 

90,919

 

 

 

 

 

 

(1)

Includes by-product credits from gold, lead and zinc production. Cash costs per ounce of silver represent measurements that are not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Item 7. — MD&A, under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

 

 

(2)

Estimates of proven and probable ore reserves for the Greens Creek unit as of December 2008, 2007 and 2006 are derived from successive generations of reserve and feasibility analyses for different areas of the mine each using a separate assessment of metals prices. The weighted average prices used for 2007 and 2006 reserve estimates were determined by the Kennecott Greens Creek Mining Company, then an indirect subsidiary of Rio Tinto, plc, and differ from the prices used by us, for example, in making such calculations for our Lucky Friday unit for those years. The average prices used for the Greens Creek unit were:


 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

Silver (per ounce)

 

$

12.25

 

$

8.00

 

$

6.00

 

Gold (per ounce)

 

$

650

 

$

529

 

$

446

 

Lead (per pound)

 

$

0.80

 

$

0.27

 

$

0.27

 

Zinc (per pound)

 

$

0.80

 

$

0.58

 

$

0.47

 


 

 

(3)

Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Mill recoveries of ore reserve grades differ by ore zones and are expected to average 74% for silver, 68% for gold, 77% for zinc and 73% for lead.

 

 

(4)

The changes in reserves in 2008 versus 2007 and 2006 are due to the our acquisition of the remaining 70.3% of Greens Creek, as discussed above, along with the addition of new drill data and increases in forecasted precious metals prices, partially offset by depletion due to production. The changes in reserves in 2007 versus 2006 are due to the addition of new drill data and increases in forecasted precious metals prices, which have resulted in the addition of new reserves based on updated estimates for certain orebodies, partially offset by depletion due to production.

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Table of Contents

 

 

(5)

We only report probable reserves at the Greens Creek unit, which are based on average drill spacing of 50 to 100 feet. Proven reserves typically require that mining samples are partly the basis of the ore grade estimates used, while probable reserve grade estimates can be based entirely on drilling results. Cutoff grade assumptions vary by orebody and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs. Cutoff grades range from $97 per ton net smelter return to $107 per ton net smelter return.

 

 

(6)

Reflects our 29.7% ownership interest until April 16, 2008, and our 100% ownership thereafter.

 

 

(7)

An independent review by AMEC E&C, Inc. was completed in 2008 for the 2007 reserve models for the 5250N and Northwest West zones.

The Lucky Friday Unit

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

(MAP)

          There have been two ore-bearing structures mined at the Lucky Friday unit. The first, mined through 2001, was the Lucky Friday vein, a fissure vein typical of many in the Coeur d’Alene Mining District. The orebody is located in the Revett Formation, which is known to provide excellent host rocks for a number of orebodies in the Coeur d’Alene Mining District. The Lucky Friday vein strikes northeasterly and dips steeply to the south with an average width of six to seven feet. Its principal ore minerals are galena and tetrahedrite with minor amounts of sphalerite and chalcopyrite. The ore occurs as a single continuous orebody in and along the Lucky Friday vein. The major part of the orebody has extended from the 1,200-foot level to and below the 6,020-foot level.

          The second ore-bearing structure, known as the Lucky Friday Expansion Area, has been mined since 1997 pursuant to an operating agreement with Independence Lead Mines Company (“Independence’). During 1991, we discovered several mineralized structures containing some high-grade silver ores in an area known as the Gold Hunter property, approximately 5,000 feet northwest of the then existing Lucky Friday workings. This discovery led to the development of the Gold Hunter property on the 4900 level. On November 6, 2008, we completed the acquisition of substantially all of the assets of Independence, including the mining claims pertaining to their agreement with us that includes all future interest or royalty obligation to Independence (see Note 19 of Notes to Consolidated Financial Statements for further discussion). Prior to the acquisition, we controlled the Gold Hunter property under a long-term operating agreement with Independence that was to expire in February 2018 and was renewable thereafter, that entitled us, as operator, to an 81.48% interest in the net profits from operations from the Gold Hunter property. Under that agreement, we would have been obligated to pay a net profits interest of 18.52% to Independence after we have recouped our costs to explore and develop the property.

          The principal mining method at the Lucky Friday unit is ramp access, cut and fill. This method utilizes rubber-tired equipment to access the veins through ramps developed outside of the orebody. Once a cut is taken along the strike of the vein, it is backfilled with cemented tailings and the next cut is accessed, either above or below, from the ramp system.

          The ore produced from Lucky Friday is processed in a conventional flotation mill, which produces both a silver-lead concentrate and a zinc concentrate. In 2008, ore was processed at an average rate of approximately 875 tons per day. During 2008, mill recovery totaled approximately 93% silver, 93% lead and 83% zinc. All silver-lead and zinc concentrate production during 2008 was shipped to Teck Cominco Limited’s smelter in Trail, British Columbia, Canada.

           Information with respect to the Lucky Friday unit’s production, average cost per ounce of silver produced and proven and probable ore reserves for the past three years is set forth in the table below.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

Production

 

 

2008

 

2007

 

2006

 

Ore milled (tons)

 

 

317,777

 

 

323,659

 

 

276,393

 

Silver (ounces)

 

 

2,880,264

 

 

3,071,857

 

 

2,873,663

 

Lead (tons)

 

 

18,393

 

 

18,297

 

 

16,657

 

Zinc (tons)

 

 

9,386

 

 

8,009

 

 

6,537

 

 

 

 

 

 

 

 

 

 

 

 

Average Cost per Ounce of Silver Produced (1)

 

 

 

 

 

 

 

 

 

 

Total cash costs

 

$

6.06

 

$

(0.75

)

$

3.65

 

Total production costs

 

$

7.87

 

$

0.52

 

$

4.90

 

 

 

 

 

 

 

 

 

 

 

 

Proven Ore Reserves (2,3,4)

 

 

 

 

 

 

 

 

 

 

Total tons

 

 

1,270,000

 

 

760,700

 

 

628,976

 

Silver (ounces per ton)

 

 

12.4

 

 

12.3

 

 

13.1

 

Lead (percent)

 

 

7.8

 

 

7.2

 

 

8.2

 

Zinc (percent)

 

 

2.5

 

 

2.5

 

 

2.8

 

Contained silver (ounces)

 

 

15,800,800

 

 

9,324,800

 

 

8,245,675

 

Contained lead (tons)

 

 

98,700

 

 

54,500

 

 

51,322

 

Contained zinc (tons)

 

 

31,600

 

 

18,900

 

 

17,548

 

 

 

 

 

 

 

 

 

 

 

 

Probable Ore Reserves (2,3,4)

 

 

 

 

 

 

 

 

 

 

Total tons

 

 

523,400

 

 

680,000

 

 

732,920

 

Silver (ounces per ton)

 

 

11.6

 

 

11.9

 

 

13.5

 

Lead (percent)

 

 

6.5

 

 

7.5

 

 

8.2

 

Zinc (percent)

 

 

2.7

 

 

2.5

 

 

2.9

 

Contained silver (ounces)

 

 

6,046,800

 

 

8,065,200

 

 

9,890,120

 

Contained lead (tons)

 

 

33,900

 

 

50,900

 

 

60,284

 

Contained zinc (tons)

 

 

14,300

 

 

16,700

 

 

21,606

 

 

 

 

 

 

 

 

 

 

 

 

Total Proven and Probable Ore Reserves (2,3,4)

 

 

 

 

 

 

 

 

 

 

Total tons

 

 

1,793,400

 

 

1,440,700

 

 

1,361,896

 

Silver (ounces per ton)

 

 

12.2

 

 

12.1

 

 

13.3

 

Lead (percent)

 

 

7.4

 

 

7.3

 

 

8.2

 

Zinc (percent)

 

 

2.6

 

 

2.5

 

 

2.9

 

Contained silver (ounces)

 

 

21,847,500

 

 

17,390,000

 

 

18,135,795

 

Contained lead (tons)

 

 

132,600

 

 

105,400

 

 

111,606

 

Contained zinc (tons)

 

 

45,900

 

 

35,600

 

 

39,154

 


 

 

 

(1)

Includes by-product credits from lead and zinc production. Cash costs per ounce of silver or gold represent measurements that are not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

 

 

(2)

Proven and probable ore reserves are calculated and reviewed in-house and are subject to periodic audit by others, although audits are not performed on an annual basis. Cutoff grade assumptions vary by ore body and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs. Due to multiple ore metals, and complex combinations of ore types, metal ratios and metallurgical performances at the Lucky Friday, the cutoff grade is expressed in terms of net smelter return (“NSR”), rather than metal grade. The cutoff grade at the Lucky Friday ranges from $66 per ton NSR to $85 per ton NSR. Our estimates of proven and probable reserves are based on the following metals prices:

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Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

2008

 

2007

 

2006

 

 

Silver (per ounce)

 

$

12.25

 

$

10.00

 

$

8.00

 

 

Lead (per pound)

 

$

0.80

 

$

0.60

 

$

0.42

 

 

Zinc (per pound)

 

$

0.80

 

$

1.00

 

$

0.67

 


 

 

(3)

Reserves are in-place materials that incorporate estimates of the amount of waste that must be mined along with the ore and expected mining recovery. Mill recoveries are expected to be 95% for silver, 94% for lead and 87% for zinc. Zinc recovery has improved from historical levels due to mill upgrades completed during 2007, 2006 and 2005.

 

 

(4)

The changes in reserves in 2008 versus 2007, and in 2007 versus 2006, are due to addition of data from new drill holes and development work together with increases in forecast metals prices, which has resulted in the addition of new reserves based on updated estimates, partially offset by depletion due to production.

 

 

          During 2008, we initiated engineering, procurement and development activities relating to construction of an internal shaft at the Lucky Friday mine, which, upon completion, would provide access from the 6200 level down to the 8000 level in the mine. This new infrastructure would allow us to mine mineralized material below our current workings on the 5900 level, and also provide a deeper exploration platform. Activities for this project thus far have included: engineering, purchase of some equipment including hoists and service trucks, and pre-development construction from existing workings to the shaft collar, hoist room and other smaller facilities on the 4900 level. However, the project has been placed on hold due to decreases in metals prices during the second half of 2008; allowing time for additional internal study and review of deep access alternatives at the Lucky Friday. As a result, the timing and extent of future work on the internal shaft project is uncertain at this time.

          Ultimate reclamation activities are anticipated to include stabilization of tailings ponds and waste rock areas. No final reclamation activities were performed in 2008, and at December 31, 2008, an asset retirement obligation of approximately $0.9 million had been recorded for reclamation and closure costs. The net book value of the Lucky Friday unit property and its associated plant, equipment and mineral interests was approximately $95.8 million as of December 31, 2008. The construction of the facilities at Lucky Friday ranges from the 1950s to 2008, and all are in good physical condition. In 2005, 2006 and 2007, we made capital improvements to our processing plant to improve concentrate grades and metal recoveries. Additions included a three-stage crushing system, increased flotation capacity and two new flash cells, new column cells and tailings thickeners, and an on-stream analyzer. The plant is maintained by our employees with assistance from outside contractors as required.

          At December 31, 2008, there were 269 employees at the Lucky Friday unit. The United Steelworkers of America is the bargaining agent for the Lucky Friday’s 211 hourly employees. The current labor agreement expires on April 30, 2009. Avista Corporation supplies electrical power to the Lucky Friday unit.

EXPLORATION PROPERTIES

The San Sebastian Unit

          The San Sebastian mine is located approximately 56 miles northeast of the city of Durango, Mexico, on concessions acquired in 1999. Access to San Sebastian is via Mexico Highway 40, approximately 7 miles east of Guadalupe Victoria, and then approximately 14 miles of paved rural road through the towns of Ignacio Allende and Emiliano Zapata. The processing plant, located near Velardeña, Durango, Mexico, was acquired in April 2001. The map below illustrates the location and access to the San Sebastian unit:

(MAP)

          Our concession holdings cover approximately 308 square miles, including the Francine vein, the Don Sergio vein and multiple outlying active exploration areas. Production from the Francine vein was from a high-grade silver vein with significant gold credits. Production from the Don Sergio vein was from a high-grade gold vein with some silver credits. Mineral concession titles are obtained and held under the laws of Mexico, and are valid for 50 years with the possibility of extending another 50 years. There are work assessment and tax requirements that are variable and increase with the time that the concession is held.

          Several intermediate sulfidation epithermal veins occur within the Saladillo Valley and include the Francine, Profesor, Middle and North vein systems. These veins are proximal to each other and are hosted within a series of shales with interbedded fine-grained sandstones interpreted to belong to the Cretaceous Caracol Formation. The Don Sergio, Jessica, Andrea and Antonella veins located in the Cerro Pedernalillo area, about 4 miles from Francine, are end member low sulfidation epithermal veins hosted by the same formation with the addition of dioritic intrusive rocks.

          Underground development along the Francine vein started in May 2001, and reached full production during the second quarter of 2002. Mining of economic ore on the upper Francine vein was completed during the first quarter of 2005. The mine has been placed on care and maintenance as exploration continues on the property, including the Hugh Zone, which is

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located 2300 feet below historic mining. Mining of economic ore on the Don Sergio vein was completed in the fourth quarter of 2005 and reclamation of this portion of the mine site was completed during 2006. San Sebastian’s life-of-mine production over four years was 11.2 million ounces of silver and 155,937 ounces of gold.

          The Francine vein strikes northwest and dips southwest, and is located on the southwestern limb of a doubly plunging anticline. The vein ranges in true thickness from more than 13 feet to less than 1.5 feet, and consists of several episodes of banded quartz, silica-healed breccias and minor amounts of calcite. The vein is oxidized to a depth of approximately 328 vertical feet and the wall rocks contain an alteration halo of less than 7 feet next to the vein. Mineralization within the oxidized portion of the vein contains limonite, hematite, silver halides and various copper carbonates. Higher-grade gold and silver mineralization is associated with disseminated hematite and limonite after pyrite and chalcopyrite, copper carbonates including malachite and azurite and hydrous copper silicates including chrysocolla. Native gold occurs associated with hematite and limonite. Mineralization in the sulfide portion of the Francine vein contains pyrite, chalcopyrite, sphalerite, galena, native silver, argentite and trace amounts of aguilarite. Hugh Zone mineralization contains chalcopyrite, sphalerite, galena, argentite, acanthite, tetrahedrite, polybasite, stephanite, freibergite, and pyrargyrite.

          Access to both underground workings has been through ramps from the surface connecting one or more levels. Ore has been mined by the cut-and-fill stoping method and extracted from the stopes using rubber-tired equipment and hauled to the surface in trucks. Run of mine ore has been hauled in trucks by contractors to our processing facility near Velardeña, which is approximately 68 miles from the San Sebastian mine and 72 miles from the Don Sergio mine. The mill, which was constructed in 1994 and is capable of processing approximately 550 tons per day, is a conventional leach, counter-current decantation and Merrill Crowe precipitation circuit. The ore has been crushed in a two-stage crushing plant consisting of a primary jaw, a secondary cone crusher and a double-deck vibrating screen. The grinding circuit includes a primary ball mill and cyclone classifiers. The ground ore was thickened, followed by agitated leaching and four stages of counter-current decantation to wash solubilized silver and gold from the pulp. The solution bearing silver and gold was clarified, deaerated and zinc dust added to precipitate silver and gold that is recovered in plate and frame filters. The precious metal precipitate was smelted and refined into doré, and was then shipped to a third-party refiner. Processing of economic ore was completed during the fourth quarter of 2005, and the mill was placed on care and maintenance at that time.

          During 2008, exploration activities were focused in the La Roca target area, district scaled soil geochemistry, and district scaled target identification through detailed mapping and sampling. Through this work, several new drillable targets have been identified in the district. Continued district scaled target identification through detailed mapping and sampling is planned during 2009.

          Additional exploration at the San Sebastian unit during 2008 included activity at the Rio Grande exploration project, which is located approximately 51 miles north of Fresnillo in Zacatecas State, on concessions acquired under an option to purchase agreement in 2007. Access to the property is via Mexico Highway 49, approximately 1 mile south of the city of Rio Grande followed by approximately 6 miles of dirt road west to the center of the property.

          Our Rio Grande concession holdings cover approximately 5 square miles and several low- to intermediate-sulfidation epithermal vein systems including the La Soledad, Arcangeles, El Leon, Sacramento, Concepcion, and San Martin vein systems in addition to multiple outlying active exploration areas. These veins are proximal to each other and are hosted within a series of shales with interbedded fine-grained sandstones interpreted to belong to the Cretaceous Caracol Formation. The Rio Grande vein systems strike north to northwest and dips to the west and southwest. The veins range in true thickness from more than 46-feet to less than 1.5 feet, and consist of several episodes of banded quartz, silica-healed breccias and minor amounts of calcite. These veins are partially oxidized to a depth of approximately 196 vertical feet and the wall rocks contain an alteration halo of less than 33 feet next to the vein. Mineralization within these veins consists of limonite, hematite, marcasite, pyrite, argentite, and pyrargyrite and trace amounts of chalcopyrite.

          During 2008, the initial drilling of the La Soledad, Arcangeles, El Leon, Sacramento, Concepcion, San Martin, and Aguila Mexicana veins was completed. In 2009, we will continue district scaled target identification through detailed mapping and sampling, but are also considering optioning or dropping the Rio Grande project.

          At December 31, 2008, the net book value of the San Sebastian unit property and its associated plant and equipment was $3.2 million, including approximately $3 million for the mill. Site infrastructure includes a water supply system, maintenance shop, warehouse, laboratory, tailings impoundment and various offices. Equipment and facilities are in good condition and have been placed on care and maintenance pending a resumption of operations. We are currently involved in litigation concerning our ownership of the Velardeña mill. We are negotiating with the plaintiff who has offered to purchase the mill from us. See the Mexico Litigation section of Note 8 of Notes to Consolidated Financial Statements for more information.

          As of December 31, 2008, $1.2 million has been accrued for reclamation and closure costs, and there were 25 hourly and 32 salaried employees performing exploration, care and maintenance, reclamation and security functions. In January 2009, we reduced our workforce in Mexico by 18 hourly and 17 salary employees as a part of an effort to conserve cash.

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Table of Contents


Due to the curtailment of mining activity, the collective bargaining agreement with the National Mine and Mill Workers Union for hourly mill employees was terminated during the fourth quarter of 2005. Electric power is purchased from Comisión Federal de Electricidad (a Mexico federal electric company).

Item 3. Legal Proceedings

          For a discussion of our legal proceedings, see Note 8 of Notes to Consolidated Financial Statements.

Item 4. Submission of Matters to a Vote of Security Holders

          No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2008.

Executive Officers of the Registrant

          Information set forth in Part III, Item 10 is incorporated by reference into this Part I, Item 4.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

 

(a)

(i)

Shares of our common stock are traded on the New York Stock Exchange, Inc.

 

 

 

 

(ii)

Our common stock quarterly high and low sale prices for the past two years were as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

2008 – High

 

$

12.79

 

$

13.14

 

$

10.00

 

$

4.93

 

         – Low

 

$

8.05

 

$

7.40

 

$

4.00

 

$

0.99

 

2007 – High

 

$

9.21

 

$

9.89

 

$

9.80

 

$

12.57

 

         – Low

 

$

6.36

 

$

7.47

 

$

6.58

 

$

8.18

 


 

 

(b)

As of February 27, 2009, there were 7,898 shareholders of record of the common stock.

 

 

(c)

No dividends have been declared on our common stock in the last two years. Quarterly dividends were paid on our Series B Cumulative Convertible Preferred Stock for the first three quarters of 2008, with $0.1 million for cumulative, undeclared, unpaid dividends at December 31, 2008 for the fourth quarter 2008. Dividends have been paid on our Mandatory Convertible Preferred Stock for the first three quarters of 2008, with cumulative, undeclared, unpaid dividends of $3.4 million at December 31, 2008 for the fourth quarter of 2008. We have no plans for payment of dividends on common stock. We cannot pay dividends on our common stock if we fail to pay, when due, dividends on our Series B or Mandatory Convertible Preferred Stock or our recently issued 12% Convertible Preferred Stock.

 

 

(d)

The following table provides information as of December 31, 2008, regarding our compensation plans under which equity securities are authorized for issuance:


 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Securities To
Be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights

 

Weighted-Average
Exercise Price of
Outstanding Options

 

Number of
Securities
Remaining
Available For
Future Issuance
Under Equity
Compensation Plans

 

Equity Compensation Plans Approved by Security Holders:

 

 

 

 

 

 

 

 

 

 

1995 Stock Incentive Plan

 

 

1,397,179

 

 

7.80

 

 

3,449,697

 

Stock Plan for Nonemployee Directors

 

 

 

 

N/A

 

 

735,454

 

Key Employee Deferred Compensation Plan

 

 

100,000

 

 

3.65

 

 

4,113,350

 

Total

 

 

1,497,179

 

 

7.52

 

 

8,298,501

 

          See Notes 9 and 10 of Notes to Consolidated Financial Statements for information regarding the above plans.

 

 

(e)

We did not sell any unregistered securities in 2006 and 2007. During 2008, we issued unregistered common shares as follows:

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Table of Contents


 

 

 

 

a.

On January 17, 2008, we issued 550,000 unregistered common shares to fund our donation to the Hecla Charitable Foundation.

 

 

 

 

b.

On January 24, 2008, we issued 118,333 unregistered common shares in a private placement pursuant to section 4(2) of the 1933 Act and Regulation D to an accredited investor to acquire properties in the Silver Valley of Northern Idaho.

 

 

 

 

c.

On February 21, 2008, we issued 927,716 unregistered common shares in a private placement pursuant to section 4(2) of the 1933 Act and Regulation D to an accredited investor to acquire a joint venture interest (see Note 19 of Notes to Consolidated Financial Statements).

 

 

 

 

d.

On April 16, 2008, we issued 4,365,000 unregistered common shares in a private placement pursuant to section 4(2) of the 1933 Act and Regulation D to an accredited investor to partially fund our acquisition of the remaining 70.3% interest in the Greens Creek Joint Venture (see Note 19 of Notes to Consolidated Financial Statements).

 

 

 

 

e.

On October 24, 2008, we issued 633,360 unregistered common shares in a private placement pursuant to section 4(2) of the 1933 Act and Regulation D to an accredited investor as the result of an amendment to a joint venture buy-in agreement (see Note 19 of Notes to Consolidated Financial Statements).


 

 

(f)

Comparison of Five-Year Cumulative Total Shareholder Return—December 2003 through December 2008(1):

Hecla Mining Company, S&P 500, S&P 500 Gold Index, and Custom Peer Group(2)

(LINE GRAPH)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

 

Hecla Mining

 

S&P 500

 

S&P 500
Gold Index

 

Custom
Peer Group

 

 

December 2003

 

$

100.00

 

$

100.00

 

$

100.00

 

$

100.00

 

December 2004

 

$

70.33

 

$

110.85

 

$

91.82

 

$

95.26

 

December 2005

 

$

48.97

 

$

116.28

 

$

111.39

 

$

117.34

 

December 2006

 

$

92.40

 

$

134.61

 

$

94.97

 

$

174.13

 

December 2007

 

$

112.79

 

$

141.99

 

$

103.92

 

$

204.53

 

December 2008

 

$

33.78

 

$

89.54

 

$

87.42

 

$

149.96

 

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Table of Contents


 

 

 

(1)

Total shareholder return assuming $100 invested on December 31, 2003 and reinvestment of dividends on quarterly basis.

 

 

(2)

Agnico-Eagle Mines Ltd., Centerra Gold, Inc., Coeur d’Alene Mines Corp., Golden Star Resources Ltd., IAMGOLD Corporation, Kinross Gold Corporation, Northgate Minerals Corporation, Pan American Silver Corp., Stillwater Mining Company, Yamana Gold Inc.

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Table of Contents

Item 6. Selected Financial Data

          The following table (in thousands, except per share amounts, common shares issued, shareholders of record, and employees) sets forth selected historical consolidated financial data as of and for each of the years ended December 31, 2004 through 2008, and is derived from our audited financial statements. The data set forth below should be read in conjunction with, and is qualified in its entirety by, our Consolidated Financial Statements and the Notes thereto.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

Sales of products

 

$

192,655

 

$

153,702

 

$

122,585

 

$

71,152

 

$

82,942

 

Income (loss) from continuing operations

 

$

(37,173

)

$

68,157

 

$

64,788

 

$

(17,951

)

$

(12,958

)

Income (loss) from discontinued operations, net of tax

 

$

(17,395

)

$

(14,960

)

$

4,334

 

$

(7,409

)

$

6,824

 

Loss on disposal of discontinued operations, net of tax

 

$

(11,995

)

$

 

$

 

$

 

$

 

Net income (loss)

 

$

(66,563

)

$

53,197

 

$

69,122

 

$

(25,360

)

$

(6,134

)

Preferred stock dividends (1,2,3)

 

 

(13,633

)

 

(1,024

)

 

(552

)

 

(552

)

 

(11,602

)

Income (loss) applicable to common shareholders

 

$

(80,196

)

$

52,173

 

$

68,570

 

$

(25,912

)

$

(17,736

)

Basic and diluted income (loss) per common share

 

$

(0.57

)

$

0.43

 

$

0.57

 

$

(0.22

)

$

(0.15

)

Total assets

 

$

988,791

 

$

650,737

 

$

346,269

 

$

272,166

 

$

279,448

 

Accrued reclamation & closure costs

 

$

121,347

 

$

106,139

 

$

65,904

 

$

69,242

 

$

74,413

 

Noncurrent portion of debt

 

$

121,667

 

$

 

$

 

$

3,000

 

$

 

Cash dividends paid per common share

 

$

 

$

 

$

 

$

 

$

 

Cash dividends paid per Series B preferred share (2)

 

$

3.50

 

$

3.50

 

$

3.50

 

$

18.38

 

$

 

Cash dividends paid per Mandatory Convertible Preferred share (3)

 

$

3.48

 

$

 

 

$

 

$

 

$

 

Common shares issued

 

 

180,461,371

 

 

121,456,837

 

 

119,828,707

 

 

118,602,135

 

 

118,350,861

 

Mandatory Convertible Preferred shares issued

 

 

2,012,500

 

 

2,012,500

 

 

 

 

 

 

 

Shareholders of record

 

 

7,936

 

 

6,598

 

 

6,815

 

 

7,568

 

 

7,853

 

Employees

 

 

742

 

 

871

 

 

1,155

 

 

1,191

 

 

1,417

 

 

 

 

 

 

(1)

During the year ended December 31, 2004, we entered into various agreements to acquire Series B preferred stock in exchange for newly issued shares of common stock as follows:


 

 

 

 

 

 

 

Year ended
December 31,
2004

 

Number of shares of Series B preferred stock exchanged for shares of common stock

 

 

306,961

 

Number of shares of common stock issued

 

 

2,436,098

 

Non-cash preferred stock dividend incurred in exchange (millions of dollars) (a)

 

$

10.9

 


 

 

 

 

(a)

The non-cash dividend represents the difference between the value of the common stock issued in the exchange offer and the value of the shares that were issuable under the stated conversion terms of the Series B preferred stock. The non-cash dividend had no impact on our total shareholders’ equity as the offset was an increase in common stock and surplus.

 

 

 

(2)

As of December 31, 2004, we had not declared or paid a total of $2.3 million of Series B preferred stock dividends. As the dividends are cumulative, they are reported in determining the income (loss) applicable to common stockholders, but are excluded in the amount reported as cash dividends paid per Series B preferred share. The $2.3 million in cumulative, undeclared dividends were paid in July 2005. A $0.875 per share dividend was declared on the 157,816 outstanding Series B preferred shares in December 2004, and paid in January 2005, and additional dividends totaling $0.4 million were declared and paid during 2005. A total of $2.9 million in dividends paid during 2005 are included in the amount reported as cash dividends paid per Series B preferred share for 2005, and $0.6 million in dividends declared during 2005 were included in the determination of loss applicable to common stockholders. During 2006 and 2007, $0.6 million in Series B preferred dividends were declared and paid. During 2008, $0.4 million in Series B preferred dividends were declared and paid, while $0.1 million in dividends for the fourth quarter of 2008 were deferred.

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Table of Contents

 

 

(3)

Cumulative undeclared, unpaid Mandatory Convertible Preferred Stock dividends for the period from issuance to December 31, 2007 totaled $0.5 million, and are reported in determining income applicable to common share holders for the year ended December 31, 2007. The $0.5 million in cumulative undeclared dividends were paid in April 2008. During 2008, $9.8 million in Mandatory Convertible Preferred dividends were declared and paid. $6.5 million of the dividends declared in 2008 were paid in cash, and are included in the amount reported as cash dividends paid per Mandatory Convertible Preferred Share, and $3.3 million of the dividends declared in 2008 were paid in our Common Stock. Mandatory Convertible Preferred Stock dividends for the fourth quarter of 2008 totaling $3.3 million were deferred.

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

Overview

          Established in 1891 in northern Idaho’s Silver Valley, Hecla Mining Company has long been well known in the mining world and financial markets as a quality producer of silver and gold. Headquartered in Coeur d’Alene, Idaho, this international, NYSE-traded company is 118 years old. Our production profile includes:

 

 

 

 

Silver, gold, lead, and zinc contained in concentrates shipped to various smelters

 

 

 

 

Silver and gold doré

          Our operating properties and exploration interests are located in jurisdictions with relatively low political and economic risk in the United States and Mexico, and are contained in historically successful mining districts. We have three business segments for financial reporting purposes: the Greens Creek operating unit on Admiralty Island in Alaska USA, the Lucky Friday operating unit in Idaho USA, and the San Sebastian exploration unit in Durango, Mexico.

          Our operating and strategic framework is based on expanding our production and locating and developing new resource potential. To implement this framework in 2008, we

 

 

 

 

Acquired the remaining 70.3% interest of the Greens Creek Mine near Juneau, Alaska, so that we now control 100% of the world’s fifth largest silver mine and have almost doubled our annual silver production.

 

 

 

 

Acquired the right to earn in to a 70% joint venture interest in a land package in one of Colorado’s most prolific silver mining districts.

 

 

 

 

Acquired substantially all of the assets of Independence Lead Mines, thus consolidating 100% of the future profits of the Lucky Friday mine near Mullan, Idaho.

 

 

 

 

Sold our subsidiaries engaged in Venezuelan mining operations.

          Following the acquisitions in the U.S. and divestiture of our Venezuelan interests, we believe we are positioned as one of the lowest-cost, lowest-risk producers of precious metals.

          Subsequent to the acquisitions discussed above we, like many companies, were affected by the global financial crisis. After opening the year at $14.93 per ounce, silver rose as high as $20.92 in the second quarter, but fell at one point as low as $8.88 in the fourth quarter. The same volatility affected our important by-products as well, with lead and zinc at the end of the fourth quarter selling for approximately one-third of their high points in the first quarter. The economic downturn affected not only our earnings, but also our stock price, which fell from its one-day high point of $13.14 in the second quarter to its one-day low of $0.99 in the fourth quarter, rebounding to $2.80 at the end of the year. With a high level of volatility in both our earnings and share price, our ability to raise capital to retire debt was affected.

          Nevertheless, of the total $758.5 million purchase price of Greens Creek, we had just $162 million in debt outstanding between our bridge and term loan credit facilities at year-end. We extended, to February 2009, the final $40 million payment of the bridge loan and rescheduled all term loan payments initially scheduled for 2008 and 2009 totaling $121.7 million to 2010 and 2011.

          We increased our production of silver to 8.7 million ounces in 2008, up from 5.6 million ounces in 2007. Production of lead and zinc, important by-products at our Lucky Friday and Greens Creek mines, also increased in 2008, with production of lead higher by 43% and zinc by 131% due to our acquisition of the remaining interest in Greens Creek. However, gold production declined in 2008 compared to 2007. While the Greens Creek acquisition increased domestic gold production, this increase was more than offset by the sale of our mining interests in Venezuela, and we no longer operate a primary gold mine as a result of the sale.

          Revenues increased by 25% from 2007 to 2008, primarily as a result of the acquisition of the remaining interest in Greens Creek, in spite of lower lead and zinc prices.

          We reported a loss of $0.57 in 2008 compared to earnings in 2007 of $0.43 per diluted share. Gross profit from operations declined from $77.8 million in 2007 to $17.9 million in 2008 as a result of lower by-product lead and zinc prices, higher operating costs, and valuation of in-process inventory associated with the Greens Creek Joint Venture acquisition. Our commitment to exploration and pre-development in 2008 was $5.5 million higher than in 2007; however, at the same time,

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Table of Contents

we reduced general and administrative expense by $1.3 million. We recorded a gain of $7.7 million on sale of investments versus a gain of $63 million on asset sales in 2007, and while in 2007 we recognized a benefit from a decreased valuation allowance on deferred tax assets, we have recorded a provision in 2008 as a result of declining metals prices. Further affecting earnings per common share, dividends on preferred shares totaled $13.6 million in 2008, up from $1.0 million in 2007 as a result of our December 2007 issuance of 2,012,500 shares of Mandatory Convertible Preferred Stock.

          The factors driving metals prices are beyond our control and are difficult to predict. As noted above, prices were highly volatile in 2008. Average prices in 2008 compared to those in 2007 and 2006 are illustrated in the Results of Operations section below.

Key Issues

          Our strategy to increase production and expand our proven and probable reserves will be achieved through development and exploration, as well as by future acquisitions. Our strategic plan requires that we overcome several pervasive challenges and risks inherent in conducting mining, development, exploration and metal sales at multiple locations.

          One such risk involves metals prices. While the metals mining industry enjoyed continued strength in metals prices from 2006 through mid-2008, we have no control over prices. As noted above, silver, lead and zinc prices in 2008 were highly volatile, and ended the year significantly lower than in the first and second quarters. We must make our strategic plans in the context of significant uncertainty about future revenues, which is a daunting challenge to an industry for which new opportunities can require many years and substantial cost from discovery to production. We approach this challenge by investing exploration and capital in districts with an established history of success, and in managing our operations in a manner that seeks to mitigate the effects of lower prices.

          The recent unprecedented volatility in global financial markets poses a significant challenge to our ability to access credit and equity markets and to sell our products at a profit. While we have seen our share price rebound from its lowest levels in 2008 and have been successful in marketing our equity, we have deferred certain loan payments to 2010 and 2011 and the terms of our credit facilities could restrict our current and future operations.

          Another challenge is the risk associated with environmental litigation and ongoing reclamation activities. As described in Note 8 of Notes to Consolidated Financial Statements, it is possible that our estimate of these liabilities may change in the future, affecting our strategic plans. In accordance with our environmental policy, our operating activities will be conducted in a manner that attempts to minimize risks to public health and safety. We attempt to design and manage our projects in an attempt to reasonably minimize risk and negative effects on the environment. We intend to continue to strive to ensure that our activities are conducted in compliance with applicable laws and regulations.

          Reserve estimation is a major risk inherent in mining. Our reserve estimates, which drive our mining and investment plans and many of our costs, may change based on economic factors and actual production experience. Until ore is actually mined and processed, the volumes and grades of our reserves must be considered as estimates. Our reserves are depleted as we mine. Reserves can also change as a result of changes in economic and operating assumptions.

Results of Operations

          For the year ended December 31, 2008, we reported a loss applicable to common shareholders of $80.2 million compared to income applicable to common shareholders of $52.2 million in 2007 and $68.6 million in 2006. The following factors led to the reduced results for the year ended December 31, 2008 compared to 2007 and 2006:

 

 

 

 

Decreased gross profit at our Greens Creek and Lucky Friday units (see the Greens Creek Segment and Lucky Friday Segment sections below for further discussion of operating results).

 

 

 

 

A $17.4 million loss from discontinued operations at the La Camorra unit for the year ended December 31, 2008 compared to a loss from discontinued operations of $15.0 million in 2007 and income from discontinued operations of $4.3 million in 2006 (see the Discontinued Operations – La Camorra Unit section below).

 

 

 

 

A loss on the sale of our interests in Venezuela, net of related income tax effect, of $12.0 million in 2008 (see Note 13 of Notes to Consolidated Financial Statements for more information).

 

 

 

 

The sale of our interest in the Hollister Development Block gold exploration project in April 2007, which resulted in a pre-tax gain of $63.1 million reported in the second quarter of 2007.

 

 

 

 

The sale of our investment in Alamos Gold, Inc. in January 2006 for $57.4 million in cash proceeds generating a pre-tax gain of $36.4 million.

 

 

 

 

The sale of our Noche Buena gold exploration property in Mexico during April 2006 generating a $4.4 million pre-tax gain.

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Table of Contents

 

 

 

 

Interest expense of $19.6 million for the year ended December 31, 2008 in connection with debt incurred for the purchase of the remaining 70.3% interest in the Greens Creek joint venture. See Note 7 of Notes to the Consolidated Financial Statements for more information on our debt facilities.

 

 

 

 

Valuation allowance adjustments to our deferred tax asset balances resulted in a $3.6 million net income tax provision recognized in 2008 compared to $10.5 million and $11.8 million income tax benefits recognized in 2007 and 2006 resulting from valuation allowance adjustments. We recorded a net increase to our deferred tax assets in 2008 by approximately $16.2 million due the addition of a $23 million net deferred tax asset relating to the purchase of the remaining 70.3% of Greens Creek, partially offset by reductions of $3.2 million due to the sale of our Venezuelan operations and $3.6 million due a decrease in the estimated future utilization of deferred tax assets (see Note 6 of Notes to the Consolidated Financial Statements for further discussion).

 

 

 

 

Preferred stock dividends of $13.6 million for the year ended December 31, 2008 compared to $1.0 million and $0.6 million, respectively, for 2007 and 2006, due to the issuance of 2,012,500 shares of Mandatory Convertible Preferred Stock in December 2007. The net proceeds from the preferred stock issuance were utilized for the purchase of the remaining interest in the Greens Creek joint venture.

 

 

 

 

Decreased average prices for zinc produced at our operations in 2008 compared to 2007 and 2006, and decreased average prices for lead produced at our operations in 2008 compared to 2007, as illustrated by the following table:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

Silver —

London PM Fix ($/ounce)

 

$

15.02

 

$

13.39

 

$

11.57

 

 

Realized price per ounce

 

$

14.40

 

$

13.78

 

$

12.10

 

Gold —

London PM Fix ($/ounce)

 

$

872

 

$

697

 

$

604

 

 

Realized price per ounce

 

$

865

 

$

731

 

$

615

 

Lead —

LME Final Cash Buyer ($/pound)

 

$

0.95

 

$

1.17

 

$

0.58

 

 

Realized price per pound

 

$

0.83

 

$

1.23

 

$

0.63

 

Zinc —

LME Final Cash Buyer ($/pound)

 

$

0.85

 

$

1.47

 

$

1.49

 

 

Realized price per pound

 

$

0.71

 

$

1.24

 

$

1.73

 

          The differences between realized metal prices and average market prices are due to the difference between metal prices upon transfer of title of concentrates to the buyer and final settlement. For 2008, we reported negative adjustments to provisional settlements of $25.7 million compared to negative adjustments of to provisional settlements of $3.1 million in 2007 and positive adjustments of $6.5 million in 2006.

          Other significant variances affecting the comparison of our 2008 operating results to results for 2007 and 2006 were as follows:

 

 

 

 

An increase of $44.7 million in 2007 in our estimated liabilities for environmental remediation in Idaho’s Coeur d’Alene Basin and the Bunker Hill Superfund Site. During the second quarter of 2007, we finalized a proposed multi-year clean-up plan for the upper portion of the Coeur d’Alene Basin, together with an estimate of related costs to implement the plan. Based on that work and a reassessment of our other potential liabilities in the Basin, we increased our accrual for remediation in the Basin by $42 million. We also accrued an additional $2.7 million for the remaining Bunker Hill Superfund Site work. For additional discussion, see Bunker Hill Superfund Site and Coeur d’Alene River Basin Environmental Claims in Note 8 of Notes to the Consolidated Financial Statements.

 

 

 

 

We committed to a donation of our common stock valued at $5.1 million in 2007 for the creation of Hecla Charitable Foundation, an organization that will fund charitable contributions in the communities in which Hecla holds mining interests.

 

 

 

 

Sale of our 8.2 million shares of Great Basin Gold stock in the second quarter of 2008, resulting in an $8.1 million gain, partially offset by $0.4 million in previously unrealized losses recorded in the fourth quarter of 2008 for the impairment of securities held at December 31, 2008.

 

 

 

 

Differences in the average prices for silver and gold produced at our operations, as illustrated by the table above.

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Table of Contents

The Greens Creek Segment

          Below is a comparison of the operating results and key production statistics of our Greens Creek segment, which reflects our 29.7% ownership share through April 16, 2008 and our 100% ownership thereafter. See Note 19 of Notes to Consolidated Financial Statements for further discussion of the acquisition of the 70.3% interest in Greens Creek. Dollars are presented in thousands, except for per ton and per ounce amounts.

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

Sales

 

$

130,760

 

$

72,726

 

$

69,208

 

Cost of sales and other direct production costs

 

$

(100,197

)

$

(27,753

)

$

(24,125

)

Depreciation, depletion and amortization

 

$

(30,022

)

$

(8,440

)

$

(8,191

)

Gross Profit

 

$

541

 

$

36,533

 

$

36,892

 

 

 

 

 

 

 

 

 

 

 

 

Tons of ore milled

 

 

598,931

 

 

217,691

 

 

217,676

 

Silver ounces produced

 

 

5,829,253

 

 

2,570,701

 

 

2,636,083

 

Gold ounces produced

 

 

54,650

 

 

20,218

 

 

18,713

 

Zinc tons produced

 

 

52,055

 

 

18,612

 

 

17,670

 

Lead tons produced

 

 

16,630

 

 

6,252

 

 

6,242

 

Payable silver ounces sold

 

 

5,143,758

 

 

2,240,092

 

 

2,463,685

 

Payable gold ounces sold

 

 

44,977

 

 

15,543

 

 

16,502

 

Payable zinc tons sold

 

 

39,433

 

 

14,187

 

 

12,620

 

Payable lead tons sold

 

 

13,877

 

 

4,748

 

 

5,297

 

Silver ounces per ton

 

 

13.69

 

 

15.45

 

 

15.78

 

Gold ounces per ton

 

 

0.14

 

 

0.14

 

 

0.13

 

Zinc percent

 

 

10.13

 

 

9.67

 

 

9.36

 

Lead percent

 

 

3.59

 

 

3.66

 

 

3.66

 

Total cash cost per silver ounce (1)

 

$

3.29

 

$

(5.27

)

$

(3.47

)

 

 

 

 

 

(1)

A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found in Reconciliation of Total Cash Costs to Costs (non-GAAP) of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).


 

 

 

The decrease in gross profit during 2008 compared to 2007 and 2006 was primarily the result of the following factors:

 

 

Higher cost of sales, as a percentage of sales, which increased to 77% in 2008 compared to 38% in 2007 and 35% in 2006. The higher cost of sales in 2008 is primarily due to increased costs of diesel fuel and other consumables, and an adjustment for the fair value of the finished and in-process product inventory acquired upon purchase of the 70.3% ownership interest. Upon the sale of the acquired inventory, the fair market value was expensed, which increased cost of sales and decreased gross profit margin in 2008.

 

 

Higher depreciation, depletion and amortization expense, as a percentage of sales, as a result of the fair market valuation of the acquired 70.3% share of property, plant, equipment and mineral interests at the acquisition date.

 

 

Lower silver ore grades in 2008 compared to 2007 and 2006.

 

 

A decline in average zinc and lead prices. Average zinc prices for 2008 were lower than those for 2007 and 2006, while average lead prices have declined from their 2007 levels.

 

 

Negative price adjustments to revenues of $22.9 million in 2008 as a result of declines in metal prices between transfer of title of concentrates to buyers and final settlements during the year.

          The Greens Creek operation is partially powered by diesel generators, and production costs have been significantly affected by increasing fuel prices in 2007 and 2008. Infrastructure has been installed that allows hydroelectric power to be supplied to Greens Creek by Alaska Electric Light and Power Company (“AEL&P”), via a submarine cable from North Douglas Island, near Juneau, to Admiralty Island, where Greens Creek is located. It is anticipated that this project will reduce production costs at Greens Creek. AEL&P had agreed to supply surplus power to Greens Creek; however, supply has been hampered by low reservoir water supplies and high power demand in the Juneau vicinity.

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Table of Contents

          The $8.56 increase in total cash cost per silver ounce in 2008 compared to 2007 is due to lower zinc and lead prices, lower silver ore grades and increased operating costs. The $1.80 improvement in total cash costs per silver ounce in 2007 compared to 2006 is attributable to increased by-product credits, as 2007 lead and gold prices exceeded prices during the same 2006 period, partially offset by higher production costs. While value from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product is appropriate because:

 

 

 

 

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

 

 

 

 

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

 

 

 

 

metallurgical treatment maximizes silver recovery;

 

 

 

 

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

 

 

 

 

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

          We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset operating costs.

The Lucky Friday Segment

          The following is a comparison of the operating results and key production statistics of our Lucky Friday segment (dollars are in thousands, except per ounce amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

Sales

 

$

61,895

 

$

80,976

 

$

52,422

 

Cost of sales and other direct production costs

 

$

(39,392

)

$

(35,840

)

$

(26,936

)

Depreciation, depletion and amortization

 

$

(5,185

)

$

(3,883

)

$

(3,565

)

Gross profit

 

$

17,318

 

$

41,253

 

$

21,921

 

 

 

 

 

 

 

 

 

 

 

 

Tons of ore milled

 

 

317,777

 

 

323,659

 

 

276,393

 

Silver ounces produced

 

 

2,880,264

 

 

3,071,857

 

 

2,873,663

 

Lead tons produced

 

 

18,393

 

 

18,297

 

 

16,657

 

Zinc tons produced

 

 

9,386

 

 

8,009

 

 

6,537

 

Payable silver ounces sold

 

 

2,697,089

 

 

2,869,322

 

 

2,583,597

 

Payable lead tons sold

 

 

16,915

 

 

17,362

 

 

15,172

 

Payable zinc tons sold

 

 

6,299

 

 

5,076

 

 

4,146

 

Silver ounces per ton

 

 

9.70

 

 

10.27

 

 

11.34

 

Lead percent

 

 

6.23

 

 

6.12

 

 

6.57

 

Zinc percent

 

 

3.52

 

 

3.16

 

 

3.34

 

Total cash cost per silver ounce (1)

 

$

6.06

 

$

(0.75

)

$

3.65

 

 

 

 

 

 

(1)

A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).

          The $23.9 million decrease in gross profit in 2008 compared to 2007 resulted primarily from lower average lead and zinc prices, higher operating costs, and silver ore grades that decreased by 6%. In addition, negative price adjustments to revenues of $2.8 million impacted results for 2008 due to declines in metals prices between transfer of title of concentrates to buyers and final settlement during the year. The increase in gross profit in 2007 compared to 2006 was due primarily to higher average silver and lead prices and increased production, partially offset by lower ore grades.

          The increase in total cash costs per silver ounce in 2008 compared to 2007 and 2006 is attributed to lower silver ore grades, higher mining and milling costs, and declining lead and zinc prices. Mining at longer strike lengths at the Lucky Friday allowed us to take advantage of the high base metals prices experienced in 2007 and the first half of 2008 and the

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Table of Contents

mill’s ability to recover more zinc due to recent mill upgrades. This resulted in an economic benefit and allowed us to temporarily mine lower silver grade ore that was below anticipated life-of-mine reserve levels, which also delayed some production of metals included in the reserve to later periods. While value from lead and zinc is significant at the Lucky Friday, we believe that identification of silver as the primary product, with zinc and lead as by-products, is appropriate because:

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

          We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc and lead to be by-products of our silver production, the values of these metals offset operating costs.

The San Sebastian Segment

          We reached the end of the known mine life on the Francine and Don Sergio veins at the San Sebastian unit located in Mexico during the fourth quarter of 2005. However, significant exploration efforts have continued during 2006, 2007, and 2008 at the Hugh Zone and other exploration targets located on or near the San Sebastian property, where we now hold 308 square miles of contiguous concessions. Concessions totaling 166 square miles were added to our land package at the San Sebastian segment during the first quarter of 2008. Additional exploration activity at the San Sebastian unit in 2007 and 2008 has included completion of initial drilling on a number of veins at our Rio Grande project, where our concession holdings cover approximately 5 square miles. We incurred $4.6 million in exploration expenses during 2008 at San Sebastian compared to $7.5 million in 2007 and $5.8 million in 2006. The San Sebastian mine and Velardeña mill have been on care-and-maintenance status as we continue exploration efforts. We are currently involved in litigation concerning our ownership of the Velardeña mill. We are negotiating with the plaintiff who has offered to purchase the mill from us. See the Mexico Litigation section of Note 8 of Notes to Consolidated Financial Statements for more information.

Discontinued Operations - The La Camorra Unit

          During the second quarter of 2008, we committed to a plan to sell all of the outstanding capital stock of El Callao Gold Mining Company (“El Callao”) and Drake-Bering Holdings B.V. (“Drake-Bering”), our wholly owned subsidiaries holding our business and operations of the La Camorra Unit to Rusoro Mining, Ltd. (“Rusoro”) for $20 million in cash and 3,595,781 shares of Rusoro common stock valued at $4.5 million at the time of the transaction. The transaction closed on July 8, 2008. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of our Venezuelan operations have been reported in discontinued operations for all periods presented. See Note 13 of Notes to Consolidated Financial Statements for more information.

          The following is a comparison of operating results and key production statistics for our discontinued Venezuelan operations, which included the La Camorra mine, a custom milling business and Mina Isidora (dollars are in thousands, except per ounce amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

Sales

 

$

23,855

 

$

68,920

 

$

96,310

 

Cost of sales and other direct production costs

 

 

(21,656

)

 

(52,212

)

 

(53,235

)

Depreciation, depletion and amortization

 

 

(4,785

)

 

(14,557

)

 

(27,039

)

Gross profit

 

$

(2,586

)

$

2,151

 

$

16,036

 

Tons of ore milled

 

 

25,516

 

 

142,927

 

 

236,460

 

Gold ounces produced

 

 

22,160

 

 

87,490

 

 

160,563

 

Gold ounce per ton

 

 

0.894

 

 

0.629

 

 

0.708

 

          Exchange control regulations in Venezuela limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. Our cash balances denominated in Bolívares that were maintained in Venezuela totaled a U.S. dollar equivalent, at official exchange rates, of approximately $30.0 million at December 31, 2007.

          Prior to the sale of our Venezuelan operations, exchanging our cash held in local currency into U.S. dollars was done through specific governmental programs, or through the use of negotiable instruments at conversion rates that were higher than the official rate (parallel rate) on which we incurred foreign currency losses. During 2008, prior to the July 8, 2008 sale of our Venezuelan operations, we exchanged the U.S. dollar equivalent of approximately $38.7 million at the official

32


Table of Contents

exchange rate of 2,150 Bolívares to $1.00 for approximately $25.4 million at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses for the difference. All of these losses were incurred on repatriations of cash from Venezuela. During 2007, we exchanged the U.S. dollar equivalent of approximately $37.0 million, valued at the official exchange rate of 2,150 Bolívares to $1.00, for approximately $19.8 million at open market exchange rates, in compliance with applicable regulations, incurring foreign exchange losses for the difference. Approximately $13.8 million of the conversion losses for 2007 were incurred on the repatriation of cash from Venezuela, while additional losses of approximately $3.4 million in 2007 were related to conversions of Bolívares for the payment of expatriate payroll and other U.S. dollar-denominated goods and services.

Corporate Matters

          Other significant variances affecting our 2008 results compared to 2007 results were as follows:

 

 

 

 

Lower general and administrative expenses in 2008 by approximately $1.3 million, primarily due to a reduction in the value of stock appreciation rights, resulting from lower stock prices, and a decrease in incentive compensation, partially offset by increased staffing.

 

 

 

 

Overall increase in exploration expense in 2008 of $6.5 million as a result of a surface drilling and generative exploration program in North Idaho’s Silver Valley, the initiation of a drilling program in the Creede Mining District in Colorado, the addition of exploration costs relating to our acquisition of the remaining 70.3% of Greens Creek, increased underground exploration at our Lucky Friday unit, and continued exploration activity at our San Sebastian unit in Mexico.

 

 

 

 

Lower pre development expense in 2008 due to our sale of the Hollister Development Block project in Nevada in April 2007.

 

 

 

 

An increase in other operating expense by $1.5 million as a result of our acquisition of the remaining 70.3% interest in Greens Creek;

 

 

 

 

A decrease in the provision for closed operations and environmental matters in 2008 of $44.8 million due to increases to reclamation accruals recorded in 2007 discussed further below.

 

 

 

 

A $3.3 million decrease in interest income in 2008 compared to 2007 due to lower cash balances and interest rates.

 

 

 

 

Interest expense of $19.6 million for the year ended December 31, 2008 in connection with debt incurred for the purchase of the remaining 70.3% interest in the Greens Creek joint venture. See Note 7 of Notes to the Consolidated Financial Statements for more information on our debt facilities.

 

 

 

 

An income tax provision of $3.8 million for 2008 compared to an income tax benefit of $8.5 million for 2007. See Note 6 to Notes to Consolidated Financial Statements for further discussion.

 

 

 

 

Significant variances relating to 2007 results of operations compared to 2006 results were as follows:

 

 

Overall increase in exploration expense in 2007 of $1.2 million, due primarily to increased costs for exploration activity at our San Sebastian unit in Mexico, the addition of our new office in Vancouver, British Columbia, and an exploration program to generate new projects underway in North Idaho’s Silver Valley, partially offset by the sale of the Hollister Development Block project.

 

 

 

 

Lower pre-development expense in 2007, by $7.1 million, as a result of the Hollister sale.

 

 

 

 

An increase in the provision for closed operations and environmental matters in 2007 of $45.6 million, which includes the $44.7 million adjustment to increase the accruals relating to the Coeur d’Alene Basin and Bunker Hill Superfund Site. A $1.2 million adjustment to increase the accrual related to the idle Republic mine site, in the State of Washington, also contributed to the higher 2007 expense.

 

 

 

 

Increased interest income in 2007 by $3.6 million, due to higher invested cash and investment balances.

 

 

 

 

An income tax benefit of $8.5 million in 2007 compared to an income tax benefit of $9.7 million in 2006. See Note 6 to Notes to Consolidated Financial Statements for further discussion.

33


Table of Contents

Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)

          The tables below present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) for our operations at the Greens Creek and Lucky Friday units for the years ended December 31, 2008, 2007 and 2006 (in thousands, except costs per ounce). Tables in previous periods have presented gold cost per ounce, however as a result of our sale of all of the outstanding capital stock of El Callao and Drake-Bering, our gold operations have been reclassified as discontinued operations for all periods presented.

          Total cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mining production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit. Total cash costs provide management and investors an indication of net cash flow, after consideration of the realized price received for production sold. Management also uses this measurement for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective. “Total cash cost per ounce” is a measure developed by gold companies in an effort to provide a comparable standard; however, there can be no assurance that our reporting of this non-GAAP measure is similar to that reported by other mining companies.

          Cost of sales and other direct production costs and depreciation, depletion and amortization, is the most comparable financial measure calculated in accordance with GAAP to total cash costs. The sum of the cost of sales and other direct production costs and depreciation, depletion and amortization for our silver and gold operating units in the tables below is presented in our Consolidated Statement of Operations and Comprehensive Income (Loss).

 

 

 

 

 

 

 

 

 

 

 

 

 

Total, All Properties

 

 

 

Year ended December 31,

 

 

 

2008

 

2007

 

2006

 

Total cash costs (1)

 

$

36,621

 

$

(15,873

)

$

1,329

 

Divided by silver ounces produced

 

 

8,709

 

 

5,643

 

 

5,510

 

Total cash cost per ounce produced

 

$

4.20

 

$

(2.81

)

$

0.24

 

Reconciliation to GAAP:

 

 

 

 

 

 

 

 

 

 

Total cash costs

 

$

36,621

 

$

(15,873

)

$

1,329

 

Depreciation, depletion and amortization

 

 

35,207

 

 

12,323

 

 

11,757

 

Treatment & freight costs

 

 

(82,786

)

 

(31,555

)

 

(37,046

)

By-product credits (1)

 

 

164,963

 

 

112,079

 

 

86,216

 

Change in product inventory (2)

 

 

20,254

 

 

(1,261

)

 

1,278

 

Reclamation, severance and other costs

 

 

537

 

 

203

 

 

190

 

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)

 

$

174,796

 

$

75,916

 

$

63,724

 


 

 

 

 

 

 

 

 

 

 

 

 

 

Greens Creek Unit

 

 

 

Year ended December 31,

 

 

 

2008

 

2007

 

2006

 

Total cash costs (1)

 

$

19,157

 

$

(13,560

)

$

(9,157

)

Divided by silver ounces produced

 

 

5,829

 

 

2,571

 

 

2,636

 

Total cash cost per ounce produced

 

$

3.29

 

$

(5.27

)

$

(3.47

)

Reconciliation to GAAP:

 

 

 

 

 

 

 

 

 

 

Total cash costs

 

$

19,157

 

$

(13,560

)

$

(9,157

)

Depreciation, depletion and amortization

 

 

30,022

 

 

8,440

 

 

8,192

 

Treatment & freight costs

 

 

(61,838

)

 

(17,295

)

 

(21,686

)

By-product credits (1)

 

 

122,146

 

 

59,622

 

 

54,081

 

Change in product inventory

 

 

20,245

 

 

(1,200

)

 

718

 

Reclamation, severance and other costs

 

 

487

 

 

186

 

 

170

 

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)

 

$

130,219

 

$

36,193

 

$

32,318

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Lucky Friday Unit

 

 

 

Year ended December 31,

 

 

 

2008

 

2007

 

2006

 

Total cash costs (1)

 

$

17,464

 

$

(2,313

)

$

10,486

 

Divided by silver ounces produced

 

 

2,880

 

 

3,072

 

 

2,874

 

Total cash cost per ounce produced

 

$

6.06

 

$

(0.75

)

$

3.65

 

Reconciliation to GAAP:

 

 

 

 

 

 

 

 

 

 

Total cash costs

 

$

17,464

 

$

(2,313

)

$

10,486

 

Depreciation, depletion and amortization

 

 

5,185

 

 

3,883

 

 

3,565

 

Treatment & freight costs

 

 

(20,948

)

 

(14,260

)

 

(15,360

)

By-product credits (1)

 

 

42,817

 

 

52,457

 

 

32,135

 

Change in product inventory

 

 

9

 

 

(61

)

 

(345

)

Reclamation, severance and other costs

 

 

50

 

 

17

 

 

20

 

Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)

 

$

44,577

 

$

39,723

 

$

30,501

 

 

 

 

 

 

(1)

“Total Cash Costs” includes all direct and indirect operating costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mine production taxes, net of by-product revenues earned from all metals other than the primary metal produced at each unit.

 

 

(2)

Includes approximately $905,000 related to San Sebastian cost of sales and other direct production costs during the first quarter of 2006 for prior period doré shipments.

Financial Liquidity and Capital Resources

Our liquid assets include (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2008

 

December 31,
2007

 

December 31,
2006

 

Cash and cash equivalents held in U.S. dollars

 

$

36.2

 

$

343.1

 

$

53.9

 

Cash and cash equivalents held in foreign currency

 

 

0.3

 

 

30.0

 

 

22.0

 

Adjustable rate securities

 

 

 

 

4.0

 

 

25.5

 

Marketable equity securities, current

 

 

 

 

21.8

 

 

 

Marketable equity securities, non-current

 

 

3.1

 

 

8.4

 

 

6.2

 

Total cash, cash equivalents and investments

 

$

39.6

 

$

407.3

 

$

107.6

 

          Cash and cash equivalents held in U.S. dollars decreased by $307 million in 2008, as discussed below. Cash held in foreign currencies decreased in the second quarter as we exchanged Venezuelan Bolívares valued at approximately $38.7 million at the official exchange rate for approximately $25.4 million at the open market exchange rate, incurring a loss on the difference, and now hold nominal balances in Canadian dollars and Mexican pesos.

          The decrease in the value of our current marketable equity securities during 2008 resulted from our sale of 8.2 million shares of Great Basin Gold, Inc. stock in the second quarter.

          The decrease in our non-current marketable equity securities in 2008 was due to changes in the market values of the securities, partially off-set by the receipt of 3,595,781 shares of common stock of Rusoro Mining Ltd. in the third quarter of 2008 in connection with the sale of our business interests in Venezuela.

          As discussed further below, a portion of the Greens Creek acquisition was funded by $220 million provided by a bridge loan which initially matured on October 16, 2008. An additional $20 million was provided by the bridge loan for general corporate purposes. In September and October 2008, we repaid $200 million of the $240 million balance outstanding on the loan, leaving a balance of $40 million, which was extended to February 13, 2009, subject to conditions as discussed in Note 7 of Notes to Condensed Consolidated Financial Statements. An additional $140 million was funded by a three-year term facility maturing in 2011, of which the first payment of $18.3 million was made on September 30, 2008, and for which another $18.3 million scheduled for payment on December 31, 2008 was moved to February 13, 2009. On February 3, 2009, we reached an agreement to amend the terms of our current credit facilities to defer all term facility principal payments due in 2009, totaling $66.7 million, to 2010 and 2011. In addition, on February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the

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payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009 (see Note 21 - Subsequent Events of Notes to Consolidated Financial Statements for further discussion of the credit facilities amendment and offering). We estimate that approximately $33 million of cash flow will be invested in capital expenditures through the end of 2009. We also may pursue additional acquisition opportunities, which would require additional equity issuances or financing. There can be no assurances that such financing will be available to us.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

Cash provided by operating activities (in millions)

 

$

14.8

 

$

65.0

 

$

61.5

 

          The lower cash provided by operating activities in 2008 compared to the 2007 period resulted primarily from lower cash provided by operating activities from continuing operations, which totaled $27.3 million in 2008 compared to $62.9 million in 2007. The $35.6 million decrease was a result of $51.6 million reduction in income from continuing operations adjusted for non-cash items resulting from lower metals prices and higher costs, partly offset by a $15.9 million increase in cash resulting from changes in accounts receivable, accounts payable, inventories, and other assets and liabilities. The decrease in cash provided by operating activities in 2008 was also impacted by increased losses from discontinued operations, including foreign exchange losses totaling $13.3 million incurred on exchange of Venezuelan Bolívares for U.S. dollars as described above. In total, losses on discontinued operations in 2008 exceeded those in 2007 by $14.5 million.

          Cash provided by operating activities were higher in 2007 than in 2006 by $3.5 million as a result of $34.0 higher cash generated by continuing operations adjusted for non-cash items and $8.2 million increase in cash from accounts receivable, accounts payable, inventories, and other assets and liabilities, partly offset by $38.7 million lower cash from discontinued operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

Cash (used in) provided by investing activities (in millions)

 

$

(681.1

)

$

29.3

 

$

8.2

 

          Cash used in investing activities was higher in 2008 than in 2007 primarily as a result of the acquisition of the remaining interest in the Greens Creek Joint Venture from Rio Tinto, plc for $688.5 million (net of cash acquired), along with Hecla stock valued at approximately $53.4 million. In addition, we invested $68.7 million of cash in property, plant, equipment, and mineral interests in 2008, up from $34.9 million in 2007, and an additional $26.7 million for non-cash acquisition of properties paid for with the Hecla stock. The increased capital investment at our Lucky Friday unit was primarily for sustaining capital that will facilitate extension of our mine plan to deeper levels and a new tailings disposal area. Capital investment at the Greens Creek unit, of which our subsidiaries have owned 100% since April 16, 2008, was for sustaining capital that will modernize communications and the hauling fleet, and additional tailings capacity. Discontinued operations provided $21.9 million more cash in 2008, while other investing activities yielded $10.1 million less cash in 2008 than in 2007.

          Cash provided by investing activities in 2007 exceeded cash provided in 2006’s level by $21.2 million as a result of liquidation of short-term investments held at the end of 2006 and lower cash requirements for discontinued operations, offset partly by higher capitalized costs in 2007 and $16.8 million less cash flow from sales of investments and properties.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

Cash (used in) provided by financing activities (in millions)

 

$

329.6

 

$

202.9

 

$

(0.1

)

          Significant financing activities in 2008 included the receipt of $380 million related to the amended credit agreement entered into in connection with the acquisition of the remaining interest in the Greens Creek Joint Venture as described in Critical Accounting Estimates - Business Combinations, the sale of 34.4 million shares of our common stock for proceeds, net of related fees, of $163.8 million in September, and the sale of 10.2 million shares for net proceeds of $19.6 million in December. In September, we repaid $181.2 million on our debt ($18.3 million on our term loan, as scheduled, and $162.9 million on our bridge loan), and in October we repaid an additional $37.1 million on our bridge loan. The primary use of cash for financing activities beyond loan payments was the payment of dividends on Series B and mandatory convertible

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preferred stock. In 2007, we realized $194.9 million from the sale of mandatory convertible preferred stock. We were required to pay $7.4 million in dividends on preferred shares in 2008 compared to $0.6 million in 2007. In 2007, $8.8 million was received from the sale of shares issued under our stock option plans.

          Cash provided by financing activities in 2007 totaled $202.9 million, in contrast to cash used in 2006 of $0.1 million, due primarily to our sale of 2,012,500 shares of mandatory convertible preferred stock in 2007 which yielded $194.9 million. Proceeds from stock option exercises in 2007 were higher than in 2006 by $4.8 million as more options were exercised due to higher stock prices in the current year; and in 2006, we repaid our $3.0 million balance on our revolving loan facility, while in 2007, the facility carried no balance.

Acquisition of the Greens Creek Joint Venture

          On April 16, 2008, we completed our acquisition of the remaining 70.3% of the Greens Creek Joint Venture from a subsidiary of Rio Tinto. We have been a partner in the Joint Venture for approximately 20 years. The 70.3% interest was acquired for $700 million cash ($688.1 million net of cash received) and 4.4 million shares of Hecla common stock, which was valued at $53.4 million. The $700 million in cash paid to Rio Tinto included $220 million in proceeds from a bridge financing which was originally scheduled to mature in October 2008, a $140 million three-year amortizing term loan facility scheduled to mature on March 31, 2011, and $340 million in cash which we held prior to closing. We utilized an additional $20 million available for general corporate purposes from the bridge facility in September 2008. See Cash (used in) provided by financing activities for information on the service of our debt facility obligations and equity issuances in 2008 related to the acquisition of the remaining 70.3% of Greens Creek.

          On February 3, 2009, we reached an agreement to amend the terms of our current credit facilities to defer all term facility principal payments due in 2009, totaling $66.7 million, to 2010 and 2011. In addition, on February 4, 2009, we entered into an agreement to sell 32 million units comprised of one share of Common Stock and one-half Series 3 Warrant to purchase one share of Common Stock in an underwritten public offering for proceeds of approximately $65.6 million. On February 6, 2009, the underwriters exercised their over-allotment option in connection with the original offering, resulting in the issuance and sale of 4.8 million additional units for additional proceeds of approximately $9.8 million. We applied $40 million of the total proceeds to the payment of our outstanding bridge facility balance on February 10, 2009. In accordance with the credit facilities, we also reduced our term loan by approximately $8 million in February 2009. See Note 21 - Subsequent Events of Notes to Consolidated Financial Statements for further discussion of the credit facilities amendment and offering.

          There are a number of factors that may impact our future ability to meet the obligations of our debt facility. If the volumes or the market prices for the metals we produce are inadequate or we fail to control our production, development or corporate costs for a sustained period of time, our ability to service our debt obligations may be adversely affected. Our cash and investment balances and cash flows from operations may not be adequate to meet our obligations, and we may be required to obtain additional cash through asset sales or the potential addition of new debt or equity financing. There can be no assurance that these cash sources will be available to us. See the discussion of Future Metals Prices in the Critical Accounting Estimates and discussion of the various risks associated with our credit facilities in Item 1A. Risk Factors.

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Contractual Obligations and Contingent Liabilities and Commitments

          The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our outstanding purchase orders, certain capital expenditures, our credit facilities (as modified by amendments), and lease arrangements as of December 31, 2008 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due By Period

 

 

 

Less than
1 year

 

1-3 years

 

3-5 years

 

After
5 years

 

Total

 

Purchase obligations (1)

 

$

7,318

 

$

 

$

 

$

 

$

7,318

 

Long-term debt (2)

 

 

58,677

 

 

122,796

 

 

 

 

 

 

181,473

 

Contractual obligations (3)

 

 

6,009

 

 

 

 

 

 

 

 

6,009

 

Operating lease commitments (4)

 

 

2,511

 

 

1,706

 

 

230

 

 

 

 

4,447

 

Total contractual cash obligations

 

$

74,515

 

$

124,502

 

$

230

 

$

 

$

199,247

 

 

 

 

 

 

(1)

Consist of open purchase orders of approximately $4.8 million at the Greens Creek unit and $2.5 million at the Lucky Friday unit. Included in these amounts are approximately $3.9 million and $2.1 million related to various capital projects at the Greens Creek and Lucky Friday units, respectively.

 

 

(2)

Obligations due in less than one year are comprised of $40 million in principal, $0.1 million in interest and $0.4 million in fees relating to our bridge credit facility and $8 million in principal and $10.2 in estimated interest on our term credit facilitiy. Obligations due in one to three years include $113.7 million in scheduled term facility principal payments and $9.1 million in estimated interest.For more information on our credit facilities, see Note 7 and Note 21 of Notes to Consolidated Financial Statements.

 

 

(3)

As of December 31, 2008, we were committed to approximately $2.2 million for various capital projects at the Greens Creek and Lucky Friday units. Total contractual obligations at December 31, 2008 also include approximately $3.8 million for commitments relating to non-capital items at Greens Creek.

 

 

(4)

We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements.

          On April 16, 2008, we completed the acquisition of the remaining 70.3% of the Greens Creek mine. Accordingly, our obligations relating to open purchase orders, capital projects, transportation and other non-capital cost commitments, and all other items relating to Greens Creek reflect our 100% ownership, versus 29.7% historically. For more information on the acquisition, see Note 19 of Notes to Consolidated Financial Statements.

          On June 19, 2008, we announced that we had entered into an agreement to sell 100% of our wholly owned subsidiaries holding our business and operations in Venezuela, and the transaction closed on July 8, 2008. See Note 13 of Notes to the Consolidated Financial Statements for further discussion of the sale. As a result, our obligations relating to the discontinued La Camorra unit for open purchase orders, transportation and other non-capital commitments, and future royalty obligations were eliminated upon completion of the sale.

          Within the area mined by Lucky Friday, we previously controlled the Gold Hunter property under a long-term operating agreement with Independence Lead Mines Company (“Independence”) scheduled to expire in February 2018 and renewable thereafter, that entitled us, as operator, to an 81.48% interest in the net profits from operations from the Gold Hunter property. Under that agreement, we would have been obligated to pay a net profits interest of 18.52% to Independence after we recouped our costs to explore and develop the property. Recoupment depended on, among other factors, metals prices and the extent of capital invested in Lucky Friday. On November 6, 2008, we completed the acquisition of substantially all of the assets of Independence, resulting in our 100% ownership of the property, thus eliminating our obligation to outside third parties (See Note 19 of Notes to Consolidated Financial Statements for further discussion of the transaction).

          We maintain reserves for costs associated with mine closure, reclamation of land and other environmental matters. At December 31, 2008, our reserves for these matters totaled $121.3 million, for which no contractual or commitment obligations exist. Future expenditures related to closure, reclamation and environmental expenditures are difficult to estimate, although we anticipate we will make expenditures relating to these obligations over the next 30 years. For additional information relating to our environmental obligations, see Notes 5 and 8 of Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

          At December 31, 2008, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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Critical Accounting Estimates

          Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. As described in Note 1, we are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

          We believe that our most critical accounting estimates are related to future metals prices, obligations for environmental, reclamation, and closure matters, mineral reserves, and accounting for business combinations, as they require us to make assumptions that were highly uncertain at the time the accounting estimates were made and changes in them are reasonably likely to occur from period to period. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosures presented below. In addition, there are other items within our financial statements that require estimation, but are not deemed to be critical. However, changes in estimates used in these and other items could have a material impact on our financial statements.

Future Metals Prices

          Metals prices are key components in estimates that determine the valuation of some of our significant assets and liabilities, including properties, plants and equipment, deferred tax assets, and certain accounts receivable. As shown under Item 1A. — Risk Factors, metals prices have been historically volatile. While average prices for silver and gold have performed favorably for five consecutive years, there has been a reduction in the average prices for zinc and lead in 2008 compared to 2007. We have recorded impairments to our asset carrying value because of low prices in the past, and we can offer no assurance that prices will either remain at their current levels or increase.

          Processes supporting valuation of our assets and liabilities that are most significantly affected by prices include analyses of asset carrying values, depreciation, and deferred income taxes. On at least an annual basis – and more frequently if circumstances warrant – we examine the carrying values of our assets, our depreciation rates, and the valuation allowances on our deferred tax assets. In our analyses of carrying values and deferred taxes, we apply several pricing views to our forecasting model, including current prices, analyst price estimates, forward-curve prices, and historical prices (see Mineral Reserves, below, regarding prices used for reserve estimates). Using applicable accounting guidance and our view of metals markets, we use the average of the various methods to determine whether the values of our assets are fairly stated, and to determine the level of valuation allowances on our deferred tax assets. In addition, estimates of future metals prices are used in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (see Business Combinations below).

          Sales of all metals products sold directly to smelters are recorded as revenues when title and risk of loss transfer to the smelter (generally at the time of shipment) at estimated forward metals prices for the estimated month of settlement. Due to the time elapsed from shipment to the smelter and the final settlement with the smelter, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales and trade accounts receivable are adjusted to estimated settlement metals prices until final settlement by the smelter. Changes in metals prices between shipment and final settlement will result in changes to revenues and accounts receivable previously recorded upon shipment. As a result, our trade accounts receivable balances are subject to changes in metals prices until final settlement occurs. For more information, see part O. Revenue Recognition of Note 1 of Notes to Consolidated Financial Statements.

Obligations for Environmental, Reclamation and Closure Matters

          The most significant liability on our balance sheet is for accrued reclamation and closure costs. We have conducted considerable remediation work at sites in the United States for which remediation requirements have not been fully determined, nor have they been agreed between us and various regulatory agencies with oversight over the properties. We have estimated our liabilities with counsel and in accordance with appropriate accounting guidance. On at least an annual basis – and more frequently if warranted – management reviews our liabilities with our Audit Committee. However, the range of liability proposed by the plaintiffs in environmental proceedings considerably exceeds the liabilities we have recognized. If substantial damages were awarded or remediation costs incurred in excess of our accruals, our financial results or condition could be materially adversely affected.

Mineral Reserves

          Critical estimates are inherent in the process of determining our reserves. Our reserves are affected largely by our assessment of future metals prices, as well as by engineering and geological estimates of ore grade, accessibility and production cost. Metals prices are estimated at long-term averages, as described in Item 2. — Property Descriptions. Our assessment of reserves occurs at least annually, and periodically utilizes external audits.

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          Reserves are a key component in valuation of our properties, plants and equipment. Reserve estimates are used in determining appropriate rates of units-of-production depreciation, with net book value of many assets depreciated over remaining estimated reserves. Reserves are also a key component in forecasts, with which we compare future cash flows to current asset values to ensure that carrying values are reported appropriately. Reserves also play a key role in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (see Business Combinations below). Reserves are a culmination of many estimates and not guarantees that we will recover the indicated quantities of metals.

Business Combinations

          In accordance with SFAS 141, “Business Combinations,” we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at acquisition date. We would recognize the excess of an acquired business’s cost over the fair value of acquired assets, less liabilities, as goodwill. The valuation of assets acquired and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to long-lived assets, including estimates of future metals prices and mineral reserves, as discussed above. In some cases, we use third-party appraisers to determine the fair values and lives of property and other identifiable assets.

New Accounting Pronouncements

          In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have a material impact on our consolidated financial statements.

          In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161),” to enhance the current disclosure framework in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended.” SFAS No. 161 amends and expands the disclosures required by SFAS No. 133 so that they provide an enhanced understanding of (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (3) how derivative instruments affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for both interim and annual reporting periods beginning after November 15, 2008. We are currently evaluating the potential impact of this statement on our consolidated financial statements and at this time we do not anticipate a material effect.

          In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of No. ARB 51,” which is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling ownership interest in a subsidiary and for the deconsolidation of a subsidiary. We are currently evaluating the potential impact of this statement on our consolidated financial statements and at this time we do not anticipate a material effect.

          In December 2007, the FASB revised SFAS No. 141 “Business Combinations”. The revised standard is effective for transactions where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.SFAS No. 141(R) will change the accounting for the assets acquired and liabilities assumed in a business combination.

 

 

 

 

Acquisition costs will be generally expensed as incurred;

 

 

 

 

Noncontrolling interests (formally known as “minority interests”) will be valued at fair value at the acquisition date;

 

 

 

 

Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

 

 

 

 

In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date

 

 

 

 

Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

 

 

 

 

Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

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          The adoption of SFAS No. 141(R) does not currently have a material effect on our Consolidated Financial Statements. However, any future business acquisitions occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 will be accounted for in accordance with this statement.

          In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which became effective for fiscal years beginning after November 15, 2007, and for interim periods within those years, for certain financial assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, FASB Staff Position (FSP) No. FAS 157-2 was issued, which delayed by a year the effective date of SFAS No. 157 for certain nonfinancial assets and liabilities. We adopted SFAS No. 157 for financial assets and liabilities in the first quarter of 2008, and the adoption did not have a material impact on our consolidated financial statements. See Note 14 of Notes to the Consolidated Financial Statements for more information. We are currently evaluating the potential impact of the adoption of SFAS No. 157 as it relates to nonfinancial assets and liabilities on our consolidated financial statements.

Forward-Looking Statements

          The foregoing discussion and analysis, as well as certain information contained elsewhere in this Form 10-K, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor created thereby. See the discussion in Special Note on Forward-Looking Statements included prior to Part I, Item 1.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

          The following discussion about our risk-management activities includes forward-looking statements that involve risk and uncertainties, as well as summarizes the financial instruments held by us at December 31, 2008, which are sensitive to changes in interest rates and commodity prices and are not held for trading purposes. Actual results could differ materially from those projected in the forward-looking statements. In the normal course of business, we also face risks that are either nonfinancial or nonquantifiable (see Part I, Item 1A. – Risk Factors).

Short-term Investments

          From time to time we hold various types of short-term investments that are subject to changes in market interest rates and are sensitive to those changes. We did not carry any such short-term investments as of December 31, 2008.

Commodity-Price Risk Management

          At times, we use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production. We use these instruments to reduce risk by offsetting market exposures. We had no commodity-related derivative positions at December 31, 2008.

Interest-Rate Risk Management

          At December 31, 2008, we had $161.7 million in debt associated with the acquisition of the remaining 70.3% of the Greens Creek mine. The debt consists of $121.7 million related to a three-year amortizing term facility maturing on March 31, 2011 and a $40.0 million bridge facility balance maturing on February 13, 2009.

          On May 5, 2008, we entered into an interest rate swap agreement that had the economic effect of modifying the LIBOR-based variable interest obligations associated with our term facility. As a result, the interest payable related to $103.3 million if the $121.7 million term facility balance at December 31, 2008 is fixed at a rate of 9.38% until maturity on March 31, 2011, in accordance with the amortization schedule of the amended and restated credit agreement dated April 16, 2008. As a result of an amendment to the facility in December 2008 to defer the $18.3 million principal payment originally due on December 31, 2008 to February 13, 2009, the terms of the interest rate swap agreement and the note that the swap agreement pertains to did not match at December 31, 2008 with regards to the maturity date of the $18.3 million payment, with the hedge being slightly ineffective as a result. The fair value of the swap at December 31, 2008 was a liability of $2.5 million. The accumulated unrealized loss at December 31, 2008 related to the swap was $2.0 million at December 31, 2008, and we realized a hedging loss of $0.5 million in 2008 related to the ineffective portion of the swap. We are accounting for this swap as a hedge pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The unrealized loss is included in accumulated other comprehensive income in our consolidated balance sheet and the realized loss is included in interest expense in our consolidated statement of operations, with the fair value payable included in other non-current liabilities in our consolidated balance sheet. For additional information regarding our credit facilities, see Note 7 and Note 21 of Notes to the Consolidated Financial Statements.

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          On February 3, 2009, we reached an agreement to amend the terms of our credit facilities to defer all principal payments due on our term facility in 2009, totaling $66.7 million, to 2010 and 2011. As a result of the amendment, the original hedging relationship was de-designated, and a new hedging relationship was designated. A retrospective hedge effectiveness test was performed on the original hedging relationship at the date of de-designation, and the original hedging relationship was determined to be ineffective. Consequently, the change in fair value of the swap of $0.2 million between December 31, 2008 and February 3, 2009 was recorded as a gain on the income statement. The amount of unrealized loss included in accumulated other comprehensive income relating to the original hedge will be recognized in the income statement when the hedged interest payments occur.

Provisional Sales

          Sales of all metals products sold directly to smelters, including by-product metals, are recorded as revenues when title and risk of loss transfer to the smelter (generally at the time of shipment) at estimated forward prices for the estimated month of settlement. Due to the time elapsed from shipment to the smelter and the final settlement with the smelter, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metals prices until final settlement by the smelter. Changes in metals prices between shipment and final settlement will result in changes to revenues previously recorded upon shipment. 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 does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control (see Item 1A – Risk Factors – A substantial or extended decline in metals prices would have a material adverse effect on us for more information). At December 31, 2008, metals contained in concentrates and exposed to future price changes totaled 902,248 ounces of silver, 3,730 ounces of gold, 17,283 tons of zinc, and 5,609 tons of lead.

Item 8. Financial Statements and Supplementary Data

          Our Consolidated Financial Statements are included herein beginning on page F-1. Financial statement schedules are omitted as they are not applicable or the information required is included in the Consolidated Financial Statements.

          The following table sets forth supplementary financial data (in thousands, except per share amounts) for each quarter of the years ended December 31, 2008 and 2007, derived from our unaudited financial statements. The data set forth below should be read in conjunction with and is qualified in its entirety by reference to our Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Total

 

Sales of products (1)

 

$

36,627

 

$

63,995

 

$

64,525

 

$

27,508

 

$

192,655

 

Gross profit (loss) (1)

 

$

18,652

 

$

1,625

 

$

11,397

 

$

(13,815

)

$

17,859

 

Income (loss) from continuing operations

 

$

13,564

 

$

(10,309

)

$

(3,766

)

$

(36,662

)

$

(37,173

)

Income (loss) from discontinued operations, net of tax

 

$

1,918

 

$

(19,298

)

$

(15

)

$

 

$

(17,395

)

Gain (loss) on sale of discontinued operations, net of tax

 

$

 

$

(11,372

)

$

25

 

$

(648

)

$

(11,995

)

Net income (loss)

 

$

15,482

 

$

(40,979

)

$

(3,756

)

$

(37,310

)

$

(66,563

)

Preferred stock dividends

 

$

(3,408

)

$

(3,409

)

$

(3,408

)

$

(3,408

)

$

(13,633

)

Income (loss) applicable to common shareholders

 

$

12,074

 

$

(44,388

)

$

(7,164

)

$

(40,718

)

$

(80,196

)

Basic and diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.08

 

$

(0.11

)

$

(0.05

)

$

(0.24

)

$

(0.36

)

Income (loss) from discontinued operations

 

$

0.02

 

$

(0.15

)

$

 

$

 

$

(0.12

)

Gain (loss) on sale of discontinued operations, net of tax

 

$

 

$

(0.09

)

$

 

$

 

$

(0.09

)

Income (loss) per common share

 

$

0.10

 

$

(0.35

)

$

(0.05

)

$

(0.24

)

$

(0.57

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of products (1)

 

$

33,100

 

$

44,431

 

$

39,810

 

$

36,361

 

$

153,702

 

Gross profit (1)

 

$

16,018

 

$

23,965

 

$

20,718

 

$

17,085

 

$

77,786

 

Income from continuing operations

 

$

7,866

 

$

38,210

 

$

13,011

 

$

9,070

 

$

68,157

 

Income (loss) from discontinued operations, net of tax

 

$

277

 

$

(13,873

)

$

(526

)

$

(838

)

$

(14,960

)

Net income

 

$

8,143

 

$

24,337

 

$

12,485

 

$

8,232

 

$

53,197

 

Preferred stock dividends

 

$

(138

)

$

(138

)

$

(138

)

$

(610

)

$

(1,024

)

Income applicable to common shareholders

 

$

8,005

 

$

24,199

 

$

12,347

 

$

7,622

 

$

52,173

 

Basic and diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.07

 

$

0.30

 

$

0.10

 

$

0.07

 

$

0.56

 

Loss from discontinued operations

 

$

 

$

(0.10

)

$

 

$

(0.01

)

$

(0.13

)

Income per common share

 

$

0.07

 

$

0.20

 

$

0.10

 

$

0.06

 

$

0.43

 

(1) Reconciliation of reported amounts varying from amounts previously reported on Form 10-Q:

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Table of Contents

 

 

 

 

 

 

 

 

2008

 

First
Quarter

 

Second
Quarter

 

Sales of products, as previously reported on Form 10-Q

 

$

45,960

 

 

 

 

Reclassification of sales from discontinued Venezuelan operations (a)

 

 

(9,333

)

 

 

 

 

 

 

 

 

 

 

Sales of products, as reported on Form 10-K

 

$

36,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit, as previously reported on Form 10-Q

 

$

21,781

 

 

 

 

Reclassification of gross profit (loss) from discontinued Venezuelan operations (a)

 

 

(3,129

)

 

 

 

 

 

 

 

 

 

 

Gross profit, as reported on Form 10-K

 

$

18,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

Sales of products, as previously reported on Form 10-Q

 

$

54,593

 

 

 

 

Reclassification of sales from discontinued Venezuelan operations (a)

 

 

21,493

 

 

 

 

 

 

 

 

 

 

 

Sales of products, as reported on Form 10-K

 

$

33,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit, as previously reported on Form 10-Q

 

$

17,870

 

 

 

 

Reclassification of gross profit (loss) from discontinued Venezuelan operations (a)

 

 

1,852

 

 

 

 

 

 

 

 

 

 

 

Gross profit, as reported on Form 10-K

 

$

16,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, as previously reported on Form 10-Q

 

 

 

 

$

36,141

 

Adjustment for income tax benefit/provision associated with continuing and discontinued operations

 

 

 

 

 

2,069

 

 

 

 

 

 

 

 

Income from continuing operations, as reported on Form 10-K

 

 

 

 

$

38,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, as previously reported on Form
10-Q

 

 

 

 

$

(11,804

)

Adjustment for income tax benefit/provision associated with continuing and discontinued operations

 

 

 

 

 

(2,069

)

 

 

 

 

 

 

 

Loss from discontinued operations, as reported on Form 10-K

 

 

 

 

$

(13,873

)

 

 

 

 

 

 

 


 

 

 

(a) As a result of the sale of our Venezuelan operations on July 8, 2008, we have revised our previously issued financial statements for the years ended December 31, 2007, 2006 and 2005, including interim periods for those years, and for the quarter ended March 31, 2008, to reflect our Venezuelan operations as discontinued operations. See Note 13 of Notes to Consolidated Financial Statements for more information. These adjustments reflect the effect of reclassifying our discontinued Venezuelan operations on amounts previously reported in our Form 10-Q filed for the interim period ended March 31, 2008. Our Form 10-Qs filed for the interim periods ended June 30 and September 30, 2008 reflect the effect of the reclassification of our discontinued Venezuelan operation for all periods presented.

 

 

 

(b) Based on our interpretation of FASB Statement No. 109 “Accounting for Income Taxes” (SFAS 109) upon filing our Form 10-Q for the period ended June 30, 2008, we classified $2.0 million of income tax benefit as a component of loss from our discontinued Venezuelan operations, and $0.1 of income tax provision to our continuing operations, for the quarter ended June 30, 2007, as reported in our Form 10-Q filed for the period ended June 30, 2008. Upon further clarification of the provisions of FAS 109, we have revised these amounts to classify $36,000 of income tax provision to discontinued operations, and $2.0 million of income tax benefit to continuing operations, resulting in $0.02 increases to basic and diluted income from continuing operations per common share and basic and diluted loss from discontinued operations per common share for the quarter ended June 30, 2007.

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Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

          None

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

          An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2008, in ensuring them in a timely manner that material information required to be disclosed in this report has been properly recorded, processed, summarized and reported.

Management’s Annual Report on Internal Control over Financial Reporting

          Management is responsible for establishing and maintaining adequate internal control over our financial reporting, which is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

          Because of its inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, because of changes in conditions, internal control effectiveness may vary over time.

          Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008, using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that we have maintained effective internal control over financial reporting as of December 31, 2008, based on these criteria.

          Our internal control over financial reporting as of December 31, 2008 has been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in the attestation report which is included herein.

          On April 16, 2008, our subsidiaries acquired the remaining 70.3% interest in the Greens Creek Joint Venture (“Greens Creek”), of which we previously held 29.7%. Prior to ownership by our various subsidiaries of 100% of the joint venture, we excluded Greens Creek from our assessment of internal control over financial reporting, as we did not have the ability to dictate or modify the controls at Greens Creek. We have commenced the process of assessing the effectiveness of our internal control over financial reporting at Greens Creek, using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). However, management has excluded Greens Creek from its assessment of internal control over financial reporting as of December 31, 2008, as we are still in the process of assessing the effectiveness of our internal control over financial reporting there. Greens Creek represented 81% of our total assets at December 31, 2008, while its revenues comprised 68% of our total sales of products for the year ended December 31, 2008.

          On January 1, 2008, we implemented a new business system at our corporate office to facilitate automation of our accounting processes. We believe the new system will enhance existing internal controls over financial reporting by decreasing manual controls inherent in our prior system.

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Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Hecla Mining Company
Coeur d’Alene, Idaho

We have audited Hecla Mining Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hecla Mining Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the Greens Creek Joint Venture, which controlling interest was acquired on April 16, 2008, and which is included in the consolidated balance sheet of Hecla Mining Company as of December 31, 2008, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. The Greens Creek Joint venture constituted 81% of total assets as of December 31, 2008, and 68% of revenues for the year then ended. Management did not complete its assessment on the effectiveness of internal control over financial reporting of the Greens Creek Joint Venture because of the timing of the acquisition which was completed on April 16, 2008. Our audit of internal control over financial reporting of Hecla Mining Company also did not include an evaluation of the internal control over financial reporting of the Greens Creek Joint Venture.

In our opinion, Hecla Mining Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hecla Mining Company as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 27, 2009 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Spokane, Washington
February 27, 2009

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Table of Contents

Changes in Internal Control over Financial Reporting

          There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information

          None.

PART III

Item 10. Directors and Executive Officers of the Registrant

          In accordance with the Corporation’s Certificate of Incorporation, its Board of Directors is divided into three classes. The terms of office of the directors in each class expire at different times. The directors are elected for three-year terms. The Effective Dates listed below for each director is their current term of office. All officers are elected for a term, which ordinarily expires on the date of the meeting of the Board of Directors immediately following the Annual Meeting of Shareholders. The positions and ages listed below are as of the date of our next Annual Meeting of Shareholders in May 2009. There are no arrangements or understandings between any of the directors or officers and any other person(s) pursuant to which such officers were elected.

 

 

 

 

 

 

 

 

 

Age at
May 29, 2009

 

Position and Committee
Assignments

 

Effective
Dates

 

 

 

 

 

 

 

Phillips S. Baker, Jr.

 

49

 

President and CEO,
Director (1)

 

5/08 — 5/09
5/08 — 5/11

 

 

 

 

 

 

 

Ronald W. Clayton

 

50

 

Senior Vice President – Operations

 

5/08 — 5/09

 

 

 

 

 

 

 

James A. Sabala

 

54

 

Senior Vice President and Chief Financial Officer (5)

 

5/08 — 5/09

 

 

 

 

 

 

 

Dr. Dean W.A.
McDonald

 

51

 

Vice President – Exploration

 

5/08 — 5/09

 

 

 

 

 

 

 

Don Poirier

 

50

 

Vice President – Corporate Development

 

5/08 – 5/09

 

 

 

 

 

 

 

John H. Bowles

 

63

 

Director (1,2,5)

 

7/06 — 5/09

 

 

 

 

 

 

 

David J. Christensen

 

47

 

Director (1,2,3)

 

5/08 — 5/11

 

 

 

 

 

 

 

Ted Crumley

 

64

 

Director and Chairman of the Board (1,4)

 

5/07 — 5/10

 

 

 

 

 

 

 

George R. Nethercutt, Jr.

 

64

 

Director (3,4)

 

5/06 — 5/09

 

 

 

 

 

 

 

Terry V. Rogers

 

62

 

Director (2,4,5)

 

5/07 – 05/10

 

 

 

 

 

 

 

Charles B. Stanley

 

50

 

Director (2,5)

 

5/07 – 05/10

 

 

 

 

 

 

 

Dr. Anthony P. Taylor

 

67

 

Director (3,4,5)

 

5/08 — 5/11

 

 

 

 

 

 

 

 

 

 

(1)

Member of Executive Committee

 

 

 

 

(2)

Member of Audit Committee

 

 

 

 

(3)

Member of Corporate Governance and Directors Nominating Committee

 

 

 

 

(4)

Member of Compensation Committee

 

 

 

 

(5)

Member of Technical Committee

          Phillips S. Baker, Jr., has been our Chief Executive Officer since May 2003; President since November 2001; and a director since November 2001. Prior to that, Mr. Baker was our Chief Financial Officer from May 2001 to June 2003; Chief Operating Officer from November 2001 to May 2003; and Vice President from May 2001 to November 2001. Prior to joining us, Mr. Baker served as Vice President and Chief Financial Officer of Battle Mountain Gold Company (a gold mining company) from March 1998 to January 2001. Mr. Baker also serves as a director for Questar Corporation (a Western U.S. natural gas distribution, pipelines and exploration and production company).

          Ronald W. Clayton was appointed Senior Vice President - Operations in November 2006. Prior to that, Mr. Clayton was Vice President - North American Operations from September 2002 to October 2006. Prior to joining us, Mr. Clayton was

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Table of Contents

Vice President – Operations for Stillwater Mining Company (a mining company) from July 2000 to May 2002. Mr. Clayton was also our Vice President – Metals Operations from May 2000 to July 2000.

          James A. Sabala was appointed Chief Financial Officer in May 2008 and Senior Vice President in March 2008. Prior to his employment with Hecla, Mr. Sabala was Executive Vice President – Chief Financial Officer of Coeur d’Alene Mines Corporation (a mining company) from 2003 to February 2008. Mr. Sabala also served as Vice President – Chief Financial Officer of Stillwater Mining Company (a mining company) from 1998 to 2002.

          Dr. Dean W.A. McDonald was appointed Vice President – Exploration in August 2006. Dr. McDonald has also been our Vice President – Exploration of our Canadian subsidiary, Hecla Mining Company of Canada Ltd., since August 2006. Prior to joining Hecla, Dr. McDonald was Vice President Exploration and Business Development for Committee Bay Resource Ltd. (a Canadian-based exploration and development company) from 2003 to August 2006.

          Don Poirier was appointed Vice President – Corporate Development in July 2007. Prior to joining Hecla, Mr. Poirier was a mining analyst with Blackmont Capital (capital market specialists) from September 2002 to June 2007. Mr. Poirier held other mining analyst positions from 1988 to 2002.

          David J. Christensen previously served as a director from May 2002 to October 2002, when he was elected to the Board of Directors by preferred shareholders in May 2002. He was re-appointed to Hecla’s Board of Directors in August 2003. The payment of the dividends in arrears in July 2005 resulted in the elimination of this director position, at such time he was then appointed to the Board of Directors when the number of director positions was increased from seven to nine. Mr. Christensen has been Chief Executive Officer of ASA Limited (a closed-end investment company) since February 2009, as well as being appointed to the board of directors of ASA Limited in November 2008. He served as Vice President – Investments of ASA Limited from May 2007 to February 2009. He served as Vice President of Corporate Development for Gabriel Resources Ltd. (a Canadian-based resource company) from October 2006 to February 2008.

          John H. Bowles was elected by the shareholders to Hecla’s Board of Directors in May 2006. Mr. Bowles was a partner in the Audit and Assurance Group of PricewaterhouseCoopers LLP (an accounting firm) from April 1976 to June 2006. He concentrated his practice on public companies operating in the mining industry. Mr. Bowles has been a Director of HudBay Minerals Inc. (a zinc, copper, gold and silver mining company) since May 2006, as well as a Director of Boss Power Corp. (a mineral exploration company) since September 2007. He holds Fellowships in both the British Columbia Institute of Chartered Accountants and the Canadian Institute of Mining and Metallurgy. Mr. Bowles has been the Treasurer of Mining Suppliers Association of British Columbia (an association of providers of equipment, products and related services to the British Columbia mining industry) since May 1999. He has been Director Emeritus of Ducks Unlimited Canada since March 1996.

          Ted Crumley has served as a director since 1995 and became Chairman of the Board in May 2006. Mr. Crumley served as the Executive Vice President and Chief Financial Officer of OfficeMax Incorporated (a distributor of office products) from January 2005 to December 2005, and as Senior Vice President from November 2004 to January 2005. Prior to that, Mr. Crumley was Senior Vice President and Chief Financial Officer of Boise Cascade Company (a wood and paper company), from 1994 to 2004.

          George R. Nethercutt, Jr., was appointed to Hecla’s Board of Directors in February 2005. Mr. Nethercutt has served as a principal of Nethercutt Consulting LLC (a strategic planning and consulting firm), since January 2007. Prior to that, Mr. Nethercutt was a principal of Lundquist, Nethercutt & Griles, LLC (a strategic planning and consulting firm) from February 2005 to January 2007. Mr. Nethercutt has also been a board member for the Washington Policy Center (a premiere public policy organization providing high quality analysis on issues relating to the free market and government regulation) since January 2005. In August 2005, Mr. Nethercutt was appointed Of Counsel with the law firm of Paine Hamblen, LLP. Mr. Nethercutt serves as a board member of ARCADIS Corporation (an international company providing consultancy, engineering and management services), the Juvenile Diabetes Research Foundation International (a charity and advocate of juvenile diabetes research worldwide), as well as being the U.S. Chairman of the Permanent Joint Board on Defense – U.S./Canada. From 1995 to 2005, Mr. Nethercutt served in the U.S. House of Representatives, including House Appropriations subcommittees on Interior, Agriculture and Defense and the Science Committees subcommittee on Energy. He has been a member of the Washington State Bar Association since 1972.

          Charles B. Stanley was elected to Hecla’s Board of Directors in May 2007. Mr. Stanley has been the Chief Operating Officer of Questar Corporation (a U.S. natural gas-focused exploration and production, interstate pipeline and local distribution company) since March 2008. He has been Executive Vice President and Director of Questar Corporation since 2002 and also President and Chief Executive Officer of Questar Market Resources, Inc.; Wexpro Company (management and development, cost-of-service properties); Questar Exploration and Production Company (oil and gas exploration and production); Questar Gas Management Company (gas gathering and processing); and Questar Energy Trading Company (wholesale marketing and storage) since 2002.

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Table of Contents

          Terry V. Rogers was elected to Hecla’s Board of Directors in May 2007. Mr. Rogers was the Senior Vice President and Chief Operating Officer of Cameco Corporation (the world’s largest uranium producer) from February 2003 to June 2007. Mr. Rogers also served as President of Kumtor Operating Company (a gold producing company and a division of Cameco Corporation) from 1999 to 2003.

          Dr. Anthony P. Taylor has served as a director since May 2002 upon election by preferred shareholders. The payment of the dividends in arrears in July 2005 resulted in the elimination of this director position. At such time he was then appointed to the Board of Directors when the number of director positions was increased from seven to nine. Dr. Taylor has been the President, CEO and Director of Gold Summit Corporation (a public Canadian minerals exploration company) since October 2003. Dr. Taylor has also served as President and Director of Caughlin Preschool Corp. (a private Nevada corporation that operates a preschool) since October 2001 and was a director of Greencastle Resources Corporation (an exploration company) from December 2003 to June 2008. Prior to that, Dr. Taylor was President, Chief Executive Officer and Director of Millennium Mining Corporation (a private Nevada minerals exploration company) from January 2000 to October 2003.

          Information with respect to our directors is set forth under the caption “Proposal 1 - Election of Directors” in our proxy statement to be filed pursuant to Regulation 14A for the annual meeting scheduled to be held on May 29, 2009 (the Proxy Statement), which information is incorporated herein by reference.

          Reference is made to the information set forth in the first paragraph under the caption “Audit Committee Report – Membership and Role of the Audit Committee,” and under the caption “Corporate Governance” in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.

          Reference is made to the information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.

          Reference is made to the information set forth under the caption “Available Information” in Item 1 for information about the Company’s Code of Business Conduct and Ethics, which information is incorporated herein by reference.

Item 11. Executive Compensation

          Reference is made to the information set forth under the caption “Compensation of Non-Management Directors;” the caption “Compensation Discussion and Analysis;” the caption “Compensation Committee Interlocks and Insider Participation;” the caption “Compensation Committee Report,” the caption “Compensation Tables;” the first paragraph under the caption “Certain Information About the Board of Directors and Committees of the Board;” and under the caption “Other Benefits” in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

          Reference is made to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” and the caption “Equity Compensation Plan Information” in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

          Reference is made to the information set forth in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

          Reference is made to the information set forth under the caption “Audit Fees – Audit and Non-Audit Fees” in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. Reference is made to the information set forth under the caption “Audit Fees – Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor” in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.

48


Table of Contents

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

 

 

 

 

(a)

(1)

Financial Statements

 

 

 

 

 

 

 

See Index to Financial Statements on Page F-1

 

 

 

 

 

(a)

(2)

Financial Statement Schedules

 

 

 

 

 

 

 

Not applicable

 

 

 

 

 

(a)

(3)

Exhibits

 

 

 

 

 

 

 

See Exhibit Index following the Financial Statements

49


Table of Contents

Signatures

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

HECLA MINING COMPANY

 

 

 

 

 

By:

/s/ Phillips S. Baker, Jr.

 

 

Phillips S. Baker, Jr., President,
Chief Executive Officer and Director

 

 

 

 

 

Date:

 

March 2, 2009

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

 

/s/ Phillips S. Baker, Jr.

 

3/2/09

 

/s/ Ted Crumley

 

3/2/09

Phillips S. Baker, Jr.

 

Date

 

Ted Crumley

 

Date

President, Chief Executive Officer and Director

 

 

 

Director

 

 

(principal executive officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ James A. Sabala

 

3/2/09

 

/s/ Charles B. Stanley

 

3/2/09

James A. Sabala

 

Date

 

Charles B. Stanley

 

Date

Senior Vice President and

 

 

 

Director

 

 

Chief Financial Officer

 

 

 

 

 

 

(principal financial and accounting officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ John H. Bowles

 

3/2/09

 

/s/ George R. Nethercutt, Jr.

 

3/2/09

John H. Bowles

 

Date

 

George R. Nethercutt, Jr.

 

Date

Director

 

 

 

Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ David J. Christensen

 

3/2/09

 

/s/ Terry V. Rogers

 

3/2/09

David J. Christensen

 

Date

 

Terry V. Rogers

 

Date

Director

 

 

 

Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Anthony P. Taylor

 

3/2/09

 

 

 

 

Anthony P. Taylor

 

Date

 

 

 

 

Director

 

 

 

 

 

 

50


Table of Contents

Index to Consolidated Financial Statements

 

 

 

 

 

Page

Consolidated Financial Statements

 

 

Report of Independent Registered Public Accounting Firm

 

F-2

Consolidated Balance Sheets at December 31, 2008 and 2007

 

F-3

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2008, 2007 and 2006

 

F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006

 

F-5

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006

 

F-6

Notes to Consolidated Financial Statements

 

F-7 to F-46

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Hecla Mining Company

Coeur d’ Alene, Idaho

We have audited the accompanying consolidated balance sheets of Hecla Mining Company as of December 31, 2008 and 2007 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hecla Mining Company at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hecla Mining Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2009 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Spokane, Washington
February 27, 2009

F-2


Table of Contents

Hecla Mining Company and Subsidiaries

Consolidated Balance Sheets
(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,470

 

$

373,123

 

Short-term investments and securities held for sale

 

 

 

 

25,759

 

Accounts and notes receivable:

 

 

 

 

 

 

 

Trade

 

 

8,314

 

 

14,053

 

Other, net

 

 

1,100

 

 

7,834

 

Inventories, net

 

 

21,331

 

 

15,511

 

Current deferred income taxes

 

 

2,481

 

 

7,370

 

Other current assets

 

 

4,154

 

 

5,934

 

Total current assets

 

 

73,850

 

 

449,584

 

Non-current investments

 

 

3,118

 

 

8,429

 

Non-current restricted cash and investments

 

 

13,133

 

 

15,181

 

Properties, plants, equipment and mineral interests, net

 

 

852,113

 

 

132,308

 

Non-current deferred income taxes

 

 

36,071

 

 

14,938

 

Other non-current assets

 

 

10,506

 

 

30,297

 

Total assets

 

$

988,791

 

$

650,737

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

21,850

 

$

22,564

 

Accrued payroll and related benefits

 

 

8,475

 

 

16,184

 

Accrued taxes

 

 

4,408

 

 

3,703

 

Current debt

 

 

40,000

 

 

 

Current portion of long-term debt

 

 

8,018

 

 

 

Current portion of accrued reclamation and closure costs

 

 

2,227

 

 

9,686

 

Total current liabilities

 

 

84,978

 

 

52,137

 

Long-term debt

 

 

113,649

 

 

 

Accrued reclamation and closure costs

 

 

119,120

 

 

96,453

 

Other noncurrent liabilities

 

 

21,587

 

 

9,618

 

Total liabilities

 

 

339,334

 

 

158,208

 

Commitments and contingencies (Notes 2, 4, 5, 7, 8, 11, 19 and 21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2008 — $8,029 and 2007 — $7,891

 

 

39

 

 

39

 

Mandatory convertible preferred stock, $0.25 par value, 2,012,500 shares issued and outstanding, liquidation preference 2008 — $204,520 and 2007 — $201,250

 

 

504

 

 

504

 

Common stock, $0.25 par value, 400,000,000 authorized; issued 2008 — 180,461,371 shares and issued 2007 — 121,456,837 shares

 

 

45,115

 

 

30,364

 

Capital surplus

 

 

981,161

 

 

725,076

 

Accumulated deficit

 

 

(351,700

)

 

(274,877

)

Accumulated other comprehensive income (loss)

 

 

(25,022

)

 

12,063

 

Less treasury stock, at cost; 81,375 common shares

 

 

(640

)

 

(640

)

Total shareholders’ equity

 

 

649,457

 

 

492,529

 

Total liabilities and shareholders’ equity

 

$

988,791

 

$

650,737

 

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

F-3


Table of Contents

Hecla Mining Company and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)
(Dollars and shares in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2008

 

2007

 

2006

 

Sales of products

 

$

192,655

 

$

153,702

 

$

122,585

 

Cost of sales and other direct production costs

 

 

139,589

 

 

63,593

 

 

51,968

 

Depreciation, depletion and amortization

 

 

35,207

 

 

12,323

 

 

11,756

 

 

 

 

174,796

 

 

75,916

 

 

63,724

 

Gross profit

 

 

17,859

 

 

77,786

 

 

58,861

 

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

13,894

 

 

15,166

 

 

15,011

 

Exploration

 

 

22,471

 

 

15,934

 

 

14,708

 

Pre-development expense

 

 

 

 

1,027

 

 

8,091

 

Depreciation and amortization

 

 

 

 

299

 

 

972

 

Other operating expense

 

 

2,744

 

 

1,229

 

 

5,309

 

Gain on disposition of property, plants, equipment and mineral interests

 

 

(203

)

 

(63,205

)

 

(4,497

)

Charitable foundation donation

 

 

 

 

5,143

 

 

 

Provision for closed operations and environmental matters

 

 

4,312

 

 

49,152

 

 

3,516

 

 

 

 

43,218

 

 

24,745

 

 

43,110

 

Income (loss) from operations

 

 

(25,359

)

 

53,041

 

 

15,751

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Net gain on sale of investments

 

 

7,724

 

 

 

 

36,422

 

Interest and other income

 

 

3,842

 

 

7,147

 

 

3,531

 

Interest expense

 

 

(19,573

)

 

(534

)

 

(608

)

 

 

 

(8,007

)

 

6,613

 

 

39,345

 

Income (loss) from continuing operations before income taxes

 

 

(33,366

)

 

59,654

 

 

55,096

 

Income tax benefit (provision)

 

 

(3,807

)

 

8,503

 

 

9,692

 

Net income (loss) from continuing operations

 

 

(37,173

)

 

68,157

 

 

64,788

 

Gain (loss) from discontinued operations, net of tax

 

 

(17,395

)

 

(14,960

)

 

4,334

 

Loss on sale of discontinued operations, net of tax

 

 

(11,995

)

 

 

 

 

Net income (loss)

 

 

(66,563

)

 

53,197

 

 

69,122

 

Preferred stock dividends

 

 

(13,633

)

 

(1,024

)

 

(552

)

 

 

 

 

 

 

 

 

 

 

 

Income (loss) applicable to common shareholders

 

$

(80,196

)

$

52,173

 

$

68,570

 

Net income (loss)

 

$

(66,563

)

$

53,197

 

$

69,122

 

Minimum pension liability adjustment

 

 

 

 

 

 

388

 

Unrealized gain (loss) on defined benefit plan

 

 

(29,113

)

 

321

 

 

 

Amortization of net prior service benefit on defined benefit plan

 

 

624

 

 

4,753

 

 

 

Prior service cost from amendment to defined benefit plan

 

 

(1,472

)

 

 

 

 

Change in derivative contracts

 

 

(1,967

)

 

 

 

 

Unrealized holding gains (losses) on investments

 

 

(4,539

)

 

5,235

 

 

20,225

 

Reclassification of net gain on sale of marketable securities included in net income (loss)

 

 

(7,766

)

 

 

 

(36,422

)

Comprehensive income (loss)

 

$

(110,796

)

$

63,506

 

$

53,313

 

Basic and diluted income (loss) applicable to common shareholders per common share after preferred stock dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.36

)

$

0.56

 

$

0.54

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

 

(0.12

)

 

(0.13

)

 

0.03

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of discontinued operations

 

 

(0.09

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share

 

$

(0.57

)

$

0.43

 

$

0.57

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding – basic

 

 

141,272

 

 

120,420

 

 

119,255

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding – diluted

 

 

141,272

 

 

121,071

 

 

119,702

 

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

F-4


Table of Contents

Hecla Mining Company and Subsidiaries

Consolidated Statements of Cash Flows
(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2008

 

2007

 

2006

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(66,563

)

$

53,197

 

$

69,122

 

(Income) loss on discontinued operations, net of tax

 

 

29,390

 

 

14,960

 

 

(4,334

)

Income (loss) from continuing operations

 

 

(37,173

)

 

68,157

 

 

64,788

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

35,846

 

 

12,611

 

 

12,728

 

Gain on sale of investments

 

 

(7,724

)

 

 

 

(36,420

)

Gain on disposition of properties, plants and equipment

 

 

(203

)

 

(63,205

)

 

(4,497

)

Gain on sale of royalty interests

 

 

 

 

 

 

(341

)

Provision for reclamation and closure costs

 

 

651

 

 

46,153

 

 

544

 

Deferred income taxes

 

 

6,756

 

 

(10,486

)

 

(11,822

)

Stock compensation

 

 

4,122

 

 

3,381

 

 

2,459

 

Amortization of loan origination fees

 

 

6,646

 

 

 

 

 

Amortization of intangible asset

 

 

710

 

 

 

 

 

Loss on derivative contract

 

 

514

 

 

 

 

 

Charitable foundation donation paid with common stock

 

 

 

 

5,143

 

 

 

Other non-cash charges

 

 

 

 

 

 

285

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

18,591

 

 

5,204

 

 

(16,923

)

Inventories

 

 

1,812

 

 

(1,656

)

 

1,085

 

Inventory purchase price allocation adjustment

 

 

16,637

 

 

 

 

 

Other current and noncurrent assets

 

 

(2,012

)

 

(2,184

)

 

1,645

 

Accounts payable and accrued liabilities

 

 

(9,263

)

 

3,632

 

 

5,730

 

Accrued payroll and related benefits

 

 

(1,943

)

 

3,423

 

 

2,492

 

Accrued taxes

 

 

1,068

 

 

461

 

 

755

 

Accrued reclamation and closure costs

 

 

(6,621

)

 

(6,520

)

 

(4,466

)

Other non-current liabilities

 

 

(1,141

)

 

(1,166

)

 

2,716

 

Net cash provided by (used by) discontinued operations

 

 

(12,488

)

 

2,047

 

 

40,736

 

Net cash provided by operating activities

 

 

14,785

 

 

64,995

 

 

61,494

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

Additions to properties, plants, equipment and mineral interests

 

 

(68,674

)

 

(34,875

)

 

(17,436

)

Purchase of 70.3% of Greens Creek, net of cash acquired

 

 

(688,452

)

 

 

 

 

Proceeds from sale of investments

 

 

27,001

 

 

 

 

57,441

 

Proceeds from disposition of properties, plants and equipment

 

 

596

 

 

45,048

 

 

4,372

 

Redemptions of restricted cash and investment balances

 

 

31,839

 

 

 

 

 

Increases in restricted cash and investment balances

 

 

(8,562

)

 

(1,328

)

 

(404

)

Purchase of securities held for sale

 

 

 

 

(181

)

 

 

Purchases of short-term investments

 

 

 

 

(89,959

)

 

(54,665

)

Maturities of short-term investments

 

 

4,036

 

 

111,414

 

 

29,210

 

Net cash provided by (used by) discontinued operations

 

 

21,159

 

 

(785

)

 

(10,335

)

Net cash provided by (used in) investing activities

 

 

(681,057

)

 

29,334

 

 

8,183

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

147

 

 

8,760

 

 

3,896

 

Proceeds from issuance of common stock and warrants, net of related expense

 

 

183,357

 

 

 

 

 

Proceeds from issuance of preferred stock, net of related expense

 

 

 

 

194,917

 

 

 

Dividend paid to preferred shareholders

 

 

(7,427

)

 

(552

)

 

(690

)

Loan origination fees paid

 

 

(8,125

)

 

 

 

 

Treasury share purchase

 

 

 

 

(209

)

 

(313

)

Borrowings on debt

 

 

380,000

 

 

 

 

4,060

 

Repayments on debt

 

 

(218,333

)

 

 

 

(7,060

)

Net cash provided by (used in) financing activities

 

 

329,619

 

 

202,916

 

 

(107

)

Change in cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(336,653

)

 

297,245

 

 

69,570

 

Cash and cash equivalents at beginning of year

 

 

373,123

 

 

75,878

 

 

6,308

 

Cash and cash equivalents at end of year

 

$

36,470

 

$

373,123

 

$

75,878

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

Cash paid during year for:

 

 

 

 

 

 

 

 

 

 

Interest

 

$

11,657

 

$

232

 

$

304

 

Income tax payments

 

$

546

 

$

4,903

 

$

1,387

 

Significant non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

Stock issued for acquisition of assets

 

$

26,693

 

$

 

$

 

Stock issued for acquisition of 70.3% of Greens Creek

 

$

53,384

 

$

 

$

 

See Notes 2, 4, 9 and 10 for additional non-cash investing and financing activities.

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

F-5


Table of Contents

Hecla Mining Company and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B
Preferred
Stock

 

Series C
Mandatory
Convertible
Preferred
Stock

 

Common
Stock

 

Additional
Paid-In
Capital

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Treasury
Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances January 1, 2006

 

$

39

 

$

 

$

29,651

 

$

508,104

 

$

(396,092

)

$

19,746

 

$

(118

)

$

161,330

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,122

 

 

 

 

 

 

 

 

69,122

 

Restricted stock units granted

 

 

 

 

 

 

 

 

 

 

 

481

 

 

 

 

 

 

 

 

 

 

 

481

 

Options granted

 

 

 

 

 

 

 

 

13

 

 

1,965

 

 

 

 

 

 

 

 

 

 

 

1,978

 

Options exercised (839,000 shares)

 

 

 

 

 

 

 

 

210

 

 

3,308

 

 

 

 

 

 

 

 

 

 

 

3,518

 

Options issued for deferred compensation (44,000 shares)

 

 

 

 

 

 

 

 

11

 

 

197

 

 

 

 

 

 

 

 

 

 

 

208

 

Stock issued for deferred compensation (83,000 shares)

 

 

 

 

 

 

 

 

21

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

1

 

Modification of stock option awards

 

 

 

 

 

 

 

 

 

 

 

(1,702

)

 

 

 

 

 

 

 

 

 

 

(1,702

)

Stock issued to directors (37,000 shares)

 

 

 

 

 

 

 

 

8

 

 

183

 

 

 

 

 

 

 

 

 

 

 

191

 

Series B Preferred dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(552

)

 

 

 

 

 

 

 

(552

)

Restricted stock distributions (156,000 shares)

 

 

 

 

 

 

 

 

43

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

23

 

Treasury stock purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(313

)

 

(313

)

Reclassification of realized gain on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,809

)

 

 

 

 

(15,809

)

Stock units formerly recorded as liabilities

 

 

 

 

 

 

 

 

 

 

 

1,289

 

 

 

 

 

 

 

 

 

 

 

1,289

 

Adjustment for adoption of SFAS No. 158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,963

 

 

 

 

 

4,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2006

 

 

39

 

 

 

 

29,957

 

 

513,785

 

 

(327,522

)

 

8,900

 

 

(431

)

 

224,728

 

Change in functional currency in Venezuela

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,146

)

 

 

 

 

(7,146

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,197

 

 

 

 

 

 

 

 

53,197

 

Options granted

 

 

 

 

 

 

 

 

 

 

 

1,842

 

 

 

 

 

 

 

 

 

 

 

1,842

 

Options exercised (1,444,000 shares)

 

 

 

 

 

 

 

 

362

 

 

8,384

 

 

 

 

 

 

 

 

 

 

 

8,746

 

Stock issued to directors (30,000 shares)

 

 

 

 

 

 

 

 

8

 

 

257

 

 

 

 

 

 

 

 

 

 

 

265

 

Series B Preferred dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(552

)

 

 

 

 

 

 

 

(552

)

Restricted stock units granted

 

 

 

 

 

 

 

 

 

 

 

1,289

 

 

 

 

 

 

 

 

 

 

 

1,289

 

Restricted stock unit distributions (154,000 shares)

 

 

 

 

 

 

 

 

37

 

 

(37

)

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(209

)

 

(209

)

Donation to charitable foundation

 

 

 

 

 

 

 

 

 

 

 

5,143

 

 

 

 

 

 

 

 

 

 

 

5,143

 

Sale of Mandatory Convertible Preferred Stock (2,012,500 shares)

 

 

 

 

 

504

 

 

 

 

 

194,413

 

 

 

 

 

 

 

 

 

 

 

194,917

 

SFAS No. 158 adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,074

 

 

 

 

 

5,074

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,235

 

 

 

 

 

5,235

 

 

Balances, December 31, 2007

 

 

39

 

 

504

 

 

30,364

 

 

725,076

 

 

(274,877

)

 

12,063

 

 

(640

)

 

492,529

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66,563

)

 

 

 

 

 

 

 

(66,563

)

Options granted

 

 

 

 

 

 

 

 

 

 

 

2,021

 

 

 

 

 

 

 

 

 

 

 

2,021

 

Options exercised (16,000 shares)

 

 

 

 

 

 

 

 

4

 

 

133

 

 

 

 

 

 

 

 

 

 

 

137

 

Stock issued to directors (20,000 shares)

 

 

 

 

 

 

 

 

5

 

 

171

 

 

 

 

 

 

 

 

 

 

 

176

 

Series B deferred dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(414

)

 

 

 

 

 

 

 

(414

)

Mandatory Convertible Preferred Stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,282

)

 

 

 

 

 

 

 

(10,282

)

Restricted stock units granted

 

 

 

 

 

 

 

 

 

 

 

1,928

 

 

 

 

 

 

 

 

 

 

 

1,928

 

Restricted stock unit distributions (220,000 shares)

 

 

 

 

 

 

 

 

55

 

 

(55

)

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for Mandatory Convertible Preferred Stock dividends (622,000 shares)

 

 

 

 

 

 

 

 

156

 

 

3,115

 

 

 

 

 

 

 

 

 

 

 

3,271

 

Common stock issued for business and asset acquisitions (12,982,000 shares)

 

 

 

 

 

 

 

 

3,245

 

 

76,690

 

 

 

 

 

 

 

 

 

 

 

79,935

 

Common stock public offering (34,350,000 shares)

 

 

 

 

 

 

 

 

8,587

 

 

154,829

 

 

 

 

 

 

 

 

 

 

 

163,416

 

Common stock and warrant private placement issuance (10,244,000 shares)

 

 

 

 

 

 

 

 

2,561

 

 

17,253

 

 

 

 

 

 

 

 

 

 

 

19,814

 

Common stock issued for donation to charitable foundation (550,000 shares)

 

 

 

 

 

 

 

 

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

138

 

SFAS No. 158 adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

436

 

 

(29,961

)

 

 

 

 

(29,525

)

Reclassification of translation adjustment to loss on sale of discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,146

 

 

 

 

 

7,146

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,270

)

 

 

 

 

(14,270

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

39

 

$

504

 

$

45,115

 

$

981,161

 

$

(351,700

)

$

(25,022

)

$

(640

)

$

649,457

 

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

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Hecla Mining Company and Subsidiaries

Notes to Consolidated Financial Statements

Note 1: Summary of Significant Accounting Policies

          A. Principles of Consolidation — Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include our accounts, our wholly-owned subsidiaries’ accounts and a proportionate share of the accounts of the joint ventures in which we participate. All significant intercompany balances and transactions have been eliminated in consolidation.

          Certain consolidated financial statement amounts have been reclassified to conform to the 2008 presentation. These reclassifications had no effect on the net income, comprehensive income, or accumulated deficit as previously recorded.

          On April 16, 2008, we completed the acquisition of the companies owning 70.3% of the joint venture operating the Greens Creek mine for $700 million in cash and 4,365,000 million shares of our common stock, resulting in 100% ownership of Greens Creek by our various wholly owned subsidiaries. The operating results of the 70.3% portion of Greens Creek are included in our operating results from the date of acquisition and, therefore, operating results on a period-by-period basis may not be comparable.

          On July 8, 2008, we completed the sale of all of the outstanding capital stock of El Callao Gold Mining Company and Drake-Bering Holdings B.V., our wholly owned subsidiaries which together owned our business and operations in Venezuela. Accordingly, our historical financial statements have been revised to report our Venezuelan operations as discontinued operations for all periods presented, and we have revised our segment reporting to discontinue the divested Venezuelan operations. See Note 13 for further discussion of the sale and resulting restatement of our previously issued financial statements.

          B.  Assumptions and Use of Estimates — Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts and related disclosure of assets, liabilities, revenue and expenses at the date of the consolidated financial statements and reporting periods. We consider our most critical accounting estimates to be future metals prices, obligations for environmental, reclamation and closure matters mineral reserves, and business combinations. Other significant areas requiring the use of management assumptions and estimates relate to asset impairments, including long-lived assets and investments; inventory net realizable value; post-employment, post-retirement and other employee benefit assets and liabilities; valuation of deferred tax assets; and reserves for contingencies and litigation. Legal costs are recorded when incurred. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable. Accordingly, actual results may differ materially from these estimates under different assumptions or conditions.

          C.  Cash and Cash Equivalents — Cash and cash equivalents consist of all cash balances and highly liquid investments with a remaining maturity of three months or less when purchased and are carried at fair value. Historically, cash and cash equivalents have been invested in certificates of deposit, U.S. government and federal agency securities, municipal securities and corporate bonds.

          D.  Investments and Securities Held for Sale — We determine the appropriate classification of our investments at the time of purchase and re-evaluate such determinations at each reporting date, in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”

          Short-term investments include certificates of deposit and held-to-maturity securities, based on our intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, which approximates market, and include government and corporate obligations rated A or higher. Marketable equity securities and variable rate demand notes are categorized as available for sale and carried at fair market value.

          Realized gains and losses on the sale of securities are recognized on a specific identification basis. Unrealized gains and losses are included as a component of accumulated other comprehensive income (loss), unless an other than temporary impairment in value has occurred, which would then be charged to current period net income (loss). Unrealized gains and losses originally included in accumulated other comprehensive income are reclassified to current period net income (loss) when the sale or determination of an other than temporary impairment of securities occurs.

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          E. Accounts and Notes Receivable — Accounts and notes receivable include both receivables due from sales, as well as value added tax receivables paid in Venezuela and Mexico and funds advanced to third-party, small mining cooperatives in Venezuela.

          In Venezuela and Mexico, value added taxes (“VAT”) are assessed on purchases of materials and services. We established a reserve equal to 3% at December 31, 2007, for the value added taxes in Venezuela to reflect estimated discounts we expected to incur. The discount reserves are comprised of provisions for historical discounts on sales of VAT receivable balances sold to brokers, potential rejections by SENIAT (the Venezuelan taxing authority), and additional amounts for contingencies. Value-added tax receivables totaled $1.1 million in Venezuela (net of reserves for anticipated discounts of $27,000) at December 31, 2007, and $0.1 million and $0.6 million, respectively, at December 31, 2008 and 2007 in Mexico.

          As an exporter from Venezuela, we were eligible for refunds from the government for payment of VAT, and we prepared a monthly filing to obtain this refund. Refunds are given by the government in the form of tax certificates, which are marketable in Venezuela.

          As part of the custom milling business included in our discontinued La Camorra unit, we entered into contracts with small mining groups and advance funds in the form of equipment and working capital, and collected such advances from ore delivered to the sampling and crushing plant. We periodically evaluated the recoverability of these receivables and established a reserve for uncollectibility, based on our review of each small mining group’s future profitability and its ability to repay advances. Receivables were classified as current and non-current based on historical collection patterns, and were not generally charged off against allowances as long as small mining groups are active.

          As a result of the sale of our Venezuelan operations on July 8, 2008 (as discussed further in Note 13), ownership of all accounts receivable balances existing at the close of the sale relating to Venezuelan VAT refunds and advancement of funds to Venezuelan small mining groups transferred to Rusoro.

          F. Inventories — Inventories are stated at the lower of average costs incurred or estimated net realizable value. Major types of inventories include materials and supplies and metals product inventory, which is determined by the stage at which the ore is in the production process (stockpiled ore, work in process and finished goods).

          Materials and supplies inventory are valued at the lower of average cost or net realizable value. Pursuant to this policy, we recorded a provision for materials inventory impairment at our discontinued La Camorra unit in Venezuela of $5.1 million at December 31, 2007 for inventory value that we did not expect to consume over current remaining known life of the operation. Ownership of all material and supplies inventories held at our discontinued Venezuelan operations at the time of the sale on July 8, 2008 was transferred to Rusoro (see Note 13 for more information on the sale of our discontinued Venezuelan operations).

          Stockpiled ore inventory represents ore that has been mined, hauled to the surface, and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile, the number of contained metal ounces or pounds (based on assay data) and the estimated metallurgical recovery rates (based on the expected processing method). Stockpile ore tonnages are verified by periodic surveys. Costs are allocated to a stockpile based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, depletion and amortization relating to mining operations, and removed at each stockpile’s average cost per recoverable unit.

          Work in process inventory represents materials that are currently in the process of being converted to a saleable product and includes circuit inventories in our milling process. In-process material is measured based on assays of the material fed into the process and the projected recoveries of the respective plants. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines and stockpiles, plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

          Finished goods inventory includes doré and concentrates at our operations, doré in transit to refiners and bullion in our accounts at refineries. Inventories are valued at the lower of full cost of production or net realizable value based on current metals prices.

          G. Restricted Cash — Restricted cash and investments primarily represent investments in money market funds and bonds of U.S. government agencies and are restricted primarily for reclamation funding or surety bonds.

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          H. Properties, Plants and Equipment – Costs are capitalized when it has been determined an ore body can be economically developed as a result of establishing proven and probable reserves. The development stage begins at new projects when our management and/or Board of Directors makes the decision to bring a mine into commercial production, and ends when the production stage, or exploitation of reserves, begins. Expenditures incurred during the development and production stages for new facilities, new assets or expenditures that extend the useful lives of existing facilities and major mine development expenditures are capitalized, including primary development costs such as costs of building access ways, shaft sinking, lateral development, drift development, ramps and infrastructure developments.

          Costs for exploration, secondary development at operating mines, and maintenance and repairs on capitalized property, plant and equipment are charged to operations as incurred. Exploration costs include those relating to activities carried out (a) in search of previously unidentified mineral deposits, (b) at undeveloped concessions, or (c) at operating mines already containing proven and probable reserves, where a determination remains pending as to whether new target deposits outside of the existing reserve areas can be economically developed. Secondary development costs are incurred for preparation of an ore body for production in a specific ore block, stope or work area, providing a relatively short-lived benefit only to the mine area they relate to, and not to the ore body as a whole.

          Drilling and related costs are either classified as exploration or secondary development, as defined above, and charged to operations as incurred, or capitalized, based on the following criteria:

 

 

 

 

Whether the costs are incurred to further define mineralization at and adjacent to existing reserve areas or intended to assist with mine planning within a reserve area;

 

 

 

 

Whether the drilling costs relate to an ore body that has been determined to be commercially mineable, and a decision has been made to put the ore body into commercial production; and

 

 

 

 

Whether, at the time that the cost is incurred, the expenditure: (a) embodies a probable future benefit that involves a capacity, singly or in combination, with other assets to contribute directly or indirectly to future net cash inflows, (b) we can obtain the benefit and control others access to it, and (c) the transaction or event giving rise to our right to or control of the benefit has already occurred.

          If all of these criteria are met, drilling and related costs are capitalized. Drilling costs not meeting all of these criteria are expensed as incurred. The following factors are considered in determining whether or not the criteria listed above have been met, and capitalization of drilling costs is appropriate:

 

 

 

 

Completion of a favorable economic study and mine plan for the ore body targeted;

 

 

 

 

Authorization of development of the ore body by management and/or the Board of Directors; and

 

 

 

 

All permitting and/or contractual requirements necessary for us to have the right to or control of the future benefit from the targeted ore body have been met.

          Drilling and related costs of approximately $3.1 million, $1.9 million and $0.2 million, respectively, for the years ended December 31, 2008, 2007 and 2006 met our criteria for capitalization listed above, at our properties that are in the production stage.

          When assets are retired or sold, the costs and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in current period net income (loss). Idle facilities placed on standby basis are carried at the lower of net carrying value or estimated net realizable value.

          Included in property, plant and equipment on our consolidated financial statements are mineral interests, which are tangible assets that include acquired undeveloped mineral interests and royalty interests. Undeveloped mineral interests include: (i) other mineralized material which is measured, indicated or inferred with insufficient drill spacing or quality to qualify as proven and probable reserves; and (ii) inferred material not immediately adjacent to existing proven and probable reserves but accessible within the immediate mine infrastructure. Residual values for undeveloped mineral interests represents the expected fair value of the interests at the time we plan to convert, develop, further explore or dispose of the interests and are evaluated at least annually.

          I. Depreciation, Depletion and Amortization — Capitalized costs are depreciated or depleted using the straight-line method or unit-of-production method at rates sufficient to depreciate such costs over the shorter of estimated productive lives of such facilities or the useful life of the individual assets. Productive lives range from 1 to 9 years, but do not exceed the useful life of the individual asset. Determination of expected useful lives for amortization calculations are made on a property-by-property or asset-by-asset basis at least annually. Our estimates for mineral reserves are a key component in determining our units of production depreciation rates. Our estimates of proven and probable ore reserves may change, possibly in the near term, resulting in changes to depreciation, depletion and amortization rates in future reporting periods.

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          Undeveloped mineral interests are amortized on a straight-line basis over their estimated useful lives taking into account residual values. At such time as an undeveloped mineral interest is converted to proven and probable reserves, the remaining unamortized basis is amortized on a unit-of-production basis as described above.

          J.  Impairment of Long-lived Assets — Management reviews and evaluates the net carrying value of all facilities, including idle facilities, for impairment at least annually, or upon the occurrence of other events or changes in circumstances that indicate that the related carrying amounts may not be recoverable. We estimate the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment, and the value associated with property interests.

          Although management has made a reasonable estimate of factors based on current conditions and information, assumptions underlying future cash flows are subject to significant risks and uncertainties. Estimates of undiscounted future cash flows are dependent upon estimates of metals to be recovered from proven and probable ore reserves, and to some extent, identified resources beyond proven and probable reserves, future production and capital costs and estimated metals prices (considering current and historical prices, forward pricing curves and related factors) over the estimated remaining mine life. It is reasonably possible that changes could occur in the near term that could adversely affect our estimate of future cash flows to be generated from our operating properties. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets,” if undiscounted cash flows including an asset’s fair value are less than the carrying value of a property, an impairment loss is recognized.

          K. Proven and Probable Ore Reserves — At least annually, management reviews the reserves used to estimate the quantities and grades of ore at our mines which we believe can be recovered and sold economically. Management’s calculations of proven and probable ore reserves are based on engineering and geological estimates, including future metals prices and operating costs. From time to time, management obtains external audits of reserves. We obtained a third-party audit of our reserves at the Lucky Friday unit during 2006, and a partial audit of reserves at Greens Creek was concluded during the second quarter of 2008.

          Reserve estimates will change as existing reserves are depleted through production and as production costs and/or metals prices change. A significant drop in metals prices may reduce reserves by making some portion of such ore uneconomic to develop and produce. Changes in reserves may also reflect that actual grades of ore processed may be different from stated reserve grades because of variation in grades in areas mined, mining dilution and other factors. Estimated reserves, particularly for properties that have not yet commenced production, may require revision based on actual production experience. It is reasonably possible that certain of our estimates of proven and probable ore reserves will change in the near term, which could result in a change to estimated future cash flows, associated carrying values of the asset and amortization rates in future reporting periods, among other things.

          Declines in the market prices of metals, increased production or capital costs, reduction in the grade or tonnage of the deposit or an increase in the dilution of the ore or reduced recovery rates may render ore reserves uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques are sufficient to offset such effects. If our realized price for the metals we produce were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, net losses, reduced cash flow, restatements or reductions in reserves and asset write-downs in the applicable accounting periods. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized. See further discussion in Critical Accounting Estimates — Mineral Reserves in MD&A.

          L. Pension Plans and Other Post-retirement Benefits — We maintain pension plans covering substantially all U.S. employees and provide certain post-retirement benefits for qualifying retired employees. Pension benefits generally depend on length and level of service and age upon retirement. Substantially all benefits are paid through pension trusts. We did not contribute to our pension plans during 2008 and 2007, and do not expect to do so in 2009.

          In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158, among other things, required us to:

 

 

 

 

Recognize the funded status of our defined benefit plans in our consolidated financial statements; and

 

 

 

 

Recognize as a component of other comprehensive income the actuarial gains and losses and prior service costs and credits that arise during the period but are not immediately recognized as components of net periodic benefit cost.

          We adopted SFAS No. 158 for the year ending December 31, 2006. Implementation of this pronouncement resulted in an increase to noncurrent assets and current liabilities of approximately $4.1 million and $0.4 million, respectively, and a

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decrease to noncurrent liabilities of $1.3 million, with a corresponding adjustment to other comprehensive income. The adoption did not affect our results of operations.

          M. Income Taxes — We provide for federal, state and foreign income taxes currently payable, as well as those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal, state and foreign tax benefits are recorded as a reduction of income taxes, when applicable. We record deferred tax liabilities and assets for expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of those assets and liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse.

          FIN 48, “Accounting for Uncertainty in Income Taxes,” requires that uncertain tax positions are evaluated in a two-step process, whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority would be recognized.

          For additional information, see Note 6 — Income Taxes.

          N. Reclamation and Remediation Costs (Asset Retirement Obligations)  — At our operating properties, we accrue costs associated with environmental remediation obligations in accordance with Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires us to record a liability for the present value of our estimated environmental remediation costs, and the related asset created with it, in the period in which the liability is incurred. The liability will be accreted and the asset will be depreciated over the life of the related assets. Adjustments for changes resulting from the passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation will be made.

          At our non-operating properties, we accrue costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. Estimates for reclamation and other closure costs are prepared in accordance with SFAS No. 5 “Accounting for Contingencies,” or Statement of Position 96-1 “Environmental Remediation Liabilities.” Accruals for estimated losses from environmental remediation obligations have historically been recognized no later than completion of the remedial feasibility study for such facility and are charged to provision for closed operations and environmental matters. Costs of future expenditures for environmental remediation are not discounted to their present value unless subject to a contractually obligated fixed payment schedule. Such costs are based on management’s current estimate of amounts to be incurred when the remediation work is performed, within current laws and regulations.

          Future closure, reclamation and environmental-related expenditures are difficult to estimate, in many circumstances, due to the early stage nature of investigations, and uncertainties associated with defining the nature and extent of environmental contamination and the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology. We periodically review accrued liabilities for such reclamation and remediation costs as evidence becomes available indicating that our liabilities have potentially changed. Changes in estimates at our non-operating properties are reflected in current period net income (loss).

          Accruals for closure costs, reclamation and environmental matters for operating and nonoperating properties totaled $121.3 million at December 31, 2008, and we anticipate that the majority of these expenditures relating to these accruals will be made over the next 30 years. It is reasonably possible the ultimate cost of reclamation and remediation could change in the future, and that changes to these estimates could have a material effect on future operating results as new information becomes known. For environmental remediation sites known as of December 31, 2008, we have recorded liabilities based on the low end of the estimated potential range of liabilities. If the highest estimate from the range (based upon information presently available) were recorded for each site, the total estimated liability would be increased by approximately $49 million. For additional information, see Note 5 and Note 8.

          O. Revenue Recognition — Sales of all metals products sold directly to smelters, including by-product metals, are recorded as revenues when title and risk of loss transfer to the smelter (generally at the time of shipment) at estimated forward prices for the estimated month of settlement. Due to the time elapsed from shipment to the smelter and the final settlement with the smelter, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metals prices until final settlement by the smelter.

          Sales to smelters are recorded net of charges by the smelters for treatment, refining, smelting losses, and other charges negotiated by us with the smelters. Charges are estimated by us upon shipment of concentrates based on contractual terms, and actual charges do not vary materially from our estimates. Costs charged by smelters include fixed treatment and refining costs per ton of concentrate, and also include price escalators which allow the smelters to participate in the increase of lead and zinc prices above a negotiated baseline.

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          Changes in metals prices between shipment and final settlement will result in changes to revenues previously recorded upon shipment. 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 does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement.

          At December 31, 2008, metals contained in concentrates and exposed to future price changes totaled 902,248 ounces of silver, 3,730 ounces of gold, 17,283 tons of zinc, and 5,609 tons of lead.

          Sales from our Greens Creek and Lucky Friday units include significant value from by-product metals mined along with net values of each unit’s primary metal.

          Sales of metals in products tolled by refiners and sold directly by us, rather than sold to smelters, are recorded at contractual amounts when title and risk of loss transfer to the buyer. We sell finished metals after refining, as well as doré produced at our locations. Third-party smelting and refinery costs are recorded as a reduction of revenue.

          Changes in the market price of metals significantly affect our revenues, profitability, and cash flow. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control, such as political and economic conditions, demand, forward selling by producers, expectations for inflation, central bank sales, custom smelter activities, the relative exchange rate of the U.S. dollar, purchases and lending, investor sentiment, and global mine production levels. The aggregate effect of these factors is impossible to predict. Because our revenue is derived from the sale of silver, gold, lead, and zinc, our earnings are directly related to the prices of these metals.

          P. Foreign Currency — The functional currency for our operations located in the U.S., Mexico and Canada, as of December 31, 2008, was the U.S. dollar. Accordingly, for the San Sebastian unit in Mexico and our Canadian office, we have translated our monetary assets and liabilities at the period-end exchange rate, and non-monetary assets and liabilities at historical rates, with income and expenses translated at the average exchange rate for the current period. All translation gains and losses have been included in the current period net income (loss).

          Effective January 1, 2007, we implemented a change in the functional currency for our discontinued Venezuelan operations from the U.S. dollar to the Bolívar, the local currency in Venezuela. We believe that significant changes in the economic facts and circumstances affecting our discontinued Venezuelan operations indicated that a change in the functional currency was appropriate, under the provisions of FASB Statement No. 52, “Foreign Currency Translation” (SFAS 52). In accordance with SFAS 52, the balance sheet for our discontinued Venezuelan operations has been recalculated, as of January 1, 2007, so that all assets and liabilities are translated at the current exchange rate of 2,150 Bolívar to $1, the fixed, official exchange rate in effect at that time. As a result, the dollar value of non-monetary assets, previously translated at historical exchange rates, has been significantly reduced. The offsetting translation adjustment was recorded to equity as a component of accumulated other comprehensive income, and reclassified to loss on sale of discontinued operations upon the sale of our Venezuelan operations.

          For the years ended December 31, 2008, 2007 and 2006, we recognized total net foreign exchange losses of $13.2 million, $12.1 million and $5.0 million, respectively. Of these, $13.3 million, $12.0 million and $4.9 million, respectively, of the net foreign exchange losses for the three years are related to our discontinued Venezuelan operations, and are included in Gain (loss) from discontinued operations, net of tax with the remaining balance included in Net foreign exchange gain (loss), on our Consolidated Statements of Operations and Comprehensive Income (Loss).

          Exchange control regulations enacted in Venezuela in 2005 limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. At December 31, 2007, we held the U.S. dollar equivalent of approximately $30.0 million denominated in the Venezuelan Bolívar at the rate of 2,150 Bolivares to $1.00. Additionally, we were required to convert into Venezuelan currency the proceeds of Venezuelan export sales made over the past 180 days, approximately $8.1 million, during the six months following December 31, 2007. Exchanging our cash held in local currency into U.S. dollars could be done through specific governmental programs, or through the use of negotiable instruments at conversion rates that were higher than the official rate (parallel rate) on which we incurred foreign currency losses. During 2008 and 2007, we exchanged the U.S. dollar equivalent of approximately $38.7 and $37.0 million, respectively, valued at the official exchange rate of 2,150 Bolivares to $1.00, for $25.4 and $19.8 million at open market exchange rates, in compliance with applicable regulations, incurring a foreign exchange loss for the difference. Changes to the Venezuelan Criminal Exchange Law enacted in December 2007 prohibit the publication of Bolívar exchange rates other than the official rate.

          On July 8, 2008, we completed the sale of our discontinued Venezuelan operations to Rusoro Mining Company (“Rusoro”) (see Note 13 for further discussion). During the second quarter of 2008, we repatriated substantially all of our remaining Bolivares-denominated cash. Pursuant to the sale agreement, Rusoro paid us $0.9 million for the U.S. dollar equivalent of the residual Bolivares-denominated cash balances held in Venezuela at the close of the sale, converted at official rates.

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          Q. Risk Management Contracts — We use derivative financial instruments as part of an overall risk-management strategy that is used as a means of hedging exposure to base metals prices and interest rates. We do not hold or issue derivative financial instruments for speculative trading purposes.

          Derivative contracts qualifying as normal purchases and sales are accounted as such, under the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” Gains and losses arising from a change in the fair value of a contract before the contract’s delivery date are not recorded, and the contract price is recognized in sales of products following settlement of the contract by physical delivery of production to the counterparty at contract maturity.

          We measure derivative contracts as assets or liabilities based on their fair value. Gains or losses resulting from changes in the fair value of derivatives in each period are recorded either in current earnings or other comprehensive income (“OCI”), depending on the use of the derivative, whether it qualifies for hedge accounting and whether that hedge is effective. Amounts deferred in OCI are reclassified to sales of products (for metals price-related contracts) or interest expense (for interest rate-related contracts) when the hedged transaction has occurred. Ineffective portions of any change in fair value of a derivative are recorded in current period other operating income (expense).

          On May 5, 2008, we entered into an interest rate swap agreement that had the economic effect of modifying the LIBOR-based variable interest obligations associated with our term facility. As a result, the interest payable related to $103.3 million of the $121.7 million term facility balance at December 31, 2008 is fixed at a rate of 9.38% until maturity on March 31, 2011, in accordance with the amortization schedule of the amended and restated credit agreement dated April 16, 2008. As a result of an amendment to the facility in December 2008 to defer the $18.3 million principal payment originally due on December 31, 2008 to February 13, 2009, the terms of the interest rate swap agreement and the note that the swap agreement pertains to did not match at December 31, 2008 with regards to the maturity date of the $18.3 million payment, with the hedge being slightly ineffective as a result. The fair value of the swap at December 31, 2008 was a liability of $2.5 million. We have recorded an accumulated unrealized loss of $2.0 million at December 31, 2008, and realized a $0.5 million hedging loss in 2008 related to the ineffective portion of the swap. The unrealized loss is included in accumulated other comprehensive income in our consolidated balance sheet and the realized loss is included in interest expense in our consolidated statement of operations, with the fair value payable included in other non-current liabilities in our consolidated balance sheet. For additional information regarding our credit facilities, see Note 7 and Note 21.

          On February 3, 2009, we reached an agreement to amend the terms of our credit facilities to defer all principal payments due on our term facility in 2009, totaling $66.7 million, to 2010 and 2011 (See Note 21 for more information). As a result of the amendment, the original hedging relationship was de-designated, and a new hedging relationship was designated.  A retrospective hedge effectiveness test was performed on the original hedging relationship at the date of de-designation, and the original hedging relationship was determined to be ineffective.  Consequently, the change in fair value of the swap of $0.2 million between December 31, 2008 and February 3, 2009 was recorded as a gain on the income statement.  The amount of unrealized loss included in accumulated other comprehensive income relating to the original hedge will be recognized in the income statement when the hedged interest payments occur.

          We had no commodity-related derivative positions at December 31, 2008.

          R. Stock Based Compensation — In accordance with SFAS No. 123(R), the fair value of the equity instruments granted to employees during 2008 were estimated on the date of grant using the Black-Scholes pricing model, utilizing the same methodologies and assumptions as we have historically used. As of December 31, 2008, the majority of the instruments outstanding were fully vested, and we recognized stock-based compensation expense under SFAS No. 123(R) of approximately $4.1 million during 2008, which was recorded to general and administrative expenses, exploration and cost of sales and other direct production costs. For the years ended December 31, 2007 and 2006, we recognized $3.4 million and $2.5 million, respectively, in compensation expense as required by SFAS No. 123(R).

          For additional information on our employee stock option and unit compensation, see Notes 9 and 10 of Notes to Consolidated Financial Statements.

          S. Pre-Development Expense — Costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, are expensed due to the lack of proven and probable reserves, which would indicate future recovery of these expenses.

          T. Legal Costs – Legal costs incurred in connection with a potential loss contingency are recorded to expense as incurred.

          U. Basic and Diluted Income (Loss) Per Common Share — We calculate basic earnings per share on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using weighted average number of common shares outstanding during the period plus the effect of potential dilutive common shares during the period using the treasury stock method.

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          Potential dilutive common shares include outstanding stock options, restricted stock awards, stock units, warrants and convertible preferred stock for periods in which we have reported net income. For periods in which we reported net losses, potential dilutive common shares are excluded, as their conversion and exercise would be anti-dilutive. See Note 15 of Notes to Consolidated Financial Statements for additional information.

          V. Comprehensive Income (Loss) — In addition to net income (loss), comprehensive income (loss) includes all changes in equity during a period, such as adjustments to minimum pension liabilities, adjustments to recognize the overfunded or underfunded status of our defined benefit pension plans pursuant to SFAS No. 158, the effective portion of changes in fair value of derivative instruments, foreign currency translation adjustments and cumulative unrecognized changes in the fair value of available for sale investments, net of tax, if applicable.

          W. New Accounting Pronouncements — In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have a material impact on our consolidated financial statements.

          In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161),” to enhance the current disclosure framework in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended.” SFAS No. 161 amends and expands the disclosures required by SFAS No. 133 so that they provide an enhanced understanding of (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (3) how derivative instruments affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for both interim and annual reporting periods beginning after November 15, 2008. We are currently evaluating the potential impact of this statement on our consolidated financial statements and at this time we do not anticipate a material effect.

          In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of No. ARB 51,” which is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling ownership interest in a subsidiary and for the deconsolidation of a subsidiary. We are currently evaluating the potential impact of this statement on our consolidated financial statements and at this time we do not anticipate a material effect.

          In December 2007, the FASB revised SFAS No. 141 “Business Combinations.” The revised standard is effective for transactions where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.SFAS No. 141(R) will change the accounting for the assets acquired and liabilities assumed in a business combination.

 

 

 

 

Acquisition costs will be generally expensed as incurred;

 

 

 

 

Noncontrolling interests (formally known as “minority interests”) will be valued at fair value at the acquisition date;

 

 

 

 

Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

 

 

 

 

In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date

 

 

 

 

Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

 

 

 

 

Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

          The adoption of SFAS No. 141(R) does not currently have a material effect on our Consolidated Financial Statements. However, any future business acquisitions occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 will be accounted for in accordance with this statement.

          In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which became effective for fiscal years beginning after November 15, 2007, and for interim periods within those years, for certain financial assets and

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liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, FASB Staff Position (FSP) No. FAS 157-2 was issued, which delayed by a year the effective date of SFAS No. 157 for certain nonfinancial assets and liabilities. We adopted SFAS No. 157 for financial assets and liabilities in the first quarter of 2008, and the adoption did not have a material impact on our consolidated financial statements. See Note 14 of Notes to the Consolidated Financial Statements for more information. We are currently evaluating the potential impact of the adoption of SFAS No. 157 as it relates to nonfinancial assets and liabilities on our consolidated financial statements.

Note 2. Short-term Investments and Securities Held for Sale, Investments, and Restricted Cash

Cash

          Exchange control regulations in Venezuela limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. Our cash balances denominated in Bolívares that were maintained in Venezuela totaled a U.S. dollar equivalent, at official exchange rates, of approximately $30.0 million at December 31, 2007. On June 19, 2008, we entered into an agreement to sell our wholly owned subsidiaries holding our business and operations in Venezuela to Rusoro, with the transaction closing on July 8, 2008 (see Note 13 for further discussion of the transaction).

          Prior to the sale of our Venezuelan operations, exchanging our cash held in local currency into U.S. dollars was done through specific governmental programs, or through the use of negotiable instruments at conversion rates that were less favorable than the official rate (parallel rate) on which we incurred foreign currency losses. During 2008, prior to the sale of our Venezuelan operations, we exchanged the U.S. dollar equivalent of approximately $38.7 million at the official exchange rate of 2,150 Bolívares to $1.00 for approximately $25.4 million at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses for the difference. All of these losses were incurred on repatriations of cash from Venezuela. During 2007, we exchanged the U.S. dollar equivalent of approximately $37.0 million, valued at the official exchange rate of 2,150 Bolívares to $1.00, for approximately $19.8 million at open market exchange rates, in compliance with applicable regulations, incurring foreign exchange losses for the difference. Approximately $13.8 million of the conversion losses for 2007 were incurred on the repatriation of cash from Venezuela, while additional losses of approximately $3.4 million in 2007 were related to conversions of Bolívares for the payment of expatriate payroll and other U.S. dollar-denominated goods and services.

          Our cash is maintained in various financial institutions, and the balances are insured up to the Federal Deposit Insurance Corporation limits of $250,000 per institution. Some of our cash balances at December 31, 2008 exceeded the federally insured limits. We have not experienced losses on cash balances exceeding the federally insured limits.

Short-term Investments and Securities Held for Sale

          Short-term investments consisted of the following at December 31, 2008 and 2007 (in thousands):

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Adjustable rate securities

 

$

 

$

4,000

 

Marketable equity securities (Cost: 2007 - $18,903)

 

 

 

 

21,759

 

 

 

$

 

$

25,759

 

          Adjustable rate securities are carried at amortized cost. However, due to the short-term nature of these investments, the amortized cost approximates fair market value. Marketable equity securities are also carried at fair market value, as they are classified as “available-for-sale” securities under the provisions of SFAS No. 115. The $21.8 million marketable equity securities balance at December 31, 2007 represents 8.2 million shares of Great Basin Gold, Inc. stock, including 7.9 million shares transferred to us upon the sale of the Hollister Development Block gold exploration project interest to Great Basin Gold in April 2007. We sold 8.2 million shares of Great Basin Gold stock during the second quarter of 2008 for total proceeds of $27.0 million and recognized a gain on sale of investment of $8.1 million. In January 2006, we sold our equity shares of Alamos Gold Inc., generating a $36.4 million pre-tax gain and netting $57.4 million of cash proceeds.

Non-current Investments

          At December 31, 2008 and 2007, the fair value of our non-current investments was $3.1 million and $8.4 million, respectively. The basis of these investments, representing equity securities, was approximately $5.2 million and $1.1 million, respectively, at December 31, 2008 and 2007. $1.9 million of the $3.1 million non-current investments balance at December 31, 2008 represents 3.6 million shares of Rusoro stock transferred to us upon the sale of El Callao and Drake Bering (see Note 13 for information on the sale of our discontinued Venezuelan operations). At December 31, 2008, we have recorded a $2.6 million unrealized loss on the Rusoro shares, which have been in a continuous unrealized loss position since August 2008. We considered the following information in concluding that the impairment on the Rusoro shares is temporary:

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We believe that we have the intent and ability to hold the investment until its cost basis is recovered, and that it is not probable that we will sell the investment at a loss.

 

 

 

 

Rusoro recently completed the acquisition of a new operating mine and continues to have access to liquidity. We believe that their assets continue to remain sound.

 

 

 

 

Analysts have recently given Rusoro stock a “buy” rating with a target share price greater than our cost, and analyst net asset value calculations have recently exceeded our cost.

          However, the exchange on which Rusoro stock is traded experienced a significant overall loss in value in 2008, there has been a general reduction in investor confidence in junior mining companies in recent months, and Rusoro shares are thinly traded. If our investment in Rusoro stock continues to have a fair value less than its original cost, we will monitor these factors in determining whether it is still appropriate to record an unrealized loss for the impairment in the future.

          At December 31, 2008, total unrealized gains of $1.0 million for investments held having a net gain position and total unrealized losses of $3.1 million for investments held having a net loss position were included in accumulated other comprehensive income.

Restricted Cash and Investments

          Various laws and permits require that financial assurances be in place for certain environmental and reclamation obligations and other potential liabilities. Restricted investments primarily represent investments in money market funds and certificate of deposit. These investments are restricted primarily for reclamation funding or surety bonds and were $15.2 million at December 31, 2008, and $17.2 million at December 31, 2007, which includes $7.6 million and $8.9 million, respectively, restricted for reclamation funding for the Greens Creek Joint Venture. In April 2008, we completed the acquisition of the companies holding 70.3% of the Greens Creek Joint Venture, resulting in our 100% ownership of Greens Creek through our various subsidiaries (see Note 19 for further discussion). In August 2008, we obtained release of the restricted cash balance of $30.4 million, replacing it with a letter of credit backed by the restricted cash balance of $7.6 million. Accordingly, the $7.6 million December 31, 2008 balance represents 100% of the Greens Creek restricted balance, while the $8.9 million balance at December 31, 2007 represents our 29.7% share of the $29.9 million total Greens Creek restricted balance held prior to our acquisition of the remaining 70.3% interest.

          Our loan covenants required that we maintain an unencumbered cash balance of at least $10 million at December 31, 2008. There was no legal restriction on the funds, therefore, we did not classify them as restricted cash.

Note 3: Inventories

          Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

Concentrates, doré, bullion, metals in transit and in-process inventories

 

$

12,874

 

$

5,465

 

Materials and supplies

 

 

8,457

 

 

10,046

 

 

 

$

21,331

 

$

15,511

 

          The product inventory acquired in connection with the purchase of the companies owning 70.3% of the Greens Creek mine, as discussed further in Note 19, was all sold during the second quarter of 2008.

Note 4: Properties, Plants, Equipment and Mineral Interests, Royalty Obligations and Lease Commitments

Properties, Plants and Equipment and Mineral Interests

          Our major components of properties, plants, equipment, and mineral interests are (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

Mining properties, including asset retirement obligations

 

$

262,104

 

$

14,405

 

Development costs

 

 

88,026

 

 

147,320

 

Plants and equipment

 

 

308,482

 

 

218,791

 

Land

 

 

9,270

 

 

1,007

 

Mineral interests

 

 

369,125

 

 

4,940

 

Construction in progress

 

 

43,941

 

 

23,703

 

 

 

 

1,080,948

 

 

410,166

 

Less accumulated depreciation, depletion and amortization

 

 

228,835

 

 

277,858

 

Net carrying value

 

$

852,113

 

$

132,308

 

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          During 2008, we incurred total capital expenditures of approximately $68.7 million that included $44.1 million at the Lucky Friday unit and $24 million at the Greens Creek unit. In addition, on April 16, 2008, we completed the acquisition of the remaining 70.3% interest in the Greens Creek Joint Venture for $758.5 million. A total of $689.7 million of the purchase price was allocated to the net carrying value of property, plants, equipment and mineral interests at the Greens Creek unit, including $5.0 million for the asset retirement obligation, $266.7 million for development costs, $67.2 million for plants and equipment, $7.2 million for land, and $343.6 million for mineral interests. We also acquired substantially all of the assets of Independence Lead Mines (“Independence”) on November 6, 2008 for 6.9 million shares of our common stock. The Independence purchase price of approximately $14.6 million was allocated to mineral interests at the Lucky Friday unit. In addition, we issued approximately 1.6 million shares of our Common Stock in 2008 to acquire the right to earn into a 70% interest in the San Juan Silver Joint Venture with Emerald Mining & Leasing, LLC and Golden 8 Mining, LLC, which holds an approximately 25-square-mile consolidated land package in the Creede Mining District of Colorado, resulting in an $11.4 million increase to mineral interests. See Note 19 for further discussion of the acquisitions of 70.3% of Greens Creek, Independence, and San Juan Silver earn-in rights.

          On July 8, 2008, we completed the sale of the companies holding 100% of the ownership interest of our discontinued Venezuelan operations, resulting in the disposal of properties, plants, equipment and mineral interests having net carrying value of approximately $32.3 million at the time of sale. See Note 13 for more information on the sale.

Leases

          We enter into operating leases during the normal course of business. During the years ended December 31, 2008, 2007 and 2006, we incurred expenses of $2.0 million, $1.8 million and $1.2 million, respectively, for these leases. At December 31, 2008, future obligations under our non-cancelable leases were as follows (in thousands):

 

 

 

 

 

Year ending December 31,

 

 

 

 

2009

 

$

2,511

 

2010

 

 

853

 

2011

 

 

853

 

2012

 

 

220

 

2013

 

 

9

 

Total

 

$

4,446

 

Note 5: Environmental and Reclamation Activities

          The liabilities accrued for our reclamation and closure costs at December 31, 2008 and 2007, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Operating properties:

 

 

 

 

 

 

 

Greens Creek

 

$

29,964

 

$

5,150

 

Lucky Friday

 

 

879

 

 

807

 

Nonoperating properties:

 

 

 

 

 

 

 

San Sebastian

 

 

1,161

 

 

1,148

 

Grouse Creek

 

 

14,326

 

 

19,061

 

Coeur d’Alene Basin

 

 

65,600

 

 

65,600

 

Bunker Hill

 

 

3,155

 

 

3,459

 

Republic

 

 

3,800

 

 

3,800

 

All other sites

 

 

2,462

 

 

2,640

 

Discontinued operations – La Camorra

 

 

 

 

4,474

 

Total

 

 

121,347

 

 

106,139

 

Reclamation and closure costs, current

 

 

(2,227

)

 

(9,686

)

Reclamation and closure costs, long-term

 

$

119,120

 

$

96,453

 

          The activity in our accrued reclamation and closure cost liability for the years ended December 31, 2008, 2007 and 2006, was as follows (in thousands):

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Balance at January 1, 2006

 

$

69,242

 

Accruals for estimated costs

 

 

643

 

Revision of estimated cash flows due to changes in reclamation plans

 

 

528

 

Payment of reclamation obligations

 

 

(4,509

)

Balance at December 31, 2006

 

 

65,904

 

Accruals for estimated costs

 

 

45,623

 

Revision of estimated cash flows due to changes in reclamation plans

 

 

1,293

 

Payment of reclamation obligations

 

 

(6,681

)

Balance at December 31, 2007

 

 

106,139

 

Accruals for estimated costs

 

 

811

 

Liability addition due to the purchase price allocation for the acquisition of 70.3% of Greens Creek

 

 

12,145

 

Revision of estimated cash flows due to changes in reclamation plans

 

 

13,114

 

Liability reduction due to the sale of discontinued operations

 

 

(4,474

)

Payment of reclamation obligations

 

 

(6,388

)

Balance at December 31, 2008

 

$

121,347

 

          Below is a reconciliation as of December 31, 2008 and 2007 (in thousands), of our asset retirement obligations, which are included in our total accrued reclamation and closure costs of $121.3 million and $106.1 million, respectively, reflected above. The sum of our estimated reclamation and abandonment costs was discounted using a credit adjusted, risk-free interest rate of 7% from the time we incurred the obligation to the time we expect to pay the retirement obligation.

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Balance January 1

 

$

11,579

 

$

9,921

 

Changes in obligations due to acquisition of 70.3% of Greens Creek