hl20150331_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

 

Commission file number

 

1-8491

 

 

HECLA MINING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

77-0664171

 
 

(State or other jurisdiction of

 

(I.R.S. Employer

 
 

incorporation or organization)

 

Identification No.)

 
         
 

6500 Mineral Drive, Suite 200

     
 

Coeur d'Alene, Idaho

 

83815-9408

 
 

(Address of principal executive offices)

 

(Zip Code)

 
         

208-769-4100

(Registrant's telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes XX .    No      .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes XX .    No___.

 

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

Large Accelerated Filer   XX.       

 

 

 

Accelerated Filer     .

Non-Accelerated Filer      .   

 

 

 

Smaller reporting company    .

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      .    No XX.

 

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

 

 

Class

 

Shares Outstanding May 5, 2015

Common stock, par value

$0.25 per share

 

370,348,437

 

 
 

Table Of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended March 31, 2015

 

INDEX*

 

   

Page

PART I - Financial Information

 
     
 

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
     
 

Condensed Consolidated Balance Sheets - March 31, 2015 and December 31, 2014

3
      
 

Condensed Consolidated Statements of Operations and Comprehensive Income - Three Months Ended March 31, 2015 and 2014

4
      
 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2015 and 2014

5
     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6
     
 

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

  27
     
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  49
     
 

Item 4. Controls and Procedures

  50
     

PART II - Other Information

  
     
 

Item 1 – Legal Proceedings

  51
     
 

Item 2 – Unregistered Sales Of Equity Securities and Use of Proceeds

54
     
 

Item 1A – Risk Factors

  51
     
 

Item 4 – Mine Safety Disclosures

  54
     
 

Item 6 – Exhibits

  54
     
 

Signatures

  55
     
 

Exhibits

  58
     
     

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

 

 

 
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Part I - Financial Information

 

Item 1. Financial Statements

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

   

March 31, 2015

   

December 31, 2014

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 196,231     $ 209,665  

Accounts receivable:

               

Trade

    27,280       17,696  

Taxes

    10,303       10,392  

Other, net

    5,215       6,792  

Inventories:

               

Concentrates, doré, and stockpiled ore

    22,921       25,999  

Materials and supplies

    20,974       21,474  

Current deferred income taxes

    10,064       12,029  

Other current assets

    15,337       12,312  

Total current assets

    308,325       316,359  

Non-current investments

    4,334       4,920  

Non-current restricted cash and investments

    883       883  

Properties, plant, equipment and mineral interests, net

    1,837,173       1,831,564  

Non-current deferred income taxes

    98,544       98,923  

Other non-current assets and deferred charges

    10,692       9,415  

Total assets

  $ 2,259,951     $ 2,262,064  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 39,712     $ 41,869  

Accrued payroll and related benefits

    18,320       27,956  

Accrued taxes

    3,891       4,241  

Current portion of capital leases

    10,289       9,491  

Current portion of accrued reclamation and closure costs

    1,631       1,631  

Other current liabilities

    14,695       5,797  

Total current liabilities

    88,538       90,985  

Capital leases

    11,590       13,650  

Accrued reclamation and closure costs

    55,781       55,619  

Long-term Debt

    498,791       498,479  

Non-current deferred tax liability

    138,422       153,300  

Other non-current liabilities

    47,504       53,057  

Total liabilities

    840,626       865,090  

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

               

STOCKHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

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

    39       39  

Common stock, $0.25 par value, 500,000,000 shares authorized; issued and outstanding 2015 — 369,992,839 shares and 2014 — 367,376,863 shares

    93,106       92,382  

Capital surplus

    1,495,893       1,486,750  

Accumulated deficit

    (129,817

)

    (141,306

)

Accumulated other comprehensive loss

    (30,095

)

    (32,031

)

Less treasury stock, at cost; 2015 - 2,433,518 and 2014 - 2,151,482

    (9,801

)

    (8,860

)

Total stockholders’ equity

    1,419,325       1,396,974  

Total liabilities and stockholders’ equity

  $ 2,259,951     $ 2,262,064  

 

 

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

 

 
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Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

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

 

 

   

Three Months Ended

 
   

March 31, 2015

   

March 31, 2014

 

Sales of products

  $ 119,092     $ 125,787  

Cost of sales and other direct production costs

    73,965       77,741  

Depreciation, depletion and amortization

    25,254       25,803  
      99,219       103,544  

Gross profit

    19,873       22,243  

Other operating expenses:

               

General and administrative

    8,720       7,941  

Exploration

    4,615       4,150  

Pre-development

    521       419  

Other operating expense

    628       718  

Provision for closed operations and environmental matters

    467       1,104  
      14,951       14,332  

Income from operations

    4,922       7,911  

Other income (expense):

               

Unrealized (loss) gain on investments

    (2,843

)

    688  

Gain on derivative contracts

    5,792       9,452  

Net foreign exchange gain

    12,274       4,134  

Interest and other income

    38       79  

Interest expense, net of amounts capitalized

    (6,192

)

    (6,840

)

      9,069       7,513  

Income before income taxes

    13,991       15,424  

Income tax provision

    (1,439

)

    (3,783

)

Net income

    12,552       11,641  

Preferred stock dividends

    (138

)

    (138

)

Income applicable to common stockholders

  $ 12,414     $ 11,503  

Comprehensive income:

               

Net income

  $ 12,552     $ 11,641  

Reclassification of impairment of investments included in net income

    2,827        

Unrealized holding gains (losses) on investments

    (891

)

    1,350  

Comprehensive income

  $ 14,488     $ 12,991  

Basic income per common share after preferred dividends

  $ 0.03     $ 0.03  

Diluted income per common share after preferred dividends

  $ 0.03     $ 0.03  

Weighted average number of common shares outstanding - basic

    368,789       342,666  

Weighted average number of common shares outstanding - diluted

    369,691       350,018  

 

 

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

 

 
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Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Three Months Ended

 
   

March 31, 2015

   

March 31, 2014

 

Operating activities:

               

Net income

  $ 12,552     $ 11,641  

Non-cash elements included in net income:

               

Depreciation, depletion and amortization

    25,523       26,054  

Unrealized loss (gain) on investments

    2,843       (688

)

Loss on disposition of properties, plants, equipment, and mineral interests

    74       275  

Provision for reclamation and closure costs

    778       933  

Stock compensation

    1,060       1,065  

Deferred income taxes

    555       (2,851

)

Amortization of loan origination fees

    454       519  

Gain on derivative contracts

    (2,970

)

    (8,847

)

Foreign exchange gain

    (11,490

)

    (4,688

)

Other non-cash gains, net

    24       692  

Change in assets and liabilities:

               

Accounts receivable

    (8,210

)

    1,387  

Inventories

    3,949       4,669  

Other current and non-current assets

    (1,638

)

    923  

Accounts payable and accrued liabilities

    4,037       (5,416

)

Accrued payroll and related benefits

    (5,116

)

    2,721  

Accrued taxes

    (263

)

    4,756  

Accrued reclamation and closure costs and other non-current liabilities

    (743

)

    (2,762

)

Cash provided by operating activities

    21,419       30,383  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (26,958

)

    (26,867

)

Proceeds from disposition of properties, plants and equipment

    25        

Purchases of investments

    (947

)

     

Changes in restricted cash and investment balances

          (2,485

)

Net cash used in investing activities

    (27,880

)

    (29,352

)

Financing activities:

               

Acquisition of treasury shares

    (941

)

     

Dividends paid to common stockholders

    (924

)

    (857

)

Dividends paid to preferred stockholders

    (138

)

    (138

)

Debt origination fees

    (63

)

    (468

)

Repayments of capital leases

    (2,347

)

    (2,403

)

Net cash (used) provided by financing activities

    (4,413

)

    (3,866

)

Effect of exchange rates on cash

    (2,560

)

    (1,698

)

Net decrease in cash and cash equivalents

    (13,434

)

    (4,533

)

Cash and cash equivalents at beginning of period

    209,665       212,175  

Cash and cash equivalents at end of period

  $ 196,231     $ 207,642  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $ 1,599     $ 2,194  

Increase to asset retirement obligations

  $     $ 8,210  

Payment of accrued compensation in restricted stock units

  $ 3,016     $ 4,600  

 

 

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

 

 
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Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (“we” or “our” or “us”).  These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2014, as it may be amended from time to time.

 

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

 

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

 

 

Note 2.    Investments and Restricted Cash

 

Investments

 

At March 31, 2015 and December 31, 2014, the fair value of our non-current investments was $4.3 million and $4.9 million, respectively.  Our non-current investments consist of marketable equity securities, which are carried at fair value as they are classified as “available-for-sale.” The cost basis of our non-current investments was approximately $4.9 million and $7.3 million at March 31, 2015 and December 31, 2014, respectively. During the first quarter of 2015, we recognized a $2.8 million impairment charge against current earnings, as we determined the impairment to be other-than-temporary. We also acquired equity in other mining companies for a total cost of $0.9 million during the first quarter of 2015.

 

At March 31, 2015, a net unrealized loss position of $0.6 million for our non-current investments was included in accumulated other comprehensive loss on our condensed consolidated balance sheet.

 

Restricted Cash and Investments

 

Various laws, permits, and covenants require that funds be in place for certain environmental and reclamation obligations and other potential liabilities.  These restricted investments are used primarily for reclamation funding or for funding surety bonds, and were $0.9 million at March 31, 2015 and December 31, 2014, respectively. Restricted investments primarily represent investments in money market funds and certificates of deposit.  

 

 
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Note 3.   Income Taxes

 

Major components of our income tax provision for the three months ended March 31, 2015 and 2014 are as follows (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2015

   

2014

 

Current:

               

Domestic

  $ 97     $ 6,499  

Foreign

    708       156  

Total current income tax provision

    805       6,655  
                 

Deferred:

               

Domestic

    2,422       (3,130

)

Foreign

    (1,788

)

    258  

Total deferred income tax provision

    634       (2,872

)

Total income tax provision

  $ 1,439     $ 3,783  

 

 

As of March 31, 2015, we have a net deferred tax asset in the U.S. of $108.6 million and a net deferred tax liability in Canada of $138.4 million for a consolidated worldwide net deferred tax liability of $29.8 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations. For the three months ended March 31, 2015, there were no circumstances that caused us to change our assessment of the ability to generate sufficient future taxable income to realize the currently recognized U.S. deferred tax assets.  At March 31, 2015 and December 31, 2014, the balances of the valuation allowances on our deferred tax assets were $36 million and $32 million, respectively, primarily for foreign net operating loss carryforwards. The amount of the deferred tax asset considered recoverable, however, could be reduced in the near term if estimates of future taxable income are reduced.

 

The current income tax provisions for the three months ended March 31, 2015 and 2014 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income primarily due to the effects of percentage depletion for all periods presented and the impact of taxation in foreign jurisdictions.

 

 

Note 4.    Commitments, Contingencies and Obligations

 

General

 

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

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of March 31, 2015, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, have jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of March 31, 2015.

 

 
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Lucky Friday Water Permit Matters

 

Over the last several years, the Lucky Friday unit has experienced several regulatory issues relating to its water discharge permits and water management more generally.

 

 

In late 2008 and early 2009, Hecla Limited experienced a number of alleged permit exceedances for water discharges at the Lucky Friday unit. These alleged violations resulted in Hecla Limited entering into a Consent Agreement and Final Order (“CAFO”) and a Compliance Order with the EPA in April 2009, which included an extended compliance timeline. In connection with the CAFO, Hecla Limited paid the maximum administrative penalty to the EPA of $177,500 to settle any liability for such alleged exceedances.

 

 

In 2009, additional alleged permit exceedances for water discharges at the Lucky Friday unit occurred. In 2010, alleged unpermitted discharges of pollutants occurred at the Lucky Friday unit. These alleged permit exceedances and certain alleged unpermitted discharges were the subject of a December 2010 notice of violation (“2010 NOV”) from the EPA informing Hecla Limited that the EPA was prepared to seek civil penalties for these alleged violations. Hecla Limited disputes many of EPA's assertions, but commenced negotiations with the EPA in 2010 in an attempt to resolve the matter. There has not yet been any resolution of the 2010 NOV.

 

 

In 2012, the Lucky Friday unit had two weekly water samples, one of which exceeded the permit concentration limit for lead (but not the associated load limit), and one of which exceeded the permit limits for zinc. Also, in late 2012, heavy rains resulted in alleged impacted storm water being discharged to a nearby river. After these incidents, in February 2013, the EPA issued a notice of violation and request for information to Hecla Limited alleging that the two storm water incidents were each a violation of Hecla Limited's storm water permit. In March 2014, the Lucky Friday unit had a weekly water sample which exceeded the maximum daily permitted concentration limit for zinc (but not the associated load limit).

 

The EPA referred the two alleged 2012 permit exceedances, along with the alleged violations in the 2010 NOV and some additional alleged unpermitted discharges from 2010 that were not included in the 2010 NOV, to the U.S. Department of Justice to possibly file a civil complaint by the United States against Hecla Limited. In addition, it is possible that the United States may include other alleged unpermitted discharges (including the 2012 storm water incidents) or permit violations in any complaint. There is the potential for larger civil penalties in the context of a United States complaint than in an administrative action by the EPA such as the 2009 CAFO.

 

In December 2013, the EPA issued to Hecla Limited a notice of violation (“2013 NOV”) alleging certain storm water reporting violations under Lucky Friday’s Clean Water Act Multi-Sector General Stormwater Permit for Industrial Activities. The 2013 NOV also contained a request for information under Section 308 of the Clean Water Act directing Hecla Limited to undertake a comprehensive groundwater investigation of Lucky Friday’s tailings pond no. 3 to evaluate whether the pond is causing the discharge of pollutants via seepage to groundwater that is discharging to surface water. We cannot ascertain what impacts, if any, the 2013 NOV and request for information will have on the matters that were already pending with the United States, including the 2010 NOV.

 

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

 

 
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We believe that it is reasonably possible that Hecla Limited faces some liability for the above water issues; however, we cannot with reasonable certainty estimate the amount or range of any such liability because, among other reasons, we have not completed the investigation called for by the request for information contained in the 2013 NOV, and thus we do not know what the impact of the investigation will be.

 

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

 

In May 2011, the EPA made a formal request to Hecla Mining Company for information regarding the Johnny M Mine Area near San Mateo, McKinley County, New Mexico, and asserted that Hecla Mining Company may be responsible under CERCLA for environmental remediation and past costs the EPA has incurred at the site. Mining at the Johnny M was conducted for a limited period of time by a predecessor of our subsidiary, Hecla Limited. In August 2012, Hecla Limited and the EPA entered into a Settlement Agreement and Administrative Order on Consent for Removal Action (“Consent Decree”), pursuant to which Hecla Limited agreed to pay (i) $1.1 million to the EPA for its past response costs at the site and (ii) any future response costs at the site, in exchange for a covenant not to sue by the EPA. Hecla Limited paid the $1.1 million to the EPA for its past response costs in the fourth quarter of 2012 and in December 2014, submitted to EPA the Engineering Evaluation and Cost Analysis (“EE/CA”) for the site. The EE/CA evaluates three alternative response actions: 1) no action, 2) off-site disposal, and 3) on-site disposal. The range in estimated costs of these alternatives is $0 to $221 million, and in the EE/CA, Hecla Limited recommends that EPA approve on-site disposal, which is currently estimated to cost $5.6 million, on the basis that such alternative is the most appropriate response action under CERCLA. There is no guarantee EPA will select this alternative. The EPA must review and approve the EE/CA, including the response action alternatives, after which the approved response action will be implemented by Hecla Limited. Based on the foregoing, we believe it is probable that Hecla Limited will incur a liability for remediation at the site, and our best estimate of that liability as of the date of this report is $5.6 million. There can be no assurance that Hecla Limited’s liability will not be more than $5.6 million, or that its ultimate liability will not have a material adverse effect on Hecla Limited’s or our results from operations or financial position.

 

Carpenter Snow Creek Site, Cascade County, Montana

 

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

 

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

 

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

 

In 1991, Hecla Limited acquired all of the outstanding common stock of CoCa Mines, Inc. (“CoCa”). CoCa is alleged to have current or prior ownership interests, and engaged in exploration activities, at each of Gilt Edge Mine in South Dakota and in the area adjacent to the Nelson Tunnel property in Creede, Colorado.

 

Gilt Edge Mine Superfund Site

 

In August 2008, the EPA made a formal request to CoCa for information regarding the Gilt Edge Mine Site located in Lawrence County, South Dakota, and asserted that CoCa may be liable for environmental cleanup at the site. The Gilt Edge Mine Site was explored and/or mined beginning in the 1870s. Beginning in the mid-1970s, CoCa held property interests at the site (primarily in the form of mining claims), and was party to an agreement with another mining company (the “operator”) that conducted a limited program of exploration work at the site. The two companies assigned the right to mine in 1983 to a third mining company, and by 1986 CoCa had divested itself of any property interests at the site.

 

 
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In July 2010, the United States informed CoCa that it intended to pursue CoCa and other potentially responsible parties (“PRPs”) on a strict, joint and several basis under CERCLA for liability for past and future response costs incurred at Gilt Edge. Currently, the United States alleges that CoCa is liable based on its historical relationship to the site, and that CoCa has succeeded to the liabilities of one or more predecessor entities that may have held certain property interests at the site. Most of the other viable PRPs have settled with the United States. The operator of the exploration effort to which CoCa was a party settled for $26 million, while the third mining company referred to above settled for $4.2 million.

 

The United States alleges that estimated total costs associated with the site may exceed $225 million, including both past and future response costs. We believe that it is reasonably possible that CoCa faces some liability under CERCLA based on its historical ownership interests at the site; however, we cannot with reasonable certainty estimate the amount or range of any such liability. Furthermore, in the event CoCa incurs a liability at this site, it has limited assets with which to satisfy any claim. Because of this, we believe that it is possible that the United States will seek to recover some of the alleged $225 million in costs associated with the site from Hecla Limited, as the sole stockholder of CoCa. However, we believe Hecla Limited has strong defenses and would vigorously defend against any such claim. For example, Hecla Limited did not acquire CoCa until 1991, well after CoCa discontinued its involvement with the Gilt Edge site. In addition, CoCa is and always has been a separate corporate entity from Hecla Limited. Therefore, we believe that Hecla Limited is not liable for any claims at the Gilt Edge site.

 

Settlement negotiations with the United States commenced in 2010 and are ongoing. Because of the unpredictability of settlement negotiations or the outcome of any trial, as well as the nature of CERCLA as a strict, joint and several liability statute, we cannot with reasonable certainty estimate the amount or range of liability faced by CoCa or Hecla Limited. Furthermore, there can be no assurance settlement negotiations will be successful, or that Hecla Limited will not incur a material liability with respect to this site.

 

Nelson Tunnel/Commodore Waste Rock Pile Superfund Site

 

In August 2009, the EPA made a formal request to CoCa for information regarding the Nelson Tunnel/Commodore Waste Rock Pile Superfund Site in Creede, Colorado. CoCa was involved in exploration and mining activities in Creede during the 1970s and the 1980s. In October 2013, the EPA made a formal claim against CoCa for past response costs under CERCLA as an owner/operator of the site, and against Hecla Limited as a corporate successor to CoCa. The EPA is seeking a total of approximately $5 million for past response costs, plus an undetermined amount of interest from CoCa, Hecla Limited, and other PRPs. The EPA stated that it is continuing its remedial investigation/feasibility study at the site, and once that is complete, it will begin remedial design and remedial action for the site. Presumably, the EPA will also seek reimbursement of at least some of those costs from viable PRPs. In April 2014, CoCa received notice from another PRP alleging that CoCa is required to indemnify it in connection with any liability it may have with respect to the Nelson/Commodore site. We believe that it is reasonably possible that CoCa faces some liability under CERCLA based on its historical ownership interests at the site. However, in the event CoCa incurs a liability for this site, it has limited assets with which to satisfy any claim. Because of this, we believe that it is possible that the United States will seek to recover some of the costs associated with the site from Hecla Limited, as the sole stockholder of CoCa.  However, we believe Hecla Limited would have strong defenses to such a claim and would vigorously defend against any such claim. For example, Hecla Limited did not acquire CoCa until 1991, well after CoCa discontinued its historical activities in the vicinity of the site.  In addition, CoCa is and always has been a separate corporate entity from Hecla Limited.  Therefore, we believe that Hecla Limited is not liable for any claims at this site.

 

Settlement negotiations with the United States commenced in 2014 and are ongoing. We cannot with reasonable certainty estimate the amount or range of any liability CoCa or Hecla Limited may have because, among other things, there is little information known on EPA’s remediation plans for the site, as well as the unpredictability of settlement negotiations or the outcome of any trial. Thus, there can be no assurance that Hecla Limited will not incur a material liability with respect to this site.

 

 
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Senior Notes

 

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

 

Other Commitments

 

Our contractual obligations as of March 31, 2015 included approximately $4.0 million for various non-capital costs. In addition, our open purchase orders at March 31, 2015 included approximately $0.5 million, $2.2 million, and $0.8 million, respectively, for various capital items at the Greens Creek, Lucky Friday, and Casa Berardi units, and approximately $8.8 million, $1.3 million and $0.3 million, for various non-capital costs at the Greens Creek, Lucky Friday and Casa Berardi units. We also have total commitments of approximately $22.7 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units (see Note 9 for more information).

 

See Note 13 for a discussion of our commitment, upon satisfaction of certain conditions, to close the proposed acquisition of Revett Mining Company and issue shares of our common stock as consideration.

 

As part of our ongoing business and operations, we are required to provide surety bonds and bank letters of credit for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of March 31, 2015, we had surety bonds totaling $68.9 million in place as financial support for future reclamation and closure of the Greens Creek mine. In addition, we had letters of credit for approximately $7.9 million outstanding as of December 31, 2014 for environmental reclamation and workers' compensation insurance bonding. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding and will be able to satisfy future bonding requirements as they arise.

 

Other Contingencies

 

In March 2012, Hecla Limited received notice of a complaint filed against it by the United Steel Workers, Local 5114, with the Federal Mine Safety and Health Review Commission ("FMSHRC") for compensation for bargaining unit workers at the Lucky Friday mine idled as a result of the temporary suspension of production at the mine. The complaint alleged the bargaining unit workers were entitled to compensation under Section 111 of the Federal Mine Safety and Health Act of 1977 the "Mine Act") from November 16, 2011 - the date an order was issued by the Mine Safety Health Administration (“MSHA”) to Hecla Limited - until June 12, 2013 - the date the order was terminated. On February 4, 2015, the judge hearing the case issued an Order finding the applicable period of time for compensation under Section 111 of the Mine Act to be approximately 8 days and the compensation owed to the employees to be approximately $13,000, plus interest. On March 4, 2015, the Union filed an appeal for discretionary review with the FMSHRC. On March 12, 2015, the FMSHRC issued a notice granting discretionary review. We believe the claim is without merit, and that all wages due under Section 111, which was an immaterial amount, have already been paid. Therefore, we have not recorded a liability relating to the claim as of March 31, 2015. The value of the union's claim is estimated to be in the range of $0 to $10 million.

 

 
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On April 12, 2013, the family of Larry Marek, an employee of Hecla Limited who was fatally injured in an April 2011 accident, filed a lawsuit against us and certain of our officers and employees seeking damages for, among other claims, wrongful death and infliction of emotional distress. No dollar amount of damages is specified in the complaint, which was filed in state court in Idaho (Kootenai County District Court). We cannot reasonably predict the outcome of this matter, however, we believe the case is without merit and are vigorously defending this lawsuit. On April 21, 2015, the judge hearing the case granted Hecla’s motion for summary judgment and dismissed the case. The plaintiffs have an opportunity to appeal the decision. As of the date of this report, no such appeal has been filed. On April 29, 2015, the plaintiffs filed a motion with the court seeking to reconsider the summary judgment decision in light of a recent decision by the FMSHRC upholding two orders and one citation issued to Hecla Limited that relate to the same April 2011 accident.

 

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

 

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

 

 

Note 5.    Earnings Per Common Share

 

We are authorized to issue 500,000,000 shares of common stock, $0.25 par value per share. At March 31, 2015, there were 372,426,357 shares of our common stock issued and 2,433,518 shares issued and held in treasury, for a net of 369,992,839 shares outstanding.

 

The following table reconciles weighted average common shares used in the computations of basic and diluted earnings per share for the three-month periods ended March 31, 2015 and 2014 (thousands, except per-share amounts):

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 

Numerator

               

Net income

  $ 12,552     $ 11,641  

Preferred stock dividends

    (138

)

    (138

)

Net income applicable to common shares for basic and diluted earnings per share

  $ 12,414     $ 11,503  
                 

Denominator

               

Basic weighted average common shares

    368,789       342,666  

Dilutive stock options and restricted stock

    902       7,352  

Diluted weighted average common shares

    369,691       350,018  

Basic earnings per common share

               

Net income applicable to common shares

  $ 0.03     $ 0.03  

Diluted earnings per common share

               

Net income applicable to common shares

  $ 0.03     $ 0.03  

 

 
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Diluted income per share for the three months ended March 31, 2015 and 2014 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion and exercise would have no effect on the calculation of dilutive shares.

 

Options to purchase 244,342 shares of our common stock were excluded from the computation of diluted earnings per share for the three-month period ended March 31, 2015.  For the three-month period ended March 31, 2014, options to purchase 612,745 shares of our common stock were excluded from the computation of diluted earnings per share.  In each case, the exercise price of the options not included in the computations of diluted earnings per share exceeded the average price of our stock during those periods and therefore would not affect the calculation of earnings per share.

 

 

Note 6.    Business Segments

 

We are currently organized and managed in three reporting segments: the Greens Creek unit, the Lucky Friday unit and the Casa Berardi unit.

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

 

The following tables present information about reportable segments for the three months ended March 31, 2015 and 2014 (in thousands):

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 

Net sales to unaffiliated customers:

               

Greens Creek

  $ 67,355     $ 63,596  

Lucky Friday

    19,891       20,096  

Casa Berardi

    31,846       42,095  
    $ 119,092     $ 125,787  

Income (loss) from operations:

               

Greens Creek

  $ 14,693     $ 11,046  

Lucky Friday

    3,546       4,700  

Casa Berardi

    (765

)

    3,441  

Other

    (12,552

)

    (11,276

)

    $ 4,922     $ 7,911  

 

The following table presents identifiable assets by reportable segment as of March 31, 2015 and December 31, 2014 (in thousands):

 

    March 31, 2015     December 31, 2014  

Identifiable assets:

               

Greens Creek

  $ 704,348     $ 704,121  

Lucky Friday

    369,503       356,482  

Casa Berardi

    789,989       800,961  

Other

    396,111       400,500  
    $ 2,259,951     $ 2,262,064  

 

 
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Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three months ended March 31, 2015 and 2014 (in thousands):

 

 

   

Three Months Ended

March 31,

 
   

2015

   

2014

 

Service cost

  $ 1,054     $ 1,020  

Interest cost

    1,206       1,186  

Expected return on plan assets

    (1,345

)

    (1,249

)

Amortization of prior service benefit

    (84

)

    (84

)

Amortization of net loss

    1,065       756  

Net periodic benefit cost

  $ 1,896     $ 1,629  

 

In January 2015, we contributed approximately $5.0 million in shares of our common stock to our defined benefit plans, with no additional contributions anticipated in 2015. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2015.

 

 

Note 8.    Stockholders’ Equity

 

Share-based Compensation Plans

 

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

 

On March 5, 2015, the Board of Directors granted 911,148 shares of common stock to employees for payment of annual and long-term incentive compensation for the period ended December 31, 2014. The shares were distributed in March 2015, and the $3.0 million in expense related to the stock awards has been recognized as of March 31, 2015.

 

Stock-based compensation expense recorded in the first three months of both 2015 and 2014 totaled $1.1 million and was related to amortization of restricted stock unit grants to employees in prior periods.

 

In connection with the vesting of restricted stock units or other issuances of common stock to employees as compensation, employees have in the past, at their election and when permitted by us, chosen to satisfy their tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.  Pursuant to such net settlements, in the first quarter of 2015 we repurchased 284,243 shares for approximately $941,000, or approximately $3.31 per share.

 

 
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Common Stock Dividends

 

In September 2011 and February 2012, our Board of Directors adopted a common stock dividend policy that has two components: (1) a dividend that links the amount of dividends on our common stock to our average quarterly realized silver price in the preceding quarter, and (2) a minimum annual dividend of $0.01 per share of common stock, in each case, payable quarterly, when and if declared by the Board. For illustrative purposes only, the table below summarizes potential per share dividend amounts at different quarterly average realized price levels according to the first component of the policy:

 

Quarterly average realized silver price

per ounce

 

Quarterly dividend

per share

 

Annualized dividend

per share

$30

 

$0.01

 

$0.04

$35

 

$0.02

 

$0.08

$40

 

$0.03

 

$0.12

$45

 

$0.04

 

$0.16

$50

 

$0.05

 

$0.20

$55

 

$0.06

 

$0.24

$60

 

$0.07

 

$0.28

 

On May 6, 2015, our Board of Directors declared a dividend on common stock, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of $0.9 million payable in June 2015. Because the average realized silver price for the first quarter of 2015 was $17.18 per ounce, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.

 

Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not to engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of March 31, 2015, 934,100 shares have been purchased in prior periods at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at May 5, 2015, was $3.01 per share.

 

 

Note 9.    Senior Notes, Credit Facilities and Capital Leases

 

Senior Notes

 

On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021, and in 2014, an additional $6.5 million aggregate principal amount of the Notes was issued to our pension plan in order to satisfy the funding requirement for 2014 (collectively, the “Notes”). The Notes are governed by the Indenture, dated as of April 12, 2013, as amended (the “Indenture”), among Hecla Mining Company ("Hecla") and certain of our subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from the initial offering of the Notes ($490 million) were used to partially fund the acquisition of Aurizon and for general corporate purposes, including expenses related to the Aurizon acquisition.

  

 
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The Notes are recorded net of a 2% initial purchaser discount totaling $10 million at the time of the April 2013 issuance and having an unamortized balance of $7.7 million as of March 31, 2015. The Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.  Interest on the Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. During the first quarter of 2015 and 2014, interest expense related to the Notes and amortization of the initial purchaser discount and fees related to the issuance of the Notes, net of $3.3 million and $2.7 million, respectively, in capitalized interest, totaled $5.7 million and $6.3 million, respectively.

 

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

 

The Notes will be redeemable in whole or in part, at any time and from time to time on or after May 1, 2016, on the redemption dates and at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.  Prior to May 1, 2016, we may redeem some or all of the Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus a “make whole” premium.  We may redeem up to 35% of the Notes before May 1, 2016 with the net cash proceeds from certain equity offerings.

 

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

  

 
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Credit Facilities

 

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

 

Interest rates:

   

Spread over the London Interbank Offer Rate

 

2.25 - 3.25%

Spread over alternative base rate

 

1.25 - 2.25%

Standby fee per annum on undrawn amounts

 

0.50%

     

Covenant financial ratios:

   

Senior leverage ratio (debt secured by liens/EBITDA)

 

not more than 2.50:1

Leverage ratio (total debt less unencumbered cash/EBITDA)

 

not more than 4.00:1

Interest coverage ratio (EBITDA/interest expense)

 

not more than 3.00:1

 

We were in compliance with all covenants under the credit agreement and no amounts were outstanding as of March 31, 2015.  We have not drawn funds on the current revolving credit facility as of the filing date of this report.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units, which we have determined to be capital leases.  At March 31, 2015, the total liability balance associated with capital leases, including certain purchase option amounts, was $21.9 million, with $10.3 million of the liability classified as current and the remaining $11.6 million classified as non-current. At December 31, 2014, the total liability balance associated with capital leases was $23.1 million, with $9.5 million of the liability classified as current and $13.7 million classified as non-current. The total obligation for future minimum lease payments was $22.7 million at March 31, 2015, with $1.0 million attributed to interest.

 

At March 31, 2015, the annual maturities of capital lease commitments, including interest, are (in thousands):

 

 

 

Twelve-month period ending March 31,

         
 

2016

  $ 10,195    
 

2017

    6,997    
 

2018

    3,821    
 

2019

    1,700    
 

Total

    22,713    
 

Less: imputed interest

    (1,046

)

 
 

Net capital lease obligation

  $ 21,667    

 

 

Note 10.    Developments in Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The guidance establishes a new five step principle-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. ASU No. 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016. We are in the process of evaluating this guidance and our method of adoption.

 

 

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

 

 
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Note 11.    Derivative Instruments

 

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, thereby partially offsetting our exposure to fluctuations in the market. These instruments do, however, expose us to (i) credit risk in the event of non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments.  These contracts do not qualify for hedge accounting and are marked-to-market through earnings each period.  At March 31, 2015, we recorded the following balances related to these contracts:

 

 

a current asset of $6.8 million which is included in other current assets and is net of $0.9 million in contracts in a fair value current liability position; and

 

a non-current asset of $7.5 million which is included in other non-current assets and is net of $0.2 million in contracts in a fair value current liability position.

 

We recognized a $0.3 million net gain during the first three months of 2015 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net gain recognized on the contracts offsets losses related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $5.8 million net gain during the first three months of 2015 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments, which includes $1.9 million in gains realized on settled contracts. The net gain on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net gain during the first three months of 2015 is the result of decreasing zinc and lead prices. This program is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below).

 

 
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The following tables summarize the quantities of metals committed under forward sales contracts at March 31, 2015 and December 31, 2014:

 

 

March 31, 2015

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2015 settlements

    1,587       6       25,849       8,874     $ 16.71     $ 1,194     $ 0.94     $ 0.81  
                                                                 

Contracts on forecasted sales

                                                               

2015 settlements

                27,999       22,487       N/A       N/A     $ 0.95     $ 1.10  

2016 settlements

                44,699       34,337       N/A       N/A     $ 0.99     $ 1.03  

2017 settlements

                1,984             N/A       N/A     $ 1.04       N/A  

 

 

December 31, 2014

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2015 settlements

    1,607       6       19,456       8,378     $ 16.06     $ 1,195     $ 1.01     $ 0.87  
                                                                 

Contracts on forecasted sales

                                                               

2015 settlements

                46,738       29,652       N/A       N/A     $ 0.96     $ 1.07  

2016 settlements

                44,699       34,337       N/A       N/A     $ 0.99     $ 1.03  

2017 settlements

                1,984             N/A       N/A     $ 1.04       N/A  

 

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 marked-to-market through earnings each period prior to final settlement.

 

 
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Note 12.    Fair Value Measurement

 

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

 

Description  

Balance at

March 31, 2015

   

Balance at

December 31, 2014

   

Input

Hierarchy Level

 

Assets:

                       

Cash and cash equivalents:

                       

Money market funds and other bank deposits

  $ 196,231     $ 209,665    

Level 1

 

Available for sale securities:

                       

Equity securities – mining industry

    4,334       4,920    

Level 1

 

Trade accounts receivable:

                       

Receivables from provisional concentrate sales

    27,280       17,696    

Level 2

 

Restricted cash balances:

                       

Certificates of deposit and other bank deposits

    883       883    

Level 1

 

Derivative contracts:

                       

Metal forward contracts

    14,317       11,347    

Level 2

 

Total assets

  $ 243,045     $ 244,511          

 

Cash and cash equivalents consist primarily of money market funds and are valued at cost, which approximates fair value.

 

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

 

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

 

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

 

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

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $498.8 million, net of unamortized initial purchaser discount at March 31, 2015, had a fair value of $445.3 million at March 31, 2015. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Notes. See Note 9 for more information.

 

 
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Note 13.    Proposed Merger with Revett

 

On March 26, 2015, we and Revett Mining Company, Inc. (Revett) entered into a merger agreement pursuant to which we would acquire all of the issued and outstanding common stock of Revett. Revett holds 100% ownership of two properties in Northwest Montana: the Troy Mine, which is currently on care-and-maintenance, and the Rock Creek project, a significant undeveloped silver and copper deposit. In the proposed merger, each outstanding common share of Revett would be exchanged for 0.1622 of a share of our common stock, which have an estimated value of $0.52 per Revett common share based on the closing price of Hecla's common stock of $3.23 per share on March 25, 2015, the last full day before the merger agreement was entered into. The actual value of consideration transferred will be based on the market price of Hecla's common stock on the date the merger is consummated. Based on the closing price of Hecla stock of $3.01 per share on May 5, 2015, total consideration would be $18.8 million. A 10% change in the price per share of Hecla stock from its closing price on May 5, 2015 would result in a $1.9 million change in the amount of consideration transferred in the merger. Estimated consideration is based on Revett having 38,548,989 outstanding common shares, excluding 725,000 shares owned by our wholly-owned subsidiary which would be canceled in the merger. All consideration given to Revett stockholders will be in newly issued Hecla stock. The proposed merger is subject to approval by Revett's stockholders. No assurance can be given as to whether the merger will be approved and consummated.

 

In April 2015, we entered into a term loan and security agreement with Revett pursuant to which we agreed to provide one or more secured loans to Revett in an aggregate amount not to exceed $1.5 million. The loans bear interest at a rate per annum equal to LIBOR plus 5% and will be due and payable on July 1, 2015. The loans are secured by certain real estate holdings of Revett's subsidiary, Revett Holdings, Inc., and the equity interests in Revett Holdings, Inc.

 

 

Note 14.   Guarantor Subsidiaries

 

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

 

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

 

 

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

 

 

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

 

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

 

 

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

 

 

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

 

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

 

 
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Unaudited Interim Condensed Consolidating Balance Sheets

 

   

As of March 31, 2015

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 145,284     $ 35,957     $ 14,990     $     $ 196,231  

Other current assets

    17,969       52,393       27,769       13,963       112,094  

Properties, plants, and equipment - net

    1,838       1,085,971       749,364             1,837,173  

Intercompany receivable (payable)

    439,735       (125,964

)

    (370,025

)

    56,254        

Investments in subsidiaries

    1,365,864                   (1,365,864

)

     

Other non-current assets

    10,102       182,205       4,207       (82,061

)

    114,453  

Total assets

  $ 1,980,792     $ 1,230,562     $ 426,305     $ (1,377,708

)

  $ 2,259,951  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 24,709     $ 48,654     $ 19,983     $ (4,808

)

  $ 88,538  

Long-term debt

    498,791       10,150       1,440             510,381  

Non-current portion of accrued reclamation

          43,886       11,895             55,781  

Non-current deferred tax liability

          7,036       138,422       (7,036

)

    138,422  

Other non-current liabilities

    37,967       10,386       (849

)

          47,504  

Stockholders' equity

    1,419,325       1,110,450       255,414       (1,365,864

)

    1,419,325  

Total liabilities and stockholders' equity

  $ 1,980,792     $ 1,230,562     $ 426,305     $ (1,377,708

)

  $ 2,259,951  

 

 
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As of December 31, 2014

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 146,885     $ 33,824     $ 28,956     $     $ 209,665  

Other current assets

    7,115       48,981       23,165       27,433       106,694  

Properties, plants, and equipment - net

    1,572       1,079,658       750,334             1,831,564  

Intercompany receivable (payable)

    470,306       (123,671

)

    (392,880

)

    46,245        

Investments in subsidiaries

    1,317,969                   (1,317,969

)

     

Other non-current assets

    8,644       189,014       4,620       (88,137

)

    114,141  

Total assets

  $ 1,952,491     $ 1,227,806     $ 414,195     $ (1,332,428

)

  $ 2,262,064  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 14,143     $ 54,918     $ 21,996     $ (72

)

  $ 90,985  

Long-term debt

    498,479       10,597       3,053             512,129  

Non-current portion of accrued reclamation

          43,314       12,305             55,619  

Non-current deferred tax liability

          14,387       153,300       (14,387

)

    153,300  

Other non-current liabilities

    42,895       11,126       (964

)

          53,057  

Stockholders' equity

    1,396,974       1,093,464       224,505       (1,317,969

)

    1,396,974  

Total liabilities and stockholders' equity

  $ 1,952,491     $ 1,227,806     $ 414,195     $ (1,332,428

)

  $ 2,262,064  

 

 
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Unaudited Interim Condensed Consolidating Statements of Operations

 

   

Three Months Ended March 31, 2015

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

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

Cost of sales

          (51,437

)

    (22,528

)

          (73,965

)

Depreciation, depletion, amortization

          (16,611

)

    (8,643

)

          (25,254

)

General and administrative

    (4,442

)

    (3,893

)

    (385

)

          (8,720

)

Exploration and pre-development

    (217

)

    (1,134

)

    (3,785

)

          (5,136

)

Gain on derivative contracts

    5,792                         5,792  

Equity in earnings of subsidiaries

    40,042                   (40,042

)

     

Other (expense) income

    (28,935

)

    3,567       31,006       (3,456

)

    2,182  

Income (loss) before income taxes

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

)

    13,991  

(Provision) benefit from income taxes

          (4,946

)

    51       3,456       (1,439

)

Net income (loss)

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

)

    12,552  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

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

)

    12,414  

Net income (loss)

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

)

    12,552  

Changes in comprehensive income (loss)

    1,936       (194

)

    2,051       (1,857

)

    1,936  

Comprehensive income (loss)

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

)

  $ 14,488  

 

   

Three Months Ended March 31, 2014

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (19

)

  $ 83,710     $ 42,096     $     $ 125,787  

Cost of sales

          (49,933

)

    (27,808

)

          (77,741

)

Depreciation, depletion, amortization

          (17,221

)

    (8,582

)

          (25,803

)

General and administrative

    (4,630

)

    (3,008

)

    (303

)

          (7,941

)

Exploration and pre-development

    (44

)

    (958

)

    (3,567

)

          (4,569

)

Gain on derivative contracts

    9,452                         9,452  

Equity in earnings of subsidiaries

    17,703                   (17,703

)

     

Other (expense) income

    (10,821

)

    408       9,955       (3,303

)

    (3,761

)

Income (loss) before income taxes

    11,641       12,998       11,791       (21,006

)

    15,424  

(Provision) benefit from income taxes

          (2,886

)

    (4,200

)

    3,303       (3,783

)

Net income (loss)

    11,641       10,112       7,591       (17,703

)

    11,641  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    11,503       10,112       7,591       (17,303

)

    11,503  

Net income (loss)

    11,641       10,112       7,591       (17,703

)

    11,641  

Changes in comprehensive income (loss)

    1,350       57       1,316       (1,373

)

    1,350  

Comprehensive income (loss)

  $ 12,991     $ 10,169     $ 8,907     $ (19,076

)

  $ 12,991  

 

 
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Unaudited Interim Condensed Consolidating Statements of Cash Flows

 

   

Three Months Ended March 31, 2015

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

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

)

  $ 21,419  

Cash flows from investing activities:

                                       

Additions to properties, plants, and equipment

    (424

)

    (18,163

)

    (8,371

)

            (26,958

)

Other investing activities, net

          25       (947

)

          (922

)

Cash flows from financing activities:

                                       

Dividends paid to stockholders

    (1,062

)

                      (1,062

)

Borrowings on debt

                             

Payments on debt

          (1,901

)

    (446

)

          (2,347

)

Other financing activity

    (15,841

)

    6,349       (21,544

)

    30,032       (1,004

)

Effect o