hl20150930_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 September 30, 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.

  

 
 

Table Of Contents
 

 

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 November 2, 2015

Common stock, par value

$0.25 per share

 

378,112,840

 

 
 

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Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended September 30, 2015

 

INDEX*

 

 

     

Page

PART I - Financial Information

 
       
   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
       
   

Condensed Consolidated Balance Sheets - September 30, 2015 and December 31, 2014

  3
       
   

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended and Nine Months Ended September 30, 2015 and 2014

 4
       
   

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 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

  30
       
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  53
       
   

Item 4. Controls and Procedures

  55
       

PART II - Other Information

 
       
   

Item 1 – Legal Proceedings

  55
       
   

Item 1A – Risk Factors

  55
       
   

Item 4 – Mine Safety Disclosures

  55
       
   

Item 6 – Exhibits

  55
       
   

Signatures

  56
       
   

Exhibits

  57
       
       

*Items 2, 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)

 

   

September 30, 2015

   

December 31, 2014

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 174,454     $ 209,665  

Accounts receivable:

               

Trade

    10,384       17,696  

Taxes

    14,219       10,392  

Other, net

    12,970       6,792  

Inventories:

               

Concentrates, doré, and stockpiled ore

    20,281       25,999  

Materials and supplies

    23,325       21,474  

Current deferred income taxes

    19,573       12,029  

Other current assets

    15,957       12,312  

Total current assets

    291,163       316,359  

Non-current investments

    2,003       4,920  

Non-current restricted cash and investments

    999       883  

Properties, plants, equipment and mineral interests, net

    1,878,177       1,831,564  

Non-current deferred income taxes

    93,037       98,923  

Reclamation insurance asset

    16,800        

Other non-current assets and deferred charges

    3,034       9,415  

Total assets

  $ 2,285,213     $ 2,262,064  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 47,724     $ 41,869  

Accrued payroll and related benefits

    23,497       27,956  

Accrued taxes

    7,078       4,241  

Current portion of capital leases

    9,492       9,491  

Current portion of debt

    1,981        

Current portion of accrued reclamation and closure costs

    20,788       1,631  

Other current liabilities

    15,056       5,797  

Total current liabilities

    125,616       90,985  

Capital leases

    9,485       13,650  

Accrued reclamation and closure costs

    70,822       55,619  

Long-term debt

    501,281       498,479  

Non-current deferred tax liability

    125,753       153,300  

Other noncurrent liabilities

    50,485       53,057  

Total liabilities

    883,442       865,090  

Commitments and contingencies

               

SHAREHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

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

    39       39  

Common stock, $0.25 par value, authorized 500,000,000 shares; issued and outstanding 2015 — 377,697,406 shares and 2014 — 367,376,863 shares

    95,114       92,382  

Capital surplus

    1,517,514       1,486,750  

Accumulated deficit

    (168,522

)

    (141,306

)

Accumulated other comprehensive loss

    (31,640

)

    (32,031

)

Less treasury stock, at cost; 2015 — 2,764,973 and 2014 — 2,151,482 shares issued and held in treasury

    (10,734

)

    (8,860

)

Total shareholders’ equity

    1,401,771       1,396,974  

Total liabilities and shareholders’ equity

  $ 2,285,213     $ 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 (Loss) (Unaudited)

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

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2015

   

September 30,

2014

   

September 30,

2015

   

September 30,

2014

 

Sales of products

  $ 104,941     $ 135,507     $ 328,230     $ 378,796  

Cost of sales and other direct production costs

    79,273       86,680       220,805       235,460  

Depreciation, depletion and amortization

    28,229       26,804       80,649       80,342  
      107,502       113,484       301,454       315,802  

Gross profit (loss)

    (2,561

)

    22,023       26,776       62,994  

Other operating expenses:

                               

General and administrative

    9,461       7,884       26,477       23,984  

Exploration

    5,540       5,797       14,748       13,086  

Pre-development

    1,696       391       3,834       1,247  

Other operating expense

    743       442       2,137       1,853  

Provision for closed operations and reclamation

    1,181       1,238       10,983       3,609  

Acquisition costs

    15             2,162        
      18,636       15,752       60,341       43,779  

Income (loss) from operations

    (21,197

)

    6,271       (33,565

)

    19,215  

Other income (expense):

                               

Gain (loss) on derivative contracts

    3,347       (411

)

    8,252       (2,560

)

Loss on disposition of investments

                       

Unrealized loss on investments

    (100

)

    (2,830

)

    (3,226

)

    (2,750

)

Foreign exchange gain

    9,077       7,299       19,518       6,051  

Interest and other income

    100       32       173       208  

Interest expense, net of amount capitalized

    (6,617

)

    (6,505

)

    (19,350

)

    (20,307

)

      5,807       (2,415

)

    5,367       (19,358

)

Income (loss) before income taxes

    (15,390

)

    3,856       (28,198

)

    (143

)

Income tax benefit (provision)

    5,500       (180

)

    4,193       1,062  

Net income (loss)

    (9,890

)

    3,676       (24,005

)

    919  

Preferred stock dividends

    (138

)

    (138

)

    (414

)

    (414

)

Income (loss) applicable to common shareholders

  $ (10,028

)

  $ 3,538     $ (24,419

)

  $ 505  

Comprehensive income (loss):

                               

Net income (loss)

  $ (9,890

)

  $ 3,676     $ (24,005

)

  $ 919  

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

          2,425       2,993       2,425  

Defined benefit pension plan costs

                      (1,192

)

Unrealized holding gains (losses) on investments

    (391

)

    (149

)

    (2,603

)

    205  

Comprehensive income (loss)

  $ (10,281

)

  $ 5,952     $ (23,615

)

  $ 2,357  

Basic income (loss) per common share after preferred dividends

  $ (0.03

)

  $ 0.01     $ (0.07

)

  $  

Diluted income (loss) per common share after preferred dividends

  $ (0.03

)

  $ 0.01     $ (0.07

)

  $  

Weighted average number of common shares outstanding - basic

    377,508       359,472       372,555       348,801  

Weighted average number of common shares outstanding - diluted

    377,508       362,262       372,555       354,673  

Cash dividends declared per common share

  $ 0.0025     $ 0.0025     $ 0.0075     $ 0.0075  

 

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)

 

   

Nine Months Ended

 
   

September 30,

2015

   

September 30,

2014

 

Operating activities:

               

Net income (loss)

  $ (24,005

)

  $ 919  

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

               

Depreciation, depletion and amortization

    81,475       81,116  

Unrealized loss on investments

    3,060       2,750  

Loss (gain) on disposition of properties, plants, equipment, and mineral interests

    175       (49

)

Provision for reclamation and closure costs

    11,028       3,646  

Stock compensation

    4,036       3,826  

Deferred income taxes

    (1,781

)

    (5,859

)

Amortization of loan origination fees

    1,365       1,703  

Loss on derivative contracts

    9,561       6,458  

Foreign exchange gain

    (17,566

)

    (5,932

)

Other non-cash items, net

    45       (914

)

Change in assets and liabilities, net of business acquisitions:

               

Accounts receivable

    (2,951

)

    10,952  

Inventories

    4,382       7,125  

Other current and non-current assets

    (6,779

)

    (1,097

)

Accounts payable and accrued liabilities

    3,986       (4,446

)

Accrued payroll and related benefits

    2,221       10,205  

Accrued taxes

    2,782       (1,541

)

Accrued reclamation and closure costs and other non-current liabilities

    7,934       (50,094

)

Cash provided by operating activities

    78,968       58,768  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (95,399

)

    (90,697

)

Acquisition of Revett, net of cash acquired

    (809

)

     

Proceeds from disposition of properties, plants, equipment and mineral interests

    277       447  

Purchases of investments

    (947

)

    (580

)

Changes in restricted cash and investment balances

          4,334  

Net cash used in investing activities

    (96,878

)

    (86,496

)

Financing activities:

               

Proceeds from exercise of warrants

          54,418  

Acquisition of treasury shares

    (1,875

)

    (3,740

)

Dividends paid to common shareholders

    (2,796

)

    (2,629

)

Dividends paid to preferred shareholders

    (414

)

    (414

)

Credit facility and debt issuance fees paid

    (123

)

    (705

)

Payments on debt

    (216

)

     

Payments on capital leases

    (7,833

)

    (6,893

)

Net cash provided by (used in) financing activities

    (13,257

)

    40,037  

Effect of exchange rates on cash

    (4,044

)

    (2,124

)

Net increase (decrease) in cash and cash equivalents

    (35,211

)

    10,185  

Cash and cash equivalents at beginning of period

    209,665       212,175  

Cash and cash equivalents at end of period

  $ 174,454     $ 222,360  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $ 4,346     $ 3,450  

Common stock issued for the acquisition of Revett

  $ 19,133     $  

Payment of accrued compensation in restricted stock units

  $ 3,016     $ 4,600  

Senior Notes contributed to pension plan, par value

  $     $ 6,500  

  

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 unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (“we” or “our” or “us”).  See Note 4 and Note 13 for information on adjustments which are nonrecurring contained in the accompanying unaudited interim condensed consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 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 ("SEC").  Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.

 

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

 

On June 15, 2015, we completed the acquisition of Revett Mining Company, Inc. ("Revett"), giving us ownership of the Rock Creek project and various other interests in Northwest Montana. The unaudited interim condensed consolidated financial statements included herein reflect our ownership of the assets previously held by Revett as of the June 15, 2015 acquisition date. See Note 13 for more information.

 

Note 2.    Investments and Restricted Cash

 

Investments

 

At September 30, 2015 and December 31, 2014, the fair value of our non-current investments was $2.0 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 bases of our non-current investments were approximately $4.2 million and $7.3 million, respectively, at September 30, 2015 and December 31, 2014. During the first quarter of 2015, we recognized a $2.8 million impairment charge against earnings, as we determined the impairment to be other-than-temporary. We also acquired equity in another mining company for a total cost of $0.9 million during the first quarter of 2015. Due to the acquisition of Revett in June 2015, the basis in previously held stock was eliminated, reducing the cost basis of our non-current investments by $0.5 million, with a $0.2 million unrealized loss included in current earnings.

 

At September 30, 2015, total unrealized loss positions of $2.2 million, net of unrealized gains of $6 thousand, for our non-current investments were included in accumulated other comprehensive loss.

 

Restricted Cash and Investments

 

Various laws, permits, and covenants require that we have financial assurances 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 $1.0 million at September 30, 2015 and $0.9 million at December 31, 2014.

  

 
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Note 3.   Income Taxes

 

Major components of our income tax provision (benefit) for the three and nine months ended September 30, 2015 and 2014 are as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Current:

                               

Domestic

  $ (4,776

)

  $ (778

)

  $ (2,911

)

  $ 4,529  

Foreign

    451       3       606       386  

Total current income tax provision (benefit)

    (4,325

)

    (775

)

    (2,305

)

    4,915  
                                 

Deferred:

                               

Domestic

    1,812       2,043       5,400       (4,973

)

Foreign

    (2,987

)

    (1,088

)

    (7,288

)

    (1,004

)

Total deferred income tax provision (benefit)

    (1,175

)

    955       (1,888

)

    (5,977

)

Total income tax provision (benefit)

  $ (5,500

)

  $ 180     $ (4,193

)

  $ (1,062

)

  

As of September 30, 2015, we have a net deferred tax asset in the U.S. of $ 112.6 million and a net deferred tax liability in Canada of $126.3 million for a consolidated worldwide net deferred tax liability of $13.7 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations within the United States; valuation allowances are provided for that portion of our deferred tax assets for which we believe it is more likely than not that we will not realize a benefit.  This judgment is based on several assumptions and estimates including life-of-mine operating plans and our estimates of future metals prices. At September 30, 2015 and December 31, 2014, the balances of the valuation allowances on our deferred tax assets were $42 million and $32 million, respectively, primarily for net operating loss carryforwards.

 

During the quarter ended September 30, 2015, there was a change in judgment about the realizability of our deferred tax assets in the U.S. Based on revised projections of future taxable income, certain tax net operating losses are projected to expire before utilization. The valuation allowance in the U.S. increased to $19.7 million based on this change in judgment.

 

The current income tax provisions for the three and nine months ended September 30, 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, the impact of taxation in foreign jurisdictions, and the change in valuation allowance.

 

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.

  

 
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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 September 30, 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 September 30, 2015.

 

Lucky Friday Water Permit Matters

 

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

 

We 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.

 

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

 

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

 

In May 2011, the EPA made a formal request to Hecla Mining Company for information regarding the Johnny M Mine Area near San Mateo, McKinley County, New Mexico, and asserted that Hecla Mining Company may be responsible under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") for environmental remediation and past costs the EPA has incurred at the site. Mining at the Johnny M was conducted for a limited period of time by a predecessor of our subsidiary, Hecla Limited. In August 2012, Hecla Limited and the EPA entered into a Settlement Agreement and Administrative Order on Consent for Removal Action (“Consent Order”), pursuant to which Hecla Limited agreed to pay (i) $1.1 million to the EPA for its past response costs at the site and (ii) any future response costs at the site under the Consent Order, in exchange for a covenant not to sue by the EPA. Hecla Limited paid the approximately $1.1 million to the EPA for its past response costs and in December 2014, submitted to EPA the Engineering Evaluation and Cost Analysis (“EE/CA”) for the site. The EE/CA evaluates three alternative response actions: 1) no action, 2) off-site disposal, and 3) on-site disposal. The range in estimated costs of these alternatives is $0 to $221 million. In the EE/CA, Hecla Limited recommended that EPA approve on-site disposal, which is currently estimated to cost $5.6 million, on the basis that it is the most appropriate response action under CERCLA. In June 2015, the EPA approved the EE/CA, with a few minor conditions. The EPA still needs to publish the EE/CA for public notice and comment, and the agency will not make a final decision on the appropriate response action until the public comment process is complete. EPA anticipates that Hecla Limited will implement the selected response action pursuant to an amendment to the Consent Order or a new order to be negotiated with 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, and we have accrued that amount. There can be no assurance that Hecla Limited’s liability will not be more than $5.6 million, or that its ultimate liability will not have a material adverse effect on Hecla Limited’s or our results from operations or financial position.

  

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

 

The United States alleges that estimated total costs associated with the Gilt Edge site may exceed $225 million, including both past and future response costs. For the Nelson Tunnel/Commodore site, 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 Nelson Tunnel/Commodore site, and once that is complete, it will begin remedial design and remedial action for the site. Presumably, the EPA also could seek reimbursement of at least some of those costs from viable PRPs.

 

We believe that it is reasonably possible that CoCa faces some liability under CERCLA based on its historical relationship to the Gilt Edge and Nelson Tunnel/Commodore sites. In the event CoCa incurs a liability at either 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 costs associated with the sites 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.

 

Settlement negotiations with the United States have been ongoing since 2010 with respect to the Gilt Edge site and since 2014 with respect to the Nelson Tunnel/Commodore site. Although we have not reached a final settlement with the United States, based on the current status of negotiations we believe it is probable that CoCa will incur a settlement liability for response costs at the sites. Our best estimate of that net liability as of the date of this report, after payments from insurance proceeds and from another party to the Gilt Edge settlement, is $9.9 million. We have accrued that net amount by recording a liability for the total estimated amount that would be paid by CoCa and an asset for the estimated amount that would be recovered by CoCa from insurers and the other party to the settlement.

 

There can be no assurance that we will be able to resolve these matters through settlement. Similarly, despite efforts to reasonably estimate potential liability at the Gilt Edge and Nelson Tunnel/Commodore sites, there can be no assurance that we have accurately estimated such liability, or that the accrual actually represents the total amount for which CoCa or Hecla Limited could be found liable in the event these matters are not settled but instead litigated. Accordingly, in the event these matters are not settled, our accrual could change, perhaps rapidly and materially.

  

 
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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 September 30, 2015 included approximately $21.3 million for various costs. In addition, our open purchase orders at September 30, 2015 included approximately $7.2 million, $0.7 million, and $1.5 million, respectively, for various capital items at the Greens Creek, Lucky Friday, and Casa Berardi units, and approximately $0.7 million, $1.2 million and $0.8 million, respectively, for various non-capital costs at the Greens Creek, Lucky Friday and Casa Berardi units. We also have total commitments of approximately $19.8 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of September 30, 2015, we had surety bonds totaling $92.3 million in place as financial support for future reclamation and closure of the Greens Creek and Troy mines, self insurance, and employee benefit plans. In addition, we had letters of credit for approximately $8.1 million outstanding as of September 30, 2015 for environmental reclamation and workers' compensation insurance bonding. We also held a $6.5 million restricted deposit at September 30, 2015 as financial support for reclamation of the Troy mine acquired as part of the Revett acquisition. 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, and oral arguments scheduled for November 17, 2015. 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 September 30, 2015. The value of the union's claim is estimated to be in the range of $0 to $10 million.

 

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

  

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

 

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

 

Note 5.    Earnings (Loss) Per Common Share

 

We are authorized to issue 500,000,000 shares of common stock, $0.25 par value per share. At September 30, 2015, there were 380,462,379 shares of our common stock issued and 2,764,973 shares issued and held in treasury, for a net of 377,697,406 shares outstanding.

 

The following table reconciles weighted average shares outstanding used in the computations of basic and diluted earnings (loss) per share for the three- and nine-month periods ended September 30, 2015 and 2014 (thousands, except per-share amounts):

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Numerator

                               

Net income (loss)

  $ (9,890

)

  $ 3,676     $ (24,005

)

  $ 919  

Preferred stock dividends

    (138

)

    (138

)

    (414

)

    (414

)

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

  $ (10,028

)

  $ 3,538     $ (24,419

)

  $ 505  
                                 

Denominator

                               

Basic weighted average common shares

    377,508       359,472       372,555       348,801  

Dilutive warrants, stock options and restricted stock

          2,790             5,872  

Diluted weighted average common shares

    377,508       362,262       372,555       354,673  

Basic earnings (loss) per common share

                               

Net income (loss) applicable to common shares

  $ (0.03

)

  $ 0.01     $ (0.07

)

  $  

Diluted earnings (loss) per common share

                               

Net income (loss) applicable to common shares

  $ (0.03

)

  $ 0.01     $ (0.07

)

  $  

 

Diluted income (loss) per share for the three- and nine-month periods ended September 30, 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.

  

 
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For the three-month and nine-month periods ended September 30, 2015, all outstanding options, restricted share units, and warrants were excluded from the computation of diluted loss per share, as our reported net losses for those periods would cause their conversion and exercise to have no effect on the calculation of loss per share. For the three-month and nine-month periods ended September 30, 2014, options to purchase 259,342 shares of our common stock were excluded from the computation of diluted earnings per share, as the exercise price of the options 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 four reporting segments: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit and the San Sebastian unit.

 

In the third quarter of 2015, we made the decision to develop a mine at the San Sebastian unit with the goal of commencing ore production by the end of 2015. As a result, we believe the San Sebastian unit now meets the criteria for consideration as a reportable segment. Activities at the San Sebastian unit were previously included in the amounts presented as "other."

 

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 and nine months ended September 30, 2015 and 2014 (in thousands):

 

   

Three Months Ended
September 30,

   

Nine Months Ended

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net sales to unaffiliated customers:

                               

Greens Creek

  $ 54,351     $ 67,763     $ 175,749     $ 186,808  

Lucky Friday

    13,916       27,883       48,376       71,740  

Casa Berardi

    36,674       39,861       104,105       120,248  

San Sebastian

                       
    $ 104,941     $ 135,507     $ 328,230     $ 378,796  

Income (loss) from operations:

                               

Greens Creek

  $ 21     $ 8,874     $ 24,664     $ 28,724  

Lucky Friday

    (3,894

)

    9,007       (933

)

    20,105  

Casa Berardi

    (2,603

)

    395       (6,567

)

    4,940  

San Sebastian

    (2,420

)

    (1,614

)

    (7,269

)

    (3,511

)

Other

    (12,301

)

    (10,391

)

    (43,460

)

    (31,043

)

    $ (21,197

)

  $ 6,271     $ (33,565

)

  $ 19,215  

  

 
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The following table presents identifiable assets by reportable segment as of September 30, 2015 and December 31, 2014 (in thousands):

 

      September 30, 2015         Deceember 31, 2014    

Identifiable assets:

                   

Greens Creek

  $ 702,244       $ 704,121    

Lucky Friday

    389,700         356,482    

Casa Berardi

    776,442         800,961    

San Sebastian

    2,612         1,529    

Other

    414,215         398,971    
    $ 2,285,213       $ 2,262,064    

  

Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

 

   

Three Months Ended

September 30,

 
   

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 cost

    (84

)

    (84

)

Amortization of net loss

    1,065       756  

Net periodic pension cost

  $ 1,896     $ 1,629  

  

   

Nine Months Ended

September 30,

 
   

2015

   

2014

 

Service cost

  $ 3,162     $ 3,060  

Interest cost

    3,618       3,558  

Expected return on plan assets

    (4,036 )     (3,747 )

Amortization of prior service cost

    (253 )     (252 )

Amortization of net loss

    3,195       2,268  

Net periodic pension cost

  $ 5,686     $ 4,887  

  

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

 

Note 8.    Shareholders’ Equity

 

Stock-based Compensation Plans

 

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

  

 
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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 $3.0 million in expense related to the stock awards was recognized as of December 31, 2014.

 

On July 1, 2015, the Board of Directors granted the following restricted stock unit awards to employees:

 

 

1,936,057 restricted stock units, with one third of those vesting in July 2016, one third vesting in July 2017, and one third vesting in July 2018;

 

149,597 restricted stock units, with one half of those vesting in July 2016 and one half vesting in July 2017; and

 

77,862 restricted stock units that vest in July 2016.

 

The $1.9 million in expense related to the unit awards discussed above vesting in 2016 will be recognized on a straight-line basis over the twelve months following the date of the award. The $1.8 million in expense related to the unit awards discussed above vesting in 2017 will be recognized on a straight-line basis over the twenty-four months following the date of the award. The $1.6 million in expense related to the unit awards discussed above vesting in 2018 will be recognized over the thirty-six month period following the date of the award.

 

In the first nine months of of 2015, a total of 235,l34 shares of common stock were granted to nonemployee directors. We granted a total of 150,378 shares of common stock to nonemployee directors in the first nine months of 2014.

 

Stock-based compensation expense for restricted stock unit grants to employees and shares issued to nonemployee directors recorded in the first nine months of 2015 totaled $4.0 million, compared to $3.8 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.  As a result, in the first nine months of 2015 we withheld 613,698 shares valued at approximately $1.9 million, or approximately $3.05 per share. In the first nine months of 2014 we withheld 695,961 shares valued at approximately $2.3 million, or approximately $3.27 per share.

 

Common Stock Dividends

 

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

 

Quarterly average

realized silver price

per ounce

   

Quarterly dividend per

share

   

Annualized dividend

per share

 
  $ 30     $ 0.01     $ 0.04  
  $ 35     $ 0.02     $ 0.08  
  $ 40     $ 0.03     $ 0.12  
  $ 45     $ 0.04     $ 0.16  
  $ 50     $ 0.05     $ 0.20  

 

 On November 3, 2015, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of $0.9 million payable in December 2015. Because the average realized silver price for the third quarter of 2015 was $14.54 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.

 

 
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Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of September 30, 2015, 934,100 shares have been purchased at an average price of $3.99 per share, leaving approximately 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at November 2, 2015, was $2.13 per share.

 

Warrants

 

At September 30, 2015, we had 2,249,550 warrants outstanding, with each warrant exercisable for 0.1622 of a share of our common stock at an exercise price of $6.17 per share. The warrants expire in March 2016.

 

Note 9.    Senior Notes, Credit Facility, 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. 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.

 

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 $7.1 million as of September 30, 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 nine months 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 $10.0 million and $8.6 million, respectively, in capitalized interest, totaled $17.2 million and $18.6 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.

  

 
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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.

 

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 less than 3.00:1  

 

We were in compliance with all covenants under the credit agreement and no amounts were outstanding as of September 30, 2015.  We have not drawn funds on the revolving credit facility as of the filing date of this report.

 

Note Payable

 

As a result of the merger with Revett, discussed in Note 13, we acquired a note payable having a principal balance of $3.8 million as of September 30, 2015. The note has a maturity date of February 2017 and an interest rate of 6.25% per year, and is collateralized by certain equipment at the Troy mine. $2.0 million of the note payable was classified as current, with the remaining $1.8 million classified as non-current, as of September 30, 2015.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek and Lucky Friday units, which we have determined to be capital leases.  At September 30, 2015, the total liability balance associated with capital leases, including certain purchase option amounts, was $19.0 million, with $9.5 million of the liability classified as current and the remaining $9.5 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 $19.8 million at September 30, 2015, with $0.8 million attributed to interest.

  

 
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At September 30, 2015, the annual maturities of capital lease commitments, including interest, are (in thousands):

  

Twelve-month period ending September 30,

       

2016

  $ 9,450  

2017

    5,876  

2018

    3,294  

2019

    1,123  

2020

    71  

Total

    19,814  

Less: imputed interest

    (837

)

Net capital lease obligation

  $ 18,977  

  

 

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. ASU No. 2014-09 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, 2017. We are in the process of evaluating this guidance and our method of adoption.

 

 

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

 

 

Note 11.    Derivative Instruments

 

At times, we may use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in the market prices. 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 subject to 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 September 30, 2015, we recorded a current asset of $1.8 million for these contracts, which is included in other current assets and is net of $0.5 million for contracts in a liability position.

 

We recognized a $6.1 million net gain during the first nine 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.

  

 
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We recognized an $8.3 million net gain during the first nine months of 2015 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments, which includes $18.8 million in gains realized on settled contracts. During the first nine months of 2015, we monetized a number of favorable base metal contracts for proceeds of $16.5 million because of the sustained weakened price environment, and all contracts under this program were closed as of September 30, 2015. 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 nine months of 2015 is the result of decreasing zinc and lead prices. This program, when utilized, 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).

 

The following tables summarize the quantities of metals committed under forward sales contracts at September 30, 2015 and December 31, 2014:

 

 

 

September 30, 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

    1,271       5       18,684       6,283     $ 14.74     $ 1,135     $ 0.85     $ 0.76  

 

 

 

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 adjusted 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

September 30, 2015

   

Balance at

December 31, 2014

 

Input

Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 174,454     $ 209,665  

Level 1

Available for sale securities:

                 

Equity securities – mining industry

    2,003       4,920  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    10,384       17,696  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other bank deposits

    999       883  

Level 1

Derivative contracts:

                 

Metal forward contracts

    1,787       11,347  

Level 2

Total assets

  $ 189,627     $ 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, adjusted for interest income earned, which approximates fair value.

 

Our 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 metals products are recorded when title and risk of loss transfer to the customer (generally at the time of loading on truck or ship).  Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment.  Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals.  We estimate the forward 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 adjusted to fair market value through earnings each period prior to final settlement.

 

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

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $499.4 million, net of unamortized initial purchaser discount at September 30, 2015, had a fair value of $413.8 million at September 30, 2015. Third-party quotes, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information.

  

 
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Note 13.    Merger with Revett

 

On June 15, 2015, we completed the acquisition of Revett through the merger of a wholly owned subsidiary of ours with and into Revett, pursuant to which we acquired all of the issued and outstanding common stock of Revett for total consideration of $20.1 million. The acquired entities hold 100% ownership of two properties and other interests in Northwest Montana, including: the Troy Mine, which is on care-and-maintenance and we intend to reclaim and close, and the Rock Creek project, a significant undeveloped silver and copper deposit which we believe provides long-term production growth potential if permitted and developed. The consideration was comprised of $0.9 million in cash used to fund Revett's operating activities prior to completion of the merger and $19.1 million in Hecla common stock. In the merger, each outstanding common share of Revett was exchanged for 0.1622 of a share of our common stock. Revett had 38,548,989 outstanding common shares, excluding 725,000 shares owned by our wholly-owned subsidiary which were canceled in the merger, resulting in 6,252,646 new shares of Hecla stock issued as consideration. The value of Hecla stock issued as consideration was based upon the closing price at the time of consummation of $3.06 per share.

 

The following summarizes the preliminary allocation of purchase price to the fair value of assets acquired and liabilities assumed as of the date of acquisition (in thousands):

 

 

Consideration:

       

Cash

  $ 949  

Hecla stock issued (6,252,646 shares at $3.06 per share)

    19,133  

Total consideration

  $ 20,082  

Fair value of net assets acquired:

       

Assets:

       

Cash

  $ 140  

Accounts receivable

    137  

Inventory - supplies

    629  

Deferred tax assets

    7,137  

Property, plants, equipment and mineral interests

    19,052  

Reclamation insurance

    16,800  

Other assets

    280  

Total assets

    44,175  

Liabilities:

       

Accounts payable and accrued liabilities

    1,218  

Notes payable

    4,061  

Non-current reclamation liability

    18,814  

Total liabilities

    24,093  

Net assets

  $ 20,082  

  

The $19.1 million fair value for "Property, plants, equipment, and mineral interests" is comprised of $4.1 million for plant and equipment, $4.6 million for land, and $10.3 million for mineral interests.

 

The $18.8 million value for "Non-current reclamation liability" represents the estimated undiscounted costs for reclamation and closure of the Troy mine. Revett holds an environmental risk transfer program ("insurance policy") which would fund costs incurred for reclamation at the Troy mine up to a maximum limit of $16.8 million and prior to the expiration date of March 29, 2020. We believe it is probable that we will utilize the full amount of the insurance policy, and have therefore included the $16.8 million "Reclamation insurance" asset above for the fair value of the insurance policy.

  

 
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The unaudited pro forma financial information below represents the combined results of our operations as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the periods presented, nor is it indicative of future operating results.

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 

(in thousands, except per share amounts)

 

2015

   

2014

   

2015

   

2014

 

Sales of products

  $ 104,941     $ 135,507     $ 330,366     $ 378,802  

Net income (loss)

    (9,875

)

    1,626       (26,155

)

    (3,601

)

Income (loss) applicable to common shareholders

    (10,013

)

    1,524       (26,569

)

    (4,015

)

Basic and diluted income (loss) per common share

    (0.03

)

    0.00       (0.07

)

    (0.01

)

 

The unaudited pro forma financial information includes adjustments to 1) eliminate acquisition-related costs totaling $2.4 million for the nine months ended September 30, 2015 which are non-recurring and 2) reflect the issuance of Hecla stock as consideration in the acquisition. A net loss by the acquired entities since the acquisition date of $1.7 million is included in our net loss reported for the nine-month period ended September 30, 2015.

 

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.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Revett Mining Company, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; and Hecla Juneau Mining Company. We completed the initial offering of the Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014.

 

The unaudited interim condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited interim consolidated financial statements set forth elsewhere in this Form 10-Q. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate Hecla, the Guarantors, and Non-Guarantors are reflected in the intercompany eliminations column. In the course of preparing consolidated financial statements, we eliminate the effects of various transactions conducted between Hecla'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 in debt or equity capital on the records of the parent company and a contribution to debt or equity capital on the records of the subsidiary. Such investments and capital contributions are eliminated in consolidation.

 

 

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

 

 

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

  

 
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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.

 

 

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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Condensed Consolidating Balance Sheets

 

   

As of September 30, 2015

 
   

Parent

 

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                         

Cash and cash equivalents

  $ 123,585       $ 45,082     $ 5,787     $     $ 174,454  

Other current assets

    5,486         56,780       34,870       19,573       116,709  

Properties, plants, and equipment - net

    1,522         1,131,491       745,164             1,878,177  

Intercompany receivable (payable)

    459,203         (141,131

)

    (364,154

)

    46,082      

 

Investments in subsidiaries

    1,373,915                     (1,373,915

)

     

Other non-current assets

    2,339         183,590       2,272       (72,328

)

    115,873  

Total assets

  $ 1,966,050       $ 1,275,812     $ 423,939     $ (1,380,588

)

  $ 2,285,213  
                                           

Liabilities and Shareholders' Equity

                                         

Current liabilities

  $ 21,123       $ 84,121     $ 22,112     $ (1,740

)

  $ 125,616  

Long-term debt

    499,417         10,343       1,006             510,766  

Non-current portion of accrued reclamation

            42,708       28,114             70,822  

Non-current deferred tax liability

            5,211       125,475       (4,933

)

    125,753  

Other non-current liabilities

    43,739         6,765       (19

)

          50,485  

Shareholders' equity

    1,401,771         1,126,664       247,251       (1,373,915

)

    1,401,771  

Total liabilities and shareholders' equity

  $ 1,966,050       $ 1,275,812     $ 423,939     $ (1,380,588

)

  $ 2,285,213  

 

 
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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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Condensed Consolidating Statements of Operations