Hecla Mining Company and Subsidiaries Form 10-Q for quarterly period ended June 30, 2008

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2008

 

Commission file number

1-8491

 

HECLA MINING COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

77-0664171

(State or other jurisdiction of incorporation or organization)

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

 

 

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

83815-9408

(Address of principal executive offices)

(Zip Code)

 

208-769-4100

(Registrant’s telephone number, including area code)

 

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

Yes  x.  

No  o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  x.

Accelerated Filer  o.

Non-Accelerated Filer   o.

Small reporting company  o.

(Do not check if a smaller reporting company)

 

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

Yes  o.  

No  x.

 

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

 

Class

 

Shares Outstanding August 4, 2008

Common stock, par value $0.25 per share

 

127,552,144

 



Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended June 30, 2008

 

I N D E X*

 

Page

 

 

PART I - Financial Information

 

 

 

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Balance Sheets -

 

June 30, 2008 and December 31, 2007

3

 

 

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

 

Three Months Ended and Six Months Ended – June 30, 2008 and 2007

4

 

 

Condensed Consolidated Statements of Cash Flows -

 

Six Months Ended June 30, 2008 and 2007

5

 

 

Notes to Condensed Consolidated Financial Statements (Unadited)

6

 

 

Item 2. Management's Discussion and Analysis of

 

Financial Condition and Results of Operations

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

 

 

Item 4. Controls and Procedures

41

 

 

PART II

 

 

 

Item 1 - Legal Proceedings

42

 

 

Item 1A - Risk Factors

42

 

 

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

45

 

 

Item 6 – Exhibits

45

 

 

Signatures

46

 

 

Exhibits

47


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

 





-2-



Item 1. Financial Statements

Part I - Financial Information

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

 

 

June 30,
2008

 

December 31
2007,

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,810

 

$

373,123

 

Short-term investments and securities held for sale

 

 

 

 

25,759

 

Accounts and notes receivable:

 

 

 

 

 

 

 

Trade

 

 

28,786

 

 

14,053

 

Other, net

 

 

1,886

 

 

7,834

 

Inventories, net

 

 

23,644

 

 

15,511

 

Deferred income taxes

 

 

10,562

 

 

7,370

 

Current restricted cash

 

 

2,059

 

 

2,059

 

Other current assets

 

 

3,207

 

 

3,875

 

Assets of operations held for sale (Note 5)

 

 

43,888

 

 

 

Total current assets

 

 

159,842

 

 

449,584

 

Non-current investments

 

 

6,530

 

 

8,429

 

Non-current restricted cash and investments

 

 

36,741

 

 

15,181

 

Properties, plants, equipment and mineral interests, net

 

 

807,724

 

 

132,308

 

Non-current deferred income taxes

 

 

36,466

 

 

14,938

 

Other non-current assets

 

 

35,662

 

 

30,297

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,082,965

 

$

650,737

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

34,631

 

$

22,564

 

Accrued payroll and related benefits

 

 

11,302

 

 

16,184

 

Accrued taxes

 

 

3,111

 

 

3,703

 

Current debt

 

 

220,000

 

 

 

Current portion of long-term debt

 

 

65,000

 

 

 

Current portion of accrued reclamation and closure costs

 

 

8,931

 

 

9,686

 

Liabilities of operations held for sale (Note 5)

 

 

17,202

 

 

 

Total current liabilities

 

 

360,177

 

 

52,137

 

Long-term debt

 

 

75,000

 

 

 

Accrued reclamation and closure costs

 

 

102,792

 

 

96,453

 

Other non-current liabilities

 

 

18,127

 

 

9,618

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

556,096

 

$

158,208

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Notes 2, 6 and 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.25 par value, authorized 5,000,000 shares; 157,816 shares
issued, liquidation preference - $7,891

 

 

39

 

 

39

 

Mandatory convertible preferred stock, $0.25 par value, 2,012,500 shares
issued and outstanding, liquidation preference - $201,250

 

 

504

 

 

504

 

Common stock, $0.25 par value, authorized 400,000,000 shares;
issued 2008 – 127,621,676 shares, and
issued 2007 – 121,456,837 shares

 

 

31,905

 

 

30,364

 

Capital surplus

 

 

790,757

 

 

725,076

 

Accumulated deficit

 

 

(307,224

)

 

(274,877

)

Accumulated other comprehensive income

 

 

11,528

 

 

12,063

 

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

 

 

(640

)

 

(640

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

526,869

 

 

492,529

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,082,965

 

$

650,737

 

 

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

 

-3-



Part I - Financial Information (Continued)

 

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

 

Six Months Ended

 

 

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of products

 

$

63,995

 

$

44,431

 

$

100,622

 

$

77,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales and other direct production costs

 

 

52,243

 

 

17,389

 

 

67,305

 

 

31,404

 

Depreciation, depletion and amortization

 

 

10,127

 

 

3,077

 

 

13,040

 

 

6,144

 

 

 

 

62,370

 

 

20,466

 

 

80,345

 

 

37,548

 

Gross profit

 

 

1,625

 

 

23,965

 

 

20,277

 

 

39,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

5,439

 

 

4,452

 

 

10,332

 

 

7,636

 

Exploration

 

 

7,340

 

 

3,166

 

 

12,911

 

 

6,521

 

Pre-development expense

 

 

 

 

76

 

 

 

 

1,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expense

 

 

960

 

 

36

 

 

1,457

 

 

1,482

 

Gain on sale of properties, plants and equipment

 

 

 

 

(63,798

)

 

 

 

(63,825

)

Provision for closed operations and environmental matters

 

 

830

 

 

45,750

 

 

1,490

 

 

46,403

 

 

 

 

14,569

 

 

(10,318

)

 

26,190

 

 

(756

)

Income (loss) from operations

 

 

(12,944

)

 

34,283

 

 

(5,913

)

 

40,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of investments

 

 

8,097

 

 

 

 

8,097

 

 

 

Interest and other income

 

 

593

 

 

2,093

 

 

3,095

 

 

3,864

 

Interest expense

 

 

(5,796

)

 

(145

)

 

(5,839

)

 

(274

)

 

 

 

2,894

 

 

1,948

 

 

5,353

 

 

3,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

(10,050

)

 

36,231

 

 

(560

)

 

44,329

 

Income tax benefit (provision)

 

 

(259

)

 

(90

)

 

3,815

 

 

(322

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

(10,309

)

 

36,141

 

 

3,255

 

 

44,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

(19,298

)

 

(11,804

)

 

(17,380

)

 

(11,527

)

Loss on impairment of discontinued operations, net of taxes

 

 

(11,372

)

 

 

 

(11,372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(40,979

)

 

24,337

 

 

(25,497

)

 

32,480

 

Preferred stock dividends

 

 

(3,409

)

 

(138

)

 

(6,817

)

 

(276

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) applicable to common shareholders

 

$

(44,388

)

$

24,199

 

$

(32,314

)

$

32,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(40,979

)

$

24,337

 

$

(25,497

)

$

32,480

 

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

 

 

(8,115

)

 

 

 

(8,115

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on investments

 

 

(1,452

)

 

3,949

 

 

3,358

 

 

4,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(50,546

)

$

28,286

 

$

(30,254

)

$

37,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.11

)

$

0.30

 

$

(0.03

)

$

0.36

 

Loss from discontinued operations

 

$

(0.15

)

$

(0.10

)

$

(0.14

)

$

(0.09

)

Loss on impairment of discontinued operations

 

$

(0.09

)

$

 

$

(0.09

)

$

 

Income (loss) per common share

 

$

(0.35

)

$

0.20

 

$

(0.26

)

$

0.27

 

Weighted average number of common shares outstanding – basic

 

 

126,341

 

 

120,307

 

 

124,538

 

 

120,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding – diluted

 

 

126,341

 

 

120,818

 

 

124,538

 

 

120,628

 

 

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

 

-4-



Part I - Financial Information (Continued)

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

Six Months Ended

 

 

 

June 30, 2008

 

June 30, 2007

 

Operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(25,497

)

$

32,480

 

Loss on discontinued operations, net of tax

 

 

28,752

 

 

11,527

 

Income from continuing operations

 

 

3,255

 

 

44,007

 

 

 

 

 

 

 

 

 

Non-cash elements included in net income:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

13,040

 

 

6,272

 

Gain on sale of investments

 

 

(8,097

)

 

 

Gain on disposition of properties, plants and equipment

 

 

 

 

(63,827

)

 

 

 

 

 

 

 

 

Provision for reclamation and closure costs

 

 

314

 

 

44,867

 

Stock compensation

 

 

3,186

 

 

2,778

 

Deferred income taxes

 

 

(1,720

)

 

(3,207

)

Amortization of loan origination fees

 

 

1,438

 

 

 

Amortization of intangible asset

 

 

241

 

 

 

 

 

 

 

 

 

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

(2,789

)

 

(399

)

Inventories

 

 

(502

)

 

(360

)

Reversal of purchase price allocation to product inventory

 

 

16,637

 

 

 

Other current and non-current assets

 

 

(572

)

 

(963

)

Accounts payable and accrued liabilities

 

 

(5,945

)

 

(2,596

)

Accrued payroll and related benefits

 

 

413

 

 

420

 

Accrued taxes

 

 

(228

)

 

534

 

Accrued reclamation and closure costs and other non-current liabilities

 

 

(2,077

)

 

(1,245

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used by) discontinued operations

 

 

(12,570

)

 

(1,898

)

 

 

 

 

 

 

 

 

Cash provided by operating activities

 

 

4,024

 

 

24,383

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Additions to properties, plants, equipment and mineral interests

 

 

(31,161

)

 

(12,349

)

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

 

 

(688,091

)

 

 

Proceeds from sale of investments

 

 

27,001

 

 

 

Deposit on operations held for sale

 

 

10,000

 

 

 

Proceeds from disposition of properties, plants and equipment

 

 

 

 

45,000

 

Purchase of equity securities

 

 

 

 

(181

)

Increase in restricted cash

 

 

(282

)

 

(2,161

)

Purchase of short-term investments and securities held for sale

 

 

 

 

(62,825

)

Maturities of short-term investments and securities held for sale

 

 

4,036

 

 

25,345

 

 

 

 

 

 

 

 

 

Net cash provided by (used by) discontinued operations

 

 

(456

)

 

1,394

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(678,953

)

 

(5,777

)

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Common stock issued under stock option plans

 

 

155

 

 

2,927

 

Dividends paid to preferred shareholders

 

 

(7,289

)

 

(276

)

Purchase of treasury shares

 

 

 

 

(208

)

Loan origination fees

 

 

(5,250

)

 

 

Borrowings on debt

 

 

360,000

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

347,616

 

 

2,443

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(327,313

)

 

21,049

 

Cash and cash equivalents at beginning of period

 

 

373,123

 

 

75,878

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

45,810

 

$

96,927

 

 

 

 

 

 

 

 

 

Significant non-cash investing activities:

 

 

 

 

 

 

 

Stock issued for acquisition of properties

 

$

10,494

 

$

 

Stock issued for acquisition of 70.3% of Greens Creek

 

$

53,384

 

$

 

 

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

 

-5-



Note 1.

Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed financial statements and notes to interim 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 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, 2007, as it may be amended from time to time, and the pro forma financial information contained in our current reports filed on form 8-K on June 13, 2008 and July 14, 2008.

 

The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The unaudited condensed 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 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 to make the information not 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 April 16, 2008, we completed the acquisition of the companies owning 70.3% of the joint venture operating the Greens Creek mine, resulting in 100% ownership of Greens Creek by our various wholly owned subsidiaries. The operating results of the 70.3% portion of Greens Creek are included in our operating results from the date of acquisition and therefore, operating results on a period-by-period basis may not be comparable.

 

We utilized $220 million of a $240 million six-month bridge debt facility established in connection with our April 16, 2008 acquisition of the companies owning 70.3% of the Greens Creek mine. During the next several months, we will be evaluating various alternatives to meet our obligation for the bridge loan, which may include potential refinancing arrangements, equity issuances, deferment of capital investing activities, and/or divestitures of properties. It is currently uncertain to us which of, and to what extent, these financial sources for retiring the bridge facility will be used, and there can be no assurance that such financing will be available to us, or that our financial position and results of operations will not be materially adversely affected as a result.

 

During the second quarter of 2008, we committed to a plan to sell all of the outstanding capital stock of El Callao Gold Mining Company (“El Callao”) and Drake-Bering Holdings B.V. (“Drake-Bering”), our wholly owned subsidiaries which together owned our business and operations in Venezuela. On June 19, 2008, we announced that we had entered into an agreement to sell 100% of the shares of El Callao and Drake-Bering to Rusoro Mining, Ltd. (“Rusoro”) for $20 million in cash and 4,273,504 shares of Rusoro common stock, valued at $5 million. The transaction closed on July 8, 2008. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” our Venezuelan business and operations have been classified as held for sale and the results of its operations have been reported in discontinued operations for all periods presented. As a result of the sale, we have revised our segment reporting as of June 30, 2008 to discontinue a separate reporting segment for our discontinued Venezuelan operations. All periods presented have been conformed to the current period’s presentation. See Note 5 for further discussion.

 

Note 2.

Cash, Short-term Investments, Investments and Restricted Cash

 

Cash

 

Exchange control regulations in Venezuela have limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. Our cash balances denominated in Bolívares that are maintained in Venezuela totaled a U.S. dollar equivalent, at official exchange rates, of approximately $1.3 million at June 30, 2008 and $30.0 million at December 31, 2007. On June 19, 2008, we entered into an agreement to sell our wholly owned subsidiaries holding our business and operations in Venezuela to Rusoro, with the transaction closing on July 8, 2008 (see Note 5 for further discussion of the transaction). The $1.3 million held at June 30, 2008 is classified as “assets of operations held for sale” on the Condensed Consolidated Balance Sheet. Pursuant to the sale agreement, Rusoro paid us $0.9 million for the U.S. dollar equivalent of Bolívares-denominated cash balances held in Venezuela at the close of the sale, converted at official rates.

 

-6-



Prior to the sale of our Venezuelan operations, exchanging our cash held in local currency into U.S. dollars was done through specific governmental programs, or through the use of negotiable instruments at conversion rates that are higher than the official rate (parallel rate) on which we incurred foreign currency losses. During the second quarter of 2008, we exchanged the U.S. dollar equivalent of approximately $38.7 million at the official exchange rate of 2,150 Bolívares to $1.00 for approximately $25.4 million at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses for the difference. No such exchanges were made during the first quarter of 2008. During the second quarter and first six months of 2007, we exchanged the U.S. dollar equivalent of approximately $26.7 million and $29.8 million, respectively, at the official exchange rate of 2,150 Bolívares to $1.00 for approximately $15.2 million and $17.0 million, respectively, at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses for the differences. All of the conversion losses discussed above were incurred on repatriations of cash from Venezuela, and are included in losses from discontinued operations, net of taxes on the Consolidated Statement of Income (Loss) for those periods.

 

Short-term Investments and Securities Held for Sale

 

Investments at June 30, 2008 and December 31, 2007 consisted of the following (in thousands)

 

 

 

June 30,
2008

 

 

December 31,
2007

 

Adjustable rate securities

 

$

 

 

$

4,000

 

Marketable equity securities (2007 cost - $18,903)

 

 

 

 

 

21,759

 

 

 

$

 

 

$

25,759

 

 

Adjustable rate securities were carried at amortized cost. However, due to the short-term nature of this investment, the amortized cost approximated fair market value. Marketable equity securities were also carried at fair market value, as they were classified as “available-for-sale” securities under the provisions of SFAS No. 115. The $21.8 million marketable equity securities balance at December 31, 2007 represents 8.2 million shares of Great Basin Gold, Inc. stock, including 7.9 million shares transferred to us upon the sale of the Hollister Development Block gold exploration project interest to Great Basin Gold in April 2007. We sold the 8.2 million shares of Great Basin Gold stock during the second quarter of 2008 for total proceeds of $27.0 million and recognized gain on sale of investment of $8.1 million.

 

Non-current Investments

 

At June 30, 2008 and December 31, 2007, the fair market value of our non-current investments was $6.5 million and $8.4 million, respectively. The cost of these investments, representing equity securities, was approximately $1.1 million.

 

-7-



Restricted Cash and Investments

 

Various laws and permits require that financial assurances be in place for certain environmental and reclamation obligations and other potential liabilities. Restricted investments primarily represent investments in money market funds and bonds of U.S. government agencies. These investments are restricted primarily for reclamation funding or surety bonds and were $38.8 million at June 30, 2008, and $17.2 million at December 31, 2007, respectively, which includes $30.4 million and $8.9 million, respectively, which are restricted for reclamation funding for the Greens Creek Joint Venture. In April 2008, we completed the acquisition of the companies holding 70.3% of the Greens Creek Joint Venture, resulting in our 100% ownership of Greens Creek through our various subsidiaries (see Note 14 for further discussion). Accordingly, the $30.4 million June 30, 2008 balance represents 100% of the Greens Creek restricted balance, while the $8.9 million balance at December 31, 2007 represents our 29.7% share of the $29.9 million total Greens Creek restricted balance held prior to our acquisition of the remaining 70.3% interest.

 

Note 3.

Income Taxes

 

For the three months ended June 30, 2008, we recorded a $3.0 million income tax provision, which is primarily the result of the reduction of deferred tax assets related to discontinued operations. See Note 5 for further discussion of discontinued operations. For the six months ended June 30, 2008, we recorded a $0.9 million net tax benefit as a result of a reduction to the valuation allowance of $4.9 million in the first quarter of 2008, reduced by a $3.0 million provision arising from discontinued operations, less a current provision of $1.0 million for alternative minimum tax, state income tax and foreign withholding taxes. For the three and six months ended June 30, 2007, we recorded $2.0 million and $1.2 million of income tax benefits, respectively, from the reversal of the valuation allowance, reduced by U.S. alternative minimum tax and foreign withholding taxes.

The Greens Creek acquisition (See Note 14 for further discussion) is a taxable acquisition whereby the tax bases of the assets acquired and liabilities assumed equal their book bases. No deferred taxes (other than for an adjustment to the existing valuation allowance discussed below) have been recognized as a result of the acquisition. Subsequent to the acquisition date, deferred taxes related to acquired operations were recorded for differences in tax and book treatment on a prospective basis.

 

Historically, the Company has recorded a valuation allowance on its net deferred tax assets to reflect the estimated amount of deferred tax assets which may not be realized principally due to the expiration of net operating losses and tax credit carryforwards. In connection with the acquisition, the valuation allowance was reduced as a result considering future earnings of our additional interest in Greens Creek. This reduction resulted in an increase in current deferred tax assets of $2,373,000, an increase in non-current deferred tax assets of $20,627,000, and a decrease in mineral interests acquired of $23,000,000 on the acquisition date.

 

The income tax provisions for the three and six-month periods ended June 30, 2008 and 2007 vary from the amount that would have resulted from applying the statutory income tax rate to pre-tax income, primarily due to utilization of U.S. tax net operating loss carry-forwards and non-utilization of foreign tax losses.

 

In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), the Company reviews uncertain tax positions for likelihood of sustainability under audit. For the three and six months ended June 30, 2008, no FIN 48 change occurred to produce a significant impact on the Company’s results of operations or financial position. No significant impact for FIN 48 uncertainties was recorded for the three or six months ended June 30, 2007.

 

-8-



Note 4

Inventories

 

Inventories consist of the following (in thousands):

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 

 

 

 

 

 

 

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

 

$

15,683

 

$

5,465

 

Materials and supplies

 

 

7,961

 

 

10,046

 

 

 

 

 

 

 

 

 

 

 

$

23,644

 

$

15,511

 

 

The product inventory acquired through our purchase of the companies owning 70.3% of the Greens Creek mine, as discussed further in Note 14, was all sold during the second quarter of 2008.

 

Note 5.

Discontinued Operations and Assets and Liabilities Held for Sale

 

During the second quarter of 2008, the Company committed to a plan to sell all of the outstanding capital stock of El Callao Gold Mining Company (“El Callao”) and Drake-Bering Holdings B.V. (“Drake-Bering”), our wholly owned subsidiaries which together owned the Company’s business and operations in Venezuela, the “La Camorra unit.” On June 19, 2008, the Company announced that it had entered into an agreement to sell 100% of the shares of El Callao and Drake-Bering to Rusoro for $20 million in cash and 4,273,504 shares of Rusoro common stock. The transaction closed on July 8, 2008. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” our Venezuelan business and operations have been classified as held for sale and the results of its operations have been reported in discontinued operations for all periods presented.

 

The following table details selected financial information included in the loss from discontinued operations in the consolidated statements of operations for the three and six months ended June 30, 2008 and 2007 (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Sales of products

 

$

14,521

 

$

15,669

 

$

23,855

 

$

35,714

 

Cost of sales and other direct production costs

 

 

(18,519

)

 

(16,749

)

 

(21,656

)

 

(31,620

)

Depreciation, depletion and amortization

 

 

(1,677

)

 

(4,427

)

 

(4,785

)

 

(9,197

)

Exploration expense

 

 

(658

)

 

(655

)

 

(1,167

)

 

(1,364

)

Other operating income (expense)

 

 

235

 

 

(1,464

)

 

(29

)

 

(38

)

Provision for closed operations

 

 

(215

)

 

 

 

(502

)

 

 

Interest income

 

 

130

 

 

602

 

 

141

 

 

747

 

Foreign exchange loss

 

 

(13,308

)

 

(6,103

)

 

(13,308

)

 

(6,103

)

Interest expense

 

 

193

 

 

(710

)

 

71

 

 

(1,142

)

Income tax benefit (provision)

 

 

 

 

2,033

 

 

 

 

1,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

$

(19,298

)

$

(11,804

)

$

(17,380

)

$

(11,527

)

 

-9-



The major classes of assets and liabilities of operations held for sale in the consolidated balance sheet are as follow (in thousands):

 

 

 

June 30, 2008

 

Assets:

 

 

 

 

Cash

 

$

1,350

 

Accounts Receivable

 

 

2,383

 

Inventory – net

 

 

7,315

 

Property, plants, equipment and mineral interests (net)

 

 

32,250

 

Other

 

 

1,870

 

 

 

 

 

 

Total assets of discontinued operations

 

 

45,168

 

 

 

 

 

 

Add: Reclassification of accumulated translation adjustment

 

 

7,147

 

Less: Loss on impairment of discontinued operations

 

 

(8,427

)

 

 

 

 

 

Total assets held for sale at June 30, 2008

 

$

43,888

 

 

 

 

 

 

Liabilities:

 

 

 

 

Accounts payable and accrued liabilities

 

$

2,780

 

Accrued payroll and related benefits

 

 

8,418

 

Accrued taxes

 

 

857

 

Accrued reclamation and closure costs

 

 

4,520

 

Other non-current liabilities

 

 

627

 

 

 

 

 

 

Total liabilities held for sale at June 30, 2008

 

$

17,202

 

 

Note 6.

Commitments and Contingencies

 

Bunker Hill Superfund Site

 

In 1994, we, as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), entered into a Consent Decree with the Environmental Protection Agency (“EPA”) and the State of Idaho concerning environmental remediation obligations at the Bunker Hill Superfund site, a 21-square-mile site located near Kellogg, Idaho (the “Bunker Hill site”). The 1994 Consent Decree (the “Bunker Hill Decree” or “Decree”) settled our response-cost responsibility under CERCLA at the Bunker Hill site. Parties to the Decree included us, Sunshine Mining and Refining Company (“Sunshine”) and ASARCO Incorporated (“ASARCO”). Sunshine subsequently filed bankruptcy and settled all of its obligations under the Bunker Hill Decree.

 

In 1994, we entered into a cost-sharing agreement with other potentially responsible parties, including ASARCO, relating to required expenditures under the Bunker Hill Decree. ASARCO is in default of its obligations under the cost-sharing agreement and consequently in August 2005, we filed a lawsuit against ASARCO in Idaho State Court seeking amounts due us for work completed under the Decree. Additionally, we have claimed certain amounts due us under a separate agreement related to expert costs incurred to defend both parties with respect to the Coeur d’Alene River Basin litigation in Federal District Court, discussed further below. After we filed suit, ASARCO filed for Chapter 11 bankruptcy protection in United States Bankruptcy Court in Texas in August 2005. As a result of this filing, an automatic stay is in effect for our claims against ASARCO. We are unable to proceed with the Idaho State Court litigation against ASARCO because of the stay, and have asserted our claims in the context of the bankruptcy proceeding.

 

-10-



In December 2005, we received notice that the EPA allegedly incurred $14.6 million in costs relating to the Bunker Hill site from January 2002 to March 2005. The notice was provided so that we and ASARCO might have an opportunity to review and comment on the EPA’s alleged costs prior to the EPA’s submission of a formal demand for reimbursement, which has not occurred as of the date of this filing. We reviewed the costs submitted by the EPA to determine whether we have any obligation to pay any portion of the EPA’s alleged costs relating to the Bunker Hill site. We were unable to determine what costs we will be obligated to pay under the Bunker Hill Decree based on the information submitted by the EPA. We requested that the EPA provide additional documentation relating to these costs. In September 2006, we received from the EPA a certified narrative cost summary, and certain documentation said to support that summary, which revised the EPA’s earlier determination to state that it had incurred $15.2 million in response costs. The September notice stated that it was not a formal demand and invited us to discuss or comment on the matter. In the second quarter of 2007, we were able to identify certain costs submitted by the EPA that we believe it is probable that we may have liability within the context of the Decree, and accordingly, in June of 2007, we estimated the range of our potential liability to be between $2.7 million and $6.8 million, and accrued the minimum of the range as we believed no amount in the range was more likely than any other. We will continue to assess the materials relating to the alleged costs sent to us and to discuss the matter with the EPA. If we are unable to reach a satisfactory resolution, we anticipate exercising our right under the Bunker Hill Decree to challenge reimbursement of the alleged costs. However, an unsuccessful challenge would likely require us to further increase our expenditures and/or accrual relating to the Bunker Hill site.

 

The accrued liability balance at June 30, 2008 relating to the Bunker Hill site was $3.6 million. The liability balance represents our portion of the remaining remediation activities associated with the site, our estimated portion of a long-term institutional controls program required by the Bunker Hill Decree, and potential reimbursement to the EPA of costs allegedly incurred by the agency as described in a notice to us by the agency. We believe ASARCO’s remaining share of its future obligations will be paid through proceeds from an ASARCO trust created in 2003 for the purpose of funding certain of ASARCO’s environmental obligations, as well as distributions to be determined by the Bankruptcy Court. In the event we are not successful in collecting what is due us from the ASARCO trust or through the bankruptcy proceedings, because the Bunker Hill Decree holds us jointly and severally liable, it is possible our liability balance for the remedial activity at the Bunker Hill site could be $18.5 million, the amount we currently estimate to complete the total remaining obligation under the Decree, as well as potential reimbursement to the EPA of costs allegedly incurred by the agency at the Bunker Hill site. There can be no assurance as to the ultimate disposition of litigation and environmental liability associated with the Bunker Hill Superfund site, and we believe it is possible that a combination of various events, as discussed above, or other events could be materially adverse to our financial results or financial condition.

 

Coeur d’Alene River Basin Environmental Claims

 

Coeur d’Alene Indian Tribe Claims

 

In July 1991, the Coeur d’Alene Indian Tribe (“Tribe”) brought a lawsuit, under CERCLA, in Federal District Court in Idaho against us, ASARCO and a number of other mining companies asserting claims for damages to natural resources downstream from the Bunker Hill site over which the Tribe alleges some ownership or control. The Tribe’s natural resource damage litigation has been consolidated with the United States’ litigation described below. Because of various bankruptcies and settlements of other defendants, we are the only remaining defendant in the Tribe’s Natural Resource Damages case.

 

U.S. Government Claims

In March 1996, the United States filed a lawsuit in Federal District Court in Idaho against certain mining companies, including us, that conducted historic mining operations in the Silver Valley of northern Idaho. The lawsuit asserts claims under CERCLA and the Clean Water Act, and seeks recovery for alleged damages to, or loss of, natural resources located in the Coeur d’Alene River Basin (“Basin”) in northern Idaho for which the United States asserts it is the trustee under CERCLA. The lawsuit claims that the defendants’ historic mining activity resulted in releases of hazardous substances and damaged natural resources within the Basin. The suit also seeks declaratory relief that we and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Basin outside the Bunker Hill site. We have asserted a number of defenses to the United States’ claims.

 

-11-



In May 1998, the EPA announced that it had commenced a Remedial Investigation/ Feasibility Study under CERCLA for the entire Basin, including Lake Coeur d’Alene, as well as the Bunker Hill site, in support of its response cost claims asserted in its March 1996 lawsuit. In October 2001, the EPA issued its proposed clean-up plan for the Basin. The EPA issued the Record of Decision (“ROD”) on the Basin in September 2002, proposing a $359.0 million Basin-wide clean-up plan to be implemented over 30 years and establishing a review process at the end of the 30-year period to determine if further remediation would be appropriate.

During 2000 and 2001, we were involved in settlement negotiations with representatives of the United States, the State of Idaho and the Tribe. These settlement efforts were unsuccessful. However, we have resumed efforts to explore possible settlement of these and other matters, but it is not possible to predict the outcome of these efforts.

Phase I of the trial on the consolidated Tribe’s and the United States’ claims commenced in January 2001, and was concluded in July 2001. Phase I addressed the extent of liability, if any, of the defendants and the allocation of liability among the defendants and others, including the United States. In September 2003, the Court issued its Phase I ruling, holding that we have some liability for Basin environmental conditions. The Court refused to hold the defendants jointly and severally liable for historic tailings releases and instead allocated a 31% share of liability to us for impacts resulting from these releases. The portion of damages, past costs and clean-up costs to which this 31% applies, other cost allocations applicable to us and the Court’s determination of an appropriate clean-up plan is to be addressed in Phase II of the litigation. The Court also left issues on the deference, if any, to be afforded the United States’ clean-up plan, for Phase II.

The Court found that while certain Basin natural resources had been injured, “there has been an exaggerated overstatement” by the plaintiffs of Basin environmental conditions and the mining impact. The Court significantly limited the scope of the trustee plaintiffs’ resource trusteeship and will require proof in Phase II of the litigation of the trustees’ percentage of trusteeship in co-managed resources. The United States and the Tribe are re-evaluating their claims for natural resource damages for Phase II; such claims may be in the range of $2.0 billion to $3.4 billion. We believe we have limited liability for natural resource damages because of the actions of the Court described above. Because of a number of factors relating to the quality and uncertainty of the United States’ and Tribe’s natural resources damage claims, we are currently unable to estimate what, if any, liability or range of liability we may have for these claims.

Two of the defendant mining companies, Coeur d’Alene Mines Corporation and Sunshine Mining and Refining Company, settled their liabilities under the litigation during 2001. We and ASARCO (which, as discussed above, filed for bankruptcy in August 2005) are the only defendants remaining in the United States’ litigation. Phase II of the trial was scheduled to commence in January 2006. As a result of ASARCO’s bankruptcy filing, the Idaho Federal Court vacated the January 2006 trial date. We anticipate the Court will schedule a status conference to address rescheduling the Phase II trial date once the Bankruptcy Court rules on a motion brought by the United States to declare the bankruptcy stay inapplicable to the Idaho Federal Court proceedings. The Company does not currently have an opinion as to when the Court might rule.

In 2003, we estimated the range of potential liability for remediation in the Basin to be between $18 million and $58 million and accrued the minimum of the range, as we believed no amount in the range was more likely than any other amount at that time. In the second quarter of 2007, we determined that the cash payment approach to estimating our potential liability used in 2003 was not reasonably likely to be successful, and changed to an approach of estimating our liability through the implementation of actual remediation in portions of the Basin. Accordingly, we finalized an upper Basin cleanup plan, including a cost estimate, and reassessed our potential liability for remediation of other portions of the Basin, which caused us to increase our estimate of potential liability for Basin cleanup to the range of $60.0 million to $80.0 million. Accordingly, in June 2007, we recorded a provision of $42.0 million, which increased our total liability for remediation in the Basin from $18.0 million to $60.0 million, the low end of the estimated range of liability, with no amount in the range being more likely than any other amount. The liability is not discounted, as the timing of the expenditures is uncertain, but is expected to occur over the next 20 to 30 years.

 

-12-



In expert reports exchanged with the defendants in August and September 2004, the United States claimed to have incurred approximately $87.0 million for past environmental study, remediation and legal costs associated with the Basin for which it is alleging it is entitled to reimbursement in Phase II. In a July 2006 Proof of Claim filed in the ASARCO bankruptcy case, the EPA increased this claim to $104.5 million. A portion of these costs is also included in the work to be done under the ROD. With respect to the United States’ past cost claims, as of June 30, 2008, we have determined a potential range of liability for this past response cost to be $5.6 million to $13.6 million, with no amount in the range being more likely than any other amount.

Although the United States has previously issued its ROD proposing a clean-up plan totaling approximately $359.0 million and its past cost claim is $87.0 million, based upon the Court’s prior orders, including its September 2003 order and other factors and issues to be addressed by the Court in Phase II of the trial, we currently estimate the range of our potential liability for both past costs and remediation (but not natural resource damages as discussed above) in the Basin to be $65.6 million to $93.6 million (including the potential range of liabilities of $60.0 million to $80.0 million for Basin cleanup, and $5.6 million to $13.6 million for the United States’ past cost claims as discussed above), with no amount in the range being more likely than any other number at this time. Based upon GAAP, we have accrued the minimum liability within this range, which at June 30, 2008, was $65.6 million. It is possible that our ability to estimate what, if any, additional liability we may have relating to the Basin may change in the future depending on a number of factors, including but not limited to information obtained or developed by us prior to Phase II of the trial and its outcome, and, any interim court determinations. There can be no assurance as to the outcome of the Coeur d’Alene River Basin environmental claims and we believe it is possible that a combination of various events, as discussed above, or other events could be materially adverse to our financial results or financial condition.

Insurance Coverage Litigation

In 1991, we initiated litigation in the Idaho District Court, County of Kootenai, against a number of insurance companies that provided comprehensive general liability insurance coverage to us and our predecessors. We believe the insurance companies have a duty to defend and indemnify us under their policies of insurance for all liabilities and claims asserted against us by the EPA and the Tribe under CERCLA related to the Bunker Hill site and the Basin. In 1992, the Idaho State District Court ruled that the primary insurance companies had a duty to defend us in the Tribe’s lawsuit. During 1995 and 1996, we entered into settlement agreements with a number of the insurance carriers named in the litigation. Prior to 2007, we have received a total of approximately $7.2 million under the terms of the settlement agreements. Thirty percent of these settlements were paid to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill Decree. Litigation is still pending against one insurer with trial suspended until the underlying environmental claims against us are resolved or settled. The remaining insurer in the litigation, along with a second insurer not named in the litigation, is providing us with a partial defense in all Basin environmental litigation. As of June 30, 2008, we have not recorded a receivable or reduced our accrual for reclamation and closure costs to reflect the receipt of any potential insurance proceeds.

Independence Lead Mines Litigation

In March 2002, Independence Lead Mines Company (“Independence”), notified us of certain alleged defaults by us under a 1968 lease agreement relating to the Gold Hunter area (also known as the DIA properties) of our Lucky Friday unit. Independence alleged that we violated the “prudent operator obligations” implied under the lease by undertaking the Gold Hunter project and violated certain other provisions of the Agreement with respect to milling equipment and calculating net profits and losses. Under the lease agreement, we have the exclusive right to manage, control and operate the DIA properties. Independence holds an 18.52% net profits interest under the lease agreement that is payable after we recoup our investments in the DIA properties. In addition, after we recoup our investment, Independence has two years within which to elect to convert its net profits interest into a working interest.

 

-13-



In June 2002, Independence filed a lawsuit in Idaho State District Court seeking termination of the lease agreement and requesting unspecified damages. Trial of the case occurred in late March 2004. In July 2004, the Court issued a decision that found in our favor on all issues and subsequently awarded us approximately $0.1 million in attorneys’ fees and certain costs, which Independence has paid. In August 2004, Independence filed its Notice of Appeal with the Idaho Supreme Court. Oral arguments were heard by the Idaho Supreme Court in February 2006. In April 2006, the Idaho Supreme Court ruled in our favor on all of Independence’s claims.

 

In December 2006, Independence filed a lawsuit in the United States District Court for the District of Idaho seeking monetary damages and injunctive relief. Independence alleged that the April 2006 decision by the Idaho Supreme Court violated their civil rights and their constitutional right to due process, and also alleged that we engaged in mail fraud and securities fraud during the term of the lease. We moved to dismiss the lawsuit, and in September 2007, the Court granted our motion to dismiss all claims in the complaint, and the case was dismissed in its entirety. In October 2007, Independence filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit.

 

In January 2007, Independence filed an action in Idaho State District Court for Shoshone County seeking rescission of the lease based upon the theory of mutual mistake. We responded to the lawsuit with a motion to dismiss. In May 2007, the court issued a decision that found in our favor and dismissed the plaintiff’s complaint on the merits and with prejudice. In addition, the court awarded us costs and attorney’s fees. Independence has appealed the judgment against it to the Idaho Supreme Court.

 

On February 12, 2008, we and our wholly owned subsidiary Hecla Merger Company entered into an asset purchase agreement with Independence. Under the terms of the Asset Purchase Agreement, Hecla Merger Company will acquire substantially all of the assets of Independence in exchange for 6,936,884 shares of Hecla common stock (the “Independence Acquisition”). The Independence Acquisition is currently expected to close during 2008, and is subject to customary closing conditions, necessary regulatory approvals and affirmative vote by Independence shareholders. The litigation is now stayed and in the event the Independence acquisition is consummated, among the terms of the Asset Purchase Agreement is that all litigation between us and Independence will be dismissed, and we will acquire all of Independence’s right, title and interest to the DIA properties and the related agreements between us and Independence.

Creede, Colorado, Litigation

In February 2007, Wason Ranch Corporation (“Wason”) filed a complaint in Federal District Court in Denver, Colorado, against us, Homestake Mining Company of California, and Chevron USA Inc. (successor in interest to Chevron Resources Company) (collectively the “defendants”). The suit alleges violations of the Resource Conservation and Recovery Act (“RCRA”) by each of the defendants. In May 2007, Wason amended its complaint to add state tort law claims against us and defendant Ty Poxon. The suit alleges damage to Wason’s property by each defendant. The suit also alleges violations of the Clean Water Act (“CWA”) by us and Homestake Mining Company of California. The suit alleges that the defendants are past and present owners and operators of mines and associated facilities located in Mineral County near Creede, Colorado, and such operations have released pollutants into the environment, including the plaintiff’s property, in violation of RCRA and CWA. The lawsuit seeks injunctive relief to abate the alleged harm and an unspecified amount of civil penalties for the alleged violations. We responded to the lawsuit with a motion to dismiss. On March 31, 2008, the Court issued a decision that found in our favor and dismissed the plaintiff’s complaint. In April 2008, Wason appealed the decision to the United States Court of Appeals for the Tenth Circuit. The parties are currently exploring settlement options for certain of the matters.

 

-14-



La Camorra Concessions

By letter dated October 15, 2007 the Company’s subsidiary, Minera Hecla Venezolana, C.A. (“MHV”), received notice from the Venezuelan Ministry for Basic Industries and Mining (“MIBAM”) that it would commence administrative proceedings that it said could lead to the revocation of MHV’s La Camorra concession (“Notice”). The Notice said it was based upon the alleged exhaustion of the gold reserves at the La Camorra concession and upon the alleged non-payment of an extraction tax. Hecla had ongoing mining operations at Mina Isidora that processed ore at the La Camorra mill and has had independent contractors extract ore from the La Camorra concession. The Company and MHV disagreed with the assertions in the Notice. We filed a formal disagreement with MIBAM, and did not receive a response.

 

On May 8, 2008, Hecla Mining Company, through its Venezuelan affiliate El Callao Gold Mining Company de Venezuela, SCS (“ECGMCV”), received notification from MIBAM that it was to “temporarily suspend exploration, exploitation and evaluation work on Block B.” The notification, signed by the Director of Fiscalization for MIBAM, alleged issues with:

 

Our compliance with the social commitment we had with the community close to the mine; and

 

Unsafe underground working conditions at the mine related to an inspection performed by MIBAM on April 24, 2008.

 

The notification provided ECGMCV ten business days to respond to MIBAM’s assertions and lists no specific milestones for correction of the alleged problems. We disagreed with the allegations in the notice. However, operations were suspended at Mina Isidora, which exists within the Block B lease addressed in the MIBAM notice.

 

On June 19, 2008, we entered into an agreement to sell all of the outstanding capital stock of ECGMCV and Drake-Bering Holdings B.V., our wholly owned subsidiaries which together owned our business and operations in Venezuela. The transaction closed on July 8, 2008. As a result, we are no longer subject to risk and contingencies associated with conducting business in Venezuela in the future. See Note 5 for further discussion of the sale.

Mexico Litigation

In Mexico, our wholly owned subsidiary, Minera Hecla, S.A de C.V., currently is involved in two cases in the State of Durango, Mexico, concerning the Velardeña mill. The Velardeña mill processed ore from our now closed San Sebastian mine, and the mill currently is on care and maintenance. In the first case we are interveners in a commercial action initiated in April of 2006 by a creditor to the prior owner of the mill. In that litigation, the creditor to the prior mill owner seeks to demonstrate that he has an ownership interest in the mill arising out of an allegedly unpaid prior debt. We are contesting this action, and deny the fact that plaintiff has an ownership interest in the mill. We take this position for a number of reasons, including the fact that the mill was sold to us prior to plaintiff’s obtaining his alleged ownership interest. In the second matter, a civil action involving Minera Hecla that is in a different court within the State of Durango, the same creditor as in the first case claims that his ownership of the Velardeña mill relates back to the time he allegedly performed the work on which the debt was based, rather than the time that he filed his lien relating to the debt, which was after the mill was sold to us. We are contesting the position of the creditor.

The basis for our defense in the above matter is that we have a judicially determined valid bill of sale for the Verlrdeña mill. Thus, we believe that the claims of the creditor and his successors are without merit, and that Minera Hecla is the sole owner of the Velardeña mill. We intend to zealously defend our ownership interest. Although there can be no assurance as to the outcome of these proceedings, we believe that the proceedings will not have a material adverse effect on our results from operations or on our financial position.

 

-15-



Other Commitments

Our contractual obligations as of June 30, 2008 included approximately $9.6 million for various capital projects at the Greens Creek unit, and approximately $14.3 million for commitments relating to non-capital items at Greens Creek. In addition, our commitments relating to open purchase orders at June 30, 2008 included approximately $5.3 million and $5.1 million, respectively, for various capital items at the Greens Creek and Lucky Friday units, and approximately $0.2 million and $0.4 million, respectively, for various non-capital costs.

 

We periodically use derivative financial instruments to manage certain interest rate and other financial risks. In May 2008, we entered into a interest rate swap agreement that has the economic effect of modifying the LIBOR-based variable interest obligations associated with the $140 million term facility maturing on March 31, 2011 so that the interest payable on the note effectively became fixed at a rate of 5.005% until maturity on March 31, 2011. The terms of the interest rate swap agreement and the notes that the swap agreement pertains to match, including the notional amounts, interest rate reset dates, and maturity dates. The fair value of the swap totaled an unrealized gain of $75,000 at June 30, 2008. We are accounting for this swap as a hedge pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities . The unrealized gain is included in accumulated other comprehensive income and the corresponding fair value receivable is included in other current assets in our condensed consolidated balance sheet.

Other Contingencies

We are subject to other legal proceedings and claims not disclosed above which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these other matters, we believe the outcome of these other proceedings will not have a material adverse effect on our results from operations or financial position.

 

Note 7.

Earnings Per Common Share

 

We are authorized to issue 400,000,000 shares of common stock, $0.25 par value per share, of which 127,621,676 shares were issued at June 30, 2008.

 

For the three- and six-month periods ended June 30, 2008 and 2007, there were no differences between basic and fully diluted earnings per share. The following table reconciles weighted average common shares used in the computations of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2008 and 2007 (thousands, except per-share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(10,309

)

$

36,141

 

$

3,255

 

$

44,007

 

Preferred stock dividends

 

 

(3,409

)

 

(138

)

 

(6,817

)

 

(276

)

(Loss) income from continuing operations applicable to common shares

 

 

(13,718

)

 

36,003

 

 

(3,562

)

 

43,731

 

Loss on discontinued operations, net of tax

 

 

(19,298

)

 

(11,804

)

 

(17,380

)

 

(11,527

)

Loss on impairment of discontinued operations, net of tax

 

 

(11,372

)

 

 

 

(11,372

)

 

 

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

 

$

(44,388

)

$

24,199

 

$

(32,314

)

$

32,204

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

126,341

 

 

120,307

 

 

124,538

 

 

120,120

 

Dilutive stock options and restricted stock

 

 

 

 

511

 

 

 

 

508

 

Diluted weighted average common shares

 

 

126,341

 

 

120,818

 

 

124,538

 

 

120,628

 

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.11

)

$

0.30

 

$

(0.03

)

$

0.36

 

Loss from discontinued operations

 

 

(0.15

)

 

(0.10

)

 

(0.14

)

 

(0.09

)

Loss on impairment of discontinued operations

 

 

(0.09

)

 

 

 

(0.09

)

 

 

Net (loss) income applicable to common shares

 

$

(0.35

)

$

0.20

 

$

(0.26

)

$

0.27

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

 

$

0.30

 

$

 

$

0.36

 

Loss from discontinued operations

 

 

 

 

(0.10

)

 

 

 

(0.09

)

Loss on impairment of discontinued operations

 

 

 

 

 

 

 

 

 

Net income applicable to common shares

 

$

 

$

0.20

 

$

 

$

0.27

 

 

 


-16-



Diluted income per share for the three and six months ended June 30, 2008 and 2007 exclude 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 1,500,560 shares of our common stock and 132,106 restricted share unit awards were not included in the computation of diluted earnings per share in the three- and six-month periods ended June 30, 2008 because due to net losses that would cause their conversion and exercise to be anti-dilutive. For the three- and six-month period ended June 30, 2007, 560,000 options and 119,000 restricted unit awards were excluded because the exercise price of the options and share units exceeded the average price of our stock during the periods.

 

Note 8.

Business Segments

 

We are currently organized and managed by three segments, which represent our operating units and various exploration targets: the Greens Creek unit, the Lucky Friday unit, and the San Sebastian unit and various exploration activities in Mexico.

 

Prior to the second quarter of 2008, we also reported a fourth segment, the La Camorra unit, representing our operations and various exploration activities in Venezuela. On June 19, 2008, we entered into an agreement to sell our wholly owned subsidiaries holding our business and operations in Venezuela, with the transaction closing on July 8, 2008. Our Venezuelan activities are reported as discontinued operations on the Condensed Consolidated Statement of Operations and Cash Flows for all periods presented, with assets and liabilities associated with our Venezuelan operations reported as held for sale as of June 30, 2008 on the Condensed Consolidated Balance Sheet (see Note 5. Discontinued Operations and Assets and Liabilities Held for Sale). As a result, we have determined that it is no longer appropriate to present a separate segment representing our operations in Venezuela as of and for the three and six-month periods ended June 30, 2008, and have restated the corresponding information for all periods presented.

 

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.

 

-17-



The following tables present information about reportable segments for the three and six months ended June 30, 2008 and 2007 (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales from continuing operations to unaffiliated customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Greens Creek

 

$

47,557

 

$

22,450

 

$

60,723

 

$

38,699

 

Lucky Friday

 

 

16,438

 

 

21,981

 

 

39,899

 

 

38,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

63,995

 

$

44,431

 

$

100,622

 

$

77,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Greens Creek

 

$

(4,032

)

$

11,930

 

$

2,268

 

$

20,246

 

Lucky Friday

 

 

3,489

 

 

11,649

 

 

14,751

 

 

19,129

 

San Sebastian

 

 

(2,538

)

 

(2,339

)

 

(4,579

)

 

(4,168

)

Other

 

 

(9,863

)

 

13,043

 

 

(18,353

)

 

5,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(12,944

)

$

34,283

 

$

(5,913

)

$

40,739

 

 

The following table presents identifiable assets by reportable segment as of June 30, 2008 and December 31, 2007 (in thousands):

 

 

 

June 30,
2008

 

December 31,
2007

 

Identifiable assets:

 

 

 

 

 

 

 

Greens Creek

 

$

849,133

 

$

70,671

 

Lucky Friday

 

 

69,996

 

 

58,350

 

San Sebastian

 

 

5,617

 

 

5,041

 

Assets held for sale at June 30, 2008

 

 

43,888

 

 

83,131

 

Other

 

 

114,331

 

 

433,544

 

 

 

 

 

 

 

 

 

 

 

$

1,082,965

 

$

650,737

 

 

Note 9.

Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees. Net periodic pension cost (income) for the plans consisted of the following for the three and six months ended June 30, 2008 and 2007 (in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

452

 

$

228

 

$

266

 

$

1

 

Interest cost

 

 

916

 

 

849

 

 

124

 

 

15

 

Expected return on plan assets

 

 

(1,586

)

 

(1,505

)

 

 

 

 

Amortization of prior service cost

 

 

137

 

 

116

 

 

125

 

 

 

Amortization of net gain

 

 

4

 

 

(7

)

 

(12

)

 

(14

)

Net periodic benefit cost (income)

 

$

(77

)

$

(319

)

$

503

 

$

2

 

 

-18-



 

 

Six Months Ended
June 30,

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

701

 

$

455

 

$

268

 

$

3

 

Interest cost

 

 

1,807

 

 

1,698

 

 

137

 

 

30

 

Expected return on plan assets

 

 

(3,235

)

 

(3,010

)

 

 

 

 

Amortization of prior service cost

 

 

244

 

 

231

 

 

124

 

 

(1

)

Amortization of net (gain) loss

 

 

(30

)

 

(13

)

 

(25

)

 

(29

)

Net periodic benefit cost (income)

 

$

(513

)

$

(639

)

$

504

 

$

3

 

 

We do not expect to contribute to the pension plans during 2008, nor did we make any contributions in 2007.

 

As a part of our acquisition of the remaining 70.3% of the Greens Creek Joint Venture (see note 14), we amended our pension plan to include certain employees of the Joint Venture. As a result, the pension plan was re-measured as of March 31, 2008. Due to changes in the market value of securities held by the plan, its assets were reduced by approximately $3.0 million. At the same time, the projected benefit obligation increased by approximately $2.1 million as a result of adding the Greens Creek employees. Of the $5.1 million reduction in the funded status of the plan, $3.0 million was charged to other comprehensive income and $2.1 was charged to the purchase price allocation of the remaining interest in the Joint Venture. The pension plan retains a funded status of approximately $20.4 million as of the measurement date of March 31, 2008.

 

Note 10.

Share-Based Compensation Plans

 

On May 15, 2008 the board of directors granted, under already existing plans, 527,560 stock options vesting on the grant date. The grant-date exercise price of the stock options is $9.855. The options expire 5 years after grant. We measure the fair value of compensation cost for stock options issued pursuant to our plan using the Black-Scholes options pricing model. Stock option grants generally vest immediately, however, grants to individual executives upon hiring vest over a defined service period, with cost amortized over that period. The fair value of the stock options granted during 2008 was estimated using the following assumptions:

 

Grant Date

 

Expected Life

 

Expected
Volatility

 

Risk-Free

Interest Rate

 

Grant Date
Fair Value per
Option

May 15, 2008

 

3.10 years

 

51%

 

2.58%

 

$3.72

 

On May 15, 2008 the board of directors also granted 34,916 restricted stock units that vested on May 27, 2008, and 168,843 restricted stock units that vest in May 2009.

 

Share-based compensation expense for stock option and restricted stock unit grants recorded in the first six months of 2008 totaled $3.1 million, compared to $2.8 million in the same period last year. The increase resulted from a larger pool of employees receiving share-based compensation. Share-based compensation grants were not material in the first quarters of 2008 and 2007.

 

Note 11.

Long-term Debt and Credit Agreement

 

In September 2005, we entered into a $30.0 million revolving credit agreement for an initial two-year term, with the right to extend the facility for two additional one-year periods, on terms acceptable to us and the lenders. In both September 2006 and September 2007, we amended and extended the agreement one additional year. Amounts borrowed under the credit agreement were to be available for general corporate purposes. Our then 29.7 % interest in the Greens Creek Joint Venture, which is held by Hecla Alaska LLC, our indirect wholly owned subsidiary, was pledged as collateral under the credit agreement. The interest rate on the agreement was either 2.25% above the London InterBank Offered Rate (“LIBOR”) or an alternate base rate plus 1.25%. We have made quarterly commitment fee payments equal to 0.75% per annum on the sum of the average unused portion of the credit agreement. There were no outstanding borrowings at December 31, 2007.

 

-19-



On April 16, 2008, the credit agreement was amended and restated in connection with our acquisition of the companies owning 70.3% of the joint venture operating the Greens Creek mine (see Note 14 for further discussion of the Greens Creek acquisition). The amended and restated agreement involves a $380 million facility, consisting of a $140 million three-year term facility maturing on March 31, 2011, which was fully drawn upon closing of the Greens Creek transaction, and a $240 million bridge facility, which matures in October 2008.

 

We utilized $220 million from the bridge facility at the time of closing the Greens Creek transaction, with the remaining $20 million unused balance available for general corporate purposes. The first term facility principal payment is due on September 30, 2008. At June 30, 2008, the current portion of the $140 million outstanding term facility balance was $65 million, and all of the $220 million outstanding bridge facility balance was classified as current at June 30, 2008. Scheduled debt repayments at June 30, 2008 are $256.6 million for the remainder of 2008, $48.3 million in 2009, $43.8 million in 2010 and $11.3 million in 2011. We and all of our material U.S. subsidiaries guarantee the amended and restated credit agreement.

 

The interest rate on the term facility is either a range of 1.25% to 2.00% above LIBOR or an alternative base rate plus a range of 0.25% to 1.00% depending on the Company’s leverage ratio. However, we have entered into a interest rate swap agreement to manage the effects of interest rate volatility on the term facility (see Other Commitments in Note 6). Our interest rate on the term facility was 5.005% at June 30, 2008.

 

The bridge facility has an interest rate of either LIBOR plus 3.00% or an alternative base rate plus 2.00%. At June 30, 2008, our interest rate on the bridge facility was 5.5%. During the second quarter of 2008, we made interest-only payments totaling $1.4 million for the term facility, including net amounts paid for interest rate swap spreads, and $2.3 million for the bridge facility. We have also paid a commitment fee equal to 0.50% per annum on the unused portion of the bridge facility. The amended and restated credit agreement includes various covenants and other limitations related to our indebtedness and investments, as well as other information and reporting requirements. We are in compliance with all covenants and other requirements related to the amended and restated credit agreement as of June 30, 2008.

 

Note 12.

Developments in Accounting Pronouncements

 

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

 

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

 

-20-



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

 

acquisition costs will be generally expensed as incurred;

 

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

 

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

 

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

 

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

 

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

 

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

 

Note 13. Fair Value Measurement

 

Effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our financial assets and financial liabilities without a material effect on our results of operations and financial position. The effective date of SFAS No. 157 for non-financial assets and non-financial liabilities has been deferred by FSP 157-2 to fiscal years beginning after November 15, 2008, and we do not anticipate the impact of adopting SFAS 157 for non-financial assets and non-financial liabilities to have a material impact on our results of operations and financial position.

 

SFAS No. 157 expands disclosure requirements to include the following information for each major category of assets and liabilities that are measured at fair value on a recurring basis:

 

a.

the fair value measurement;

 

b.

the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3);

 

c.

for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following:

 

1)

total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities);

 

-21-



 

2)

the amount of these gains or losses attributable to the change in unrealized gains or losses relating to those assets liabilities still held at the reporting period date and a description of where those unrealized gains or losses are reported;

 

3)

purchases, sales, issuances, and settlements (net); and

 

4)

transfers in and/or out of Level 3.

 

The table below sets forth our financial assets that were accounted for at fair value on a recurring basis as of June 30, 2008, and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category. The amounts include financial asset balances relating to our discontinued Venezuelan operations, which are classified as “assets of operations held for sale” on the Condensed Consolidated Balance Sheet (Unaudited) (see Note 5 for further discussion). We did not have financial liabilities accounted for at fair value on a recurring basis as of June 30, 2008. In addition to the assets listed below, we held an interest rate swap contract for which fair value was not material to our financial statements.

 

 

 

Balance at
June 30, 2008

 

 

Input
Hierarchy
Level

Cash and cash equivalents

 

$

47,162

 

 

Level 1

Trade accounts receivable

 

 

30,255

 

 

Level 2

Current restricted cash

 

 

2,059

 

 

Level 1

Non-current investments

 

 

6,530

 

 

Level 1

Non-current restricted cash

 

 

36,741

 

 

Level 1

 

The provisions of SFAS No. 159, “The Fair Value Option for Financial Liabilities,” also became effective for us on January 1, 2008. SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. The provisions of SFAS No. 159 have not had a material effect on our financial position or results of operations as of and for the three and six-month periods ended June 30, 2008.

 

Note 14.

Acquisitions

 

Acquisition of 70.3% of Greens Creek

 

On April 16, 2008, we completed the acquisition of all of the equity of the Rio Tinto, PLC subsidiaries holding a 70.3% interest in the Greens Creek mine, consolidating our ownership of this world-class, low-cost silver asset with which we have been intimately knowledgeable through our 20-year history as a joint venture partner . We announced the agreement for this transaction on February 12, 2008. Our wholly-owned subsidiary, Hecla Alaska LLC, previously owned an undivided 29.7% joint venture interest in the assets of Greens Creek. The acquisition gives our various subsidiaries control of 100% of the Greens Creek mine.

 

The purchase price was composed of $700 million in cash and 4,365,000 shares of our common stock valued at $53.4 million, and estimated acquisition related costs of $5.1 million for a total acquisition price of $758.5 million. The number of common shares issued, 4,365,000, was determined by dividing $50 million by the volume-weighted average trading price for the 20 trading days immediately prior to the second trading day immediately preceding the closing date. For purchase accounting, the valuation of the shares was based upon the average closing price of Hecla shares a few days before and after April 14, 2008 (two days prior to the closing date of the acquisition on April 16, 2008).

 

The cash portion of the purchase price was partially funded by a $380 million debt facility, which includes a $140 million three-year term facility and a $240 million bridge facility, which matures in October 2008. We utilized $220 million from the bridge facility at the time of closing the Greens Creek transaction. See Note 11 for more information on the debt facility.

 

-22-



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

 

Consideration:

 

 

 

 

Cash payments

 

$

700,000

 

Hecla stock issued (4,365,000 shares at $12.23 per share)

 

 

53,384

 

Acquisition related costs

 

 

5,074

 

Total purchase price

 

$

758,458

 

 

 

 

 

 

Fair value of net assets acquired:

 

 

 

 

Cash

 

$

16,938

 

Product inventory

 

 

28,510

 

Other current assets

 

 

15,597

 

Property, plants, equipment and mineral interests, net

 

 

691,827

 

Identified intangible

 

 

5,994

 

Deferred tax asset

 

 

23,000

 

Other assets

 

 

21,279

 

Total assets

 

 

803,145

 

 

 

 

 

 

Less:  Liabilities assumed

 

 

44,687

 

 

 

 

 

 

Net assets acquired

 

$

758,458

 

 

Included in the acquired assets are account receivable valued at approximately $9.8 million due under provisional sales contracts based on the fair values of the underlying metals at acquisition date. Final pricing settlements on all receivables acquired at April 16th occurred at various times during this period, at which time negative price adjustments were recorded as reductions of revenue.

 

The $691.8 million fair value for “Property, plants, equipment and mineral interests, net” acquired is comprised of $5.0 million for the asset retirement obligation, $266.7 million for development costs, $66.8 million plants and equipment, $7.2 million for land, and $346.1 million for value beyond proven and probable reserves.

 

As noted in the table above, we attributed approximately $6.0 million of the purchase price to an intangible asset. Amortization of the intangible asset is expected to total approximately $1.2 million annually through the year 2012.

 

The results of operations of this acquisition have been included in the Condensed Consolidated Financial Statements from the date of acquisition. As a result, product and material and supplies inventory balances at June 30, 2008 reflect our 100% share of Greens Creek’s balances, while December 31, 2007 amounts reflect our 29.7% ownership prior to acquisition. The value of the acquired 70.3% portion of Greens Creek product inventory was based upon its fair market value as of the acquisition date, resulting in increased cost of sales by approximately $16.6 million during the second quarter of 2008. The acquired product inventory has all been sold.

 

The unaudited pro forma financial information below represents the combined results of our operations as if the Greens Creek 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.

 

-23-



 

 

Three months ended

 

Six months ended

 

(In thousands, except per share amounts)

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

Sales of products

 

$

72,093

 

$

97,214

 

$

139,545

 

$

168,432

 

Income (loss) from continuing operations

 

 

(7,840

)

 

39,850

 

 

10,232

 

 

57,822

 

Income (loss) applicable to common shareholders

 

 

(41,919

)

 

24,637

 

 

(25,337

)

 

39,478

 

Basic and diluted income (loss) per common share

 

 

(0.33

)

 

0.20

 

 

(0.20

)

 

0.32

 

 

The pro forma financial information includes adjustments to reflect the depreciation and amortization of assets acquired, an estimate of the interest expense that would have been incurred, and the dividends on the mandatory convertible preferred stock that would have been incurred. Also included in the three-month and six-month periods ended June 30, 2007 is a nonrecurring adjustment of $16,637 for the purchase accounting valuation for product inventory.

 

Agreement to acquire Independence

 

On February 13, 2008, we announced an agreement to acquire substantially all of the assets of Independence Lead Mines Company (“Independence”), located in northern Idaho’s Silver Valley, for 6,936,884 shares of our common stock, which had an estimated fair value of $55.9 million at August 4, 2008. Included in the assets to be acquired is a land position near our Lucky Friday unit in the Silver Valley, in close proximity to where we have initiated a significant generative exploration program. The assets to be acquired also include mining claims held by Independence pertaining to an agreement with the Lucky Friday mine, which includes all future interest or royalty obligation by us to Independence. The transaction is subject to approval by the shareholders of Independence, and Independence is subject to a $1.25 million transaction break-up fee under specific circumstances associated with the agreement. Completion of the transaction is expected to take place during the third quarter of 2008.

 

Acquisition of San Juan Silver Mining Joint Venture earn-in rights

 

On February 21, 2008, we announced that our wholly-owned subsidiary, Rio Grande Silver Inc., acquired the right to earn into a 70% interest in the San Juan Silver Joint Venture, which holds an approximately 25-square-mile consolidated land package in the Creede Mining District of Colorado, for a total of 927,716 shares of our common stock, valued at $9.4 million. The agreement also consists of a three-year buy-in with a total value of $23.2 million, consisting of exploration work and cash. We can earn up to a 70% joint interest by paying Emerald Mining & Leasing, LLC, and Golden 8 Mining, LLC, a total of $11.2 million in common stock, by spending $6 million in exploration on the property during the first year, and by committing to an additional total of $6 million in exploration work over the subsequent two years.

 

-24-




Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations


 

Certain statements contained in this Form 10-Q, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, results of litigation, prospects and opportunities. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “feel,” “plan,” “estimate,” “project,” “forecast” and similar expressions. These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

 

These risks, uncertainties and other factors include, but are not limited to, those set forth under Part I, Item 1A – Business – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2007, as updated in Part II, Item 1A. Risk Factors in this quarterly report on Form 10-Q. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview

 

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

 

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

 

The Lucky Friday unit;

 

The Greens Creek unit; and

 

The San Sebastian unit and various exploration activities in Mexico.

 

Prior to the second quarter of 2008, we also reported a fourth segment, the La Camorra unit, representing our operations and various exploration activities in Venezuela. On June 19, 2008, we entered into an agreement to sell our wholly owned subsidiaries holding our business and operations in Venezuela, the transaction closing on July 8, 2008. Our Venezuelan activities are reported as discontinued operations on the Condensed Consolidated Statement of Operations for all periods presented, with assets and liabilities associated with our Venezuelan operations reported as held for sale as of June 30, 2008 on the Condensed Consolidated Balance Sheet (see Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information). As a result, we have determined that it is no longer appropriate to present a separate segment representing our operations in Venezuela as of and for the three and six-month periods ended June 30, 2008, and have restated the corresponding information for all periods presented.

 

-25-




Metals prices represent one of our greatest opportunities, and risks, as well as the bases for some of our most significant estimates. In the second quarter and first six months of 2008, the prices of silver, gold, and lead all exceeded their levels from the same periods last year, however, zinc prices were lower.

 

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

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

 

Assuming operating responsibility for and fully integrating our acquisition in April 2008 of the remaining 70.3% of the Greens Creek Joint Venture in Alaska, of which we previously held 29.7%, which will double our silver production by giving us sole ownership of the world’s fifth largest silver mine (See Note 14 of Notes to the Condensed Consolidated Financial Statements (Unaudited) for further discussion);

 

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

 

Investing in the generation of new exploration projects in the vicinities of four world-class mining districts we believe to be under-explored and under-invested, including North Idaho’s Silver Valley in the historic Coeur d’Alene Mining District, the prolific silver-producing district near Durango, Mexico, Alaska’s Admiralty Island located offshore of Juneau, and the Creede district of Southwestern Colorado;

 

Continuing to seek opportunities to capitalize on the recent increase in investment in mining properties and companies through acquisition; and

 

Along with the expansion occurring in 2008 as a result of our acquisition of the remaining interest in Greens Creek, the right to earn into a 70% interest in the San Juan Silver Mining Joint Venture, and an agreement to acquire substantially all of the assets of Independence Lead Mines Company, as discussed further in Note 14 of Notes to the Condensed Consolidated Financial Statements (Unaudited), we plan to continue to seek opportunities for growth both internally and through acquisition. See the Results of Operations and Financial Liquidity and Capital Resources sections below.

 

Our estimate for 2008 silver production is approximately 9 million ounces, which includes production resulting from our April 16, 2008 acquisition of the companies owning the remaining 70.3% of the Greens Creek mine (discussed in Notes 14 of Notes to the Condensed Consolidated Financial Statements (Unaudited)).

 

Results of Operations

 

For the second quarter and first six months of 2008, we recorded losses applicable to common shareholders of $44.4 million and $32.3 million ($0.35 and $0.26 per common share, respectively), compared to income applicable to common shareholders of $24.2 million and $32.3 million ($0.20 and $0.27 per common share) during the same periods in 2007. The following factors resulted in the reduced results for the second quarter and first six months of 2008, compared to the same periods in 2007:

 

 

Decreased gross profit at our Greens Creek and Lucky Friday units, by $15.2 million and $7.1 million, respectively, for the second quarter of 2008, and by $17.1 million and $2.6 million, respectively, for the first six months of 2008, compared to the same 2007 periods (see the Greens Creek Segment and Lucky Friday Segment sections below for further discussion of these variances).

 

-26-



 

Increased loss on discontinued operations at the La Camorra unit, by $7.5 million and $5.9 million, respectively, for the second quarter and first six months of 2008, compared to the same 2007 periods, including foreign exchange losses in the first six months of 2008 exceeding those in 2007 by $7.2 million (see the Discontinued Operations – La Camorra Unit section below).

 

A loss on the impairment of our interests in Venezuela of $11.4 million, net of income tax effect, in the second quarter of 2008 (see Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).

 

The sale of our interest in the Hollister Development Block gold exploration project in April 2007, which resulted in a pre-tax gain of $63.8 million reported in the second quarter of 2007.

 

Interest expense of $5.8 million as a result of debt incurred for the purchase of the remaining interest in the Greens Creek joint venture.

 

Decreased average prices for zinc produced at our operations, illustrated by the following table comparing the average prices for the three and six months ended June 30, 2008 and 2007:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Silver – London PM Fix ($/ounce)

 

$

17.17

 

$

13.34

 

$

17.43

 

$

13.33

 

Gold – London PM Fix ($/ounce)

 

$

896

 

$

667

 

$

911

 

$

659

 

Lead – LME Final Cash Buyer ($/pound)

 

$

1.05

 

$

0.99

 

$

1.18

 

$

0.90

 

Zinc – LME Final Cash Buyer ($/pound)

 

$

0.96

 

$

1.66

 

$

1.03

 

$

1.62

 

 

The factors above, which negatively impacted our 2008 operating results for the three and six-month periods ended June 30, 2008, were partially offset by the items listed below:

 

 

Recognition of $44.7 million to increase our current estimated liabilities for environmental remediation in Idaho’s Coeur d’Alene Basin and the Bunker Hill Superfund Site. During the second quarter of 2007, we finalized a proposed multi-year clean-up plan for the upper portion of the Coeur d’Alene Basin, together with an estimate of related costs to implement the plan. Based on that work and a reassessment of our other potential liabilities in the Basin, we increased our accrual for remediation in the Basin by $42 million. We also accrued an additional $2.7 million for the remaining Bunker Hill Superfund Site work. For additional discussion, see Bunker Hill Superfund Site and Coeur d’Alene River Basin Environmental Claims in Note 6 of Notes to Consolidated Financial Statements.

 

Sale of our 8.2 million shares of Great Basin Gold stock in the second quarter of 2008, resulting in an $8.1 million gain.

 

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

 

The Greens Creek Segment

 

Below is a comparison of the operating results and key production statistics of our Greens Creek segment, which reflects our 29.7% ownership share through April 16, 2008 and our 100% ownership thereafter, as we completed the acquisition of the companies holding the remaining 70.3% ownership of the Greens Creek mine on April 16. See Note 14 of Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion of the acquisition. Dollars are presented in thousands, except for per ton and per ounce amounts.

 

-27-




 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Sales

 

$

47,557

 

$

22,450

 

$

60,723

 

$

38,699

 

Cost of sales and other direct production costs

 

 

(41,697

)

 

(8,220

)

 

(46,571

)

 

(13,991

)

Depreciation, depletion and amortization

 

 

(8,941

)

 

(2,099

)

 

(10,777

)

 

(4,230

)

Gross profit (loss)

 

$

(3,081

)

$

12,131

 

$

3,375

 

$

20,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tons of ore milled

 

 

155,535

 

 

48,466

 

 

205,585

 

 

102,820

 

Silver ounces produced

 

 

1,744,341

 

 

688,623

 

 

2,240,194

 

 

1,393,551

 

Gold ounces produced

 

 

15,256

 

 

4,497

 

 

20,108

 

 

9,349

 

Zinc tons produced

 

 

13,445

 

 

3,951

 

 

17,919

 

 

8,553

 

Lead tons produced

 

 

4,701

 

 

1,437

 

 

6,139

 

 

2,992

 

Silver ounces per ton

 

 

15.88

 

 

18.19

 

 

15.31

 

 

17.23

 

Gold ounces per ton

 

 

0.16

 

 

0.13

 

 

0.15

 

 

0.13

 

Zinc percent

 

 

10.36

 

 

9.13

 

 

10.35

 

 

9.34

 

Lead percent

 

 

3.91

 

 

3.75

 

 

3.85

 

 

3.66

 

Total cash cost per silver ounce (1)

 

$

2.10

 

$

(3.45

)

$

0.50

 

$

(4.04

)

 

 

(1)

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

 

The $15.1 million and $17.1 million decreases in gross profit during the second quarter and first six months of 2008, respectively, compared to the same 2007 periods, were primarily the result of the following factors:

 

higher cost of sales by approximately $16.6 million in the second quarter of 2008 which includes the fair value of the finished and in-process inventory acquired upon purchase of the 70.3% ownership. Upon the sale of the acquired inventory, the fair market value was expensed, which increased the cost of sales, and decreased the gross profit margin. The lower of cost or market represents the difference between the fair value of the acquired inventory and the acquired company’s cost to produce;

 

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

 

13% and 11% declines in silver ore grades for the second quarter and first six months of 2008, compared to the same 2007 periods;

 

lower average zinc prices; and

 

higher prices for diesel fuel and other consumables.

 

a 97% increase in per ounce treatment and freight costs

 

declining metals prices following acquisition of accounts receivable on April 16th, resulting in negative price adjustments to revenues upon final settlement

 

Cash distributions were not made from the Greens Creek Joint Venture to the joint venture partners during the period between signing the agreement to purchase the remaining 70.3% of Greens Creek on February 12, 2008 and closure of the transaction on April 16, pursuant to the agreement. This resulted in the transfer of 70.3% of the accumulated cash balance to us upon closing the transaction, which reduced our cash purchase price for the 70.3% interest by approximately $16.9 million.

 

The Greens Creek operation is currently powered by diesel generators, and production costs have been significantly affected by increasing fuel prices. As a result, infrastructure has been installed that will allow hydroelectric power to be supplied to Greens Creek by Alaska Electric Light and Power Company (“AEL&P”), via a submarine cable from North Douglas Island, near Juneau, to Admiralty Island, where Greens Creek is located. This project is anticipated to reduce production costs at Greens Creek in the future. AEL&P has agreed to supply its excess power to Greens Creek, however, supply has been hampered by low reservoir water supplies and high demand in the Juneau vicinity. Because most of Greens Creek’s power is currently generated by diesel generators on-site, the mine was unaffected by recent avalanches which have impaired utility power in the region.

 

-28-




The Greens Creek joint venture maintains a restricted trust for future reclamation funding. The balance of the restricted cash account was $30.4 million at June 30, 2008, of which we own 100%, and $30.0 million at December 31, 2007, of which our 29.7% portion was $8.9 million.

 

The $5.55 and $4.54 negative variances in total cash cost per ounce for the second quarter and first six months of 2008, respectively, compared to 2007, are attributable to lower silver grades and higher smelter treatment costs, partially offset by increased by-product credits, despite reduced zinc prices, as 2008 lead and gold prices have continued to exceed prices during the same 2007 periods. While value from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product is appropriate because:

 

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

 

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

 

metallurgical treatment maximizes silver recovery;

 

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

 

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

 

We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Within our cost per ounce calculations, because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset increases in operating costs due to increased prices.

 

The Lucky Friday Segment

 

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

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Sales

 

$

16,438

 

$

21,981

 

$

39,899

 

$

38,832

 

Cost of sales and other direct production costs

 

 

(10,546

)

 

(9,169

)

 

(20,734

)

 

(17,412

)

Depreciation, depletion and amortization

 

 

(1,186

)

 

(977

)

 

(2,263

)

 

(1,914

)

Gross profit

 

$

4,706

 

$

11,835

 

$

16,902

 

$

19,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tons of ore milled

 

 

83,448

 

 

83,571

 

 

163,815

 

 

168,419

 

Silver ounces produced

 

 

665,165

 

 

804,117

 

 

1,424,468

 

 

1,656,230

 

Lead tons produced

 

 

4,461

 

 

4,852

 

 

9,170

 

 

9,598

 

Zinc tons produced

 

 

2,543

 

 

2,060

 

 

5,090

 

 

4,105

 

Silver ounces per ton

 

 

8.63

 

 

10.45

 

 

9.32

 

 

10.70

 

Lead percent

 

 

5.82

 

 

6.28

 

 

6.03

 

 

6.21

 

Zinc percent

 

 

3.68

 

 

3.14

 

 

3.60

 

 

3.14

 

Total cash cost per silver ounce (1)

 

$

6.93

 

$

(0.72

)

$

3.76

 

$

0.56

 

 

 

(1)

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

 

-29-




The $7.1 million and $2.6 million decreases in gross profit for the second quarter and first six months of 2008, compared to the same 2007 periods, respectively, resulted primarily from lower silver production due to silver ore grades that decreased by 17% and 13%, respectively, a 63% increase in per ounce treatment and freight charges for concentrates, and lower average zinc prices. The lower silver ore grades are due to the nature of the ore body and efforts to optimize the mine plan given the high metal prices.

 

The $7.65 and $3.20 increases in total cash costs per silver ounce in the second quarter and first six months of 2008, compared to the same 2007 periods, are also attributed primarily to the lower silver ore grades, increased smelter charges and higher mining and milling costs. The negative second quarter variance was also a result of reduced by-product credits, due to lower zinc prices and lower lead production caused by a decline in lead ore grades. Mining at longer strike lengths at the Lucky Friday has allowed us to take advantage of the high metal prices and the mill’s ability to recover more zinc due to recent upgrades. This results in an economic benefit and allows us to temporarily mine lower grade ore that is below anticipated life-of-mine reserve levels, which also delays some production of metals included in the reserve to later periods. While value from lead and zinc is significant at the Lucky Friday, we believe that identification of silver as the primary product, with zinc and lead as by-products, is appropriate because:

 

 

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

 

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

 

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

 

We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Within our cost per ounce calculations, because we consider zinc and lead to be by-products of our silver production, the values of these metals have offset increases in operating costs due to the increased average prices.

 

The San Sebastian Segment

 

We reached the end of the known mine life on the Francine and Don Sergio veins at the San Sebastian unit located in Mexico during the fourth quarter of 2005. However, significant exploration efforts have continued during 2006, 2007, and 2008 at the Hugh Zone and other exploration targets located on or near the San Sebastian property, where we now hold approximately 500 square miles of contiguous concessions. Concessions totaling 166 square miles were added to our land package at the San Sebastian segment during the first quarter of 2008. Additional exploration activity at the San Sebastian unit in 2007 and 2008 has included completion of initial drilling on a number of veins at our Rio Grande project, where our concession holdings cover approximately 5 square miles. We incurred $2.0 million and $3.6 million, respectively, in exploration expenses during the second quarter and first six months of 2008 at San Sebastian, compared to $1.8 million and 3.1 million in the comparable periods of 2007. The San Sebastian mine and Velardeña mill are currently on care-and-maintenance status as we continue exploration efforts.

 

Discontinued Operations - The La Camorra Unit

 

During the second quarter of 2008, we committed to a plan to sell all of the outstanding capital stock of El Callao Gold Mining Company (“El Callao”) and Drake-Bering Holdings B.V. (“Drake-Bering”), our wholly owned subsidiaries holding our business and operations of the La Camorra Unit. On June 19, 2008, we announced that it had entered into an agreement to sell 100% of the shares of El Callao and Drake-Bering to Rusoro Mining, Ltd. (“Rusoro”) for $20 million in cash and 4,273,504 shares of Rusoro common stock. The transaction closed on July 8, 2008. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company’s Venezuelan business and operations have been classified as held for sale and the results of its operations have been reported in discontinued operations for all periods presented. See Note 5 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

-30-




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

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Sales

 

$

14,521

 

$

15,669

 

$

23,855

 

$

35,714

 

Cost of sales and other direct production costs

 

 

(18,519

)

 

(16,749

)

 

(21,656

)

 

(31,620

)

Depreciation, depletion and amortization

 

 

(1,677

)

 

(4,427

)

 

(4,785

)

 

(9,197

)

Gross (loss)

 

$

(5,675

)

$

(5,507

)

$

(2,586

)

$

(5,103

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tons of ore processed

 

 

4,613

 

 

37,430

 

 

25,516

 

 

98,059

 

Gold ounces produced

 

 

5,179

 

 

21,546

 

 

22,160

 

 

53,025

 

Gold ounces per ton

 

 

1.920

 

 

0.758

 

 

0.894

 

 

0.558

 

Total cash cost per gold ounce (1)

 

$

2,155

 

$

577

 

$

996

 

$

514

 

 

 

(1)

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

 

The increase in gross loss for the second quarter of 2008, compared to the same period in 2007, primarily resulted from the following:

 

 

Decreased production from Mina Isidora due primarily to suspension of operations there during much of the second quarter of 2008 as a result of: government intervention, lower mine productivity due to labor interruptions, disruptions to ore haulage due to attacks on the vehicles subsequent to leaving the mine site, and low mine equipment availability resulting from lack of parts and supplies due to theft and delivery delays.

 

The end of the known mine life at the La Camorra mine was reached in June 2007, which also had a negative impact on 2008 production, compared to the same 2007 period, as substantially all mine production came from Mina Isidora in 2008.

 

Escalating labor, commodity and transportation costs. The higher transportation costs were related to haulage of ore mined from Mina Isidora and ore purchased from small third-party mining operations to our milling facility located approximately 70 miles from Mina Isidora.

 

The gross loss improvement for the first six months of 2008, compared to the same 2007 period, primarily resulted from higher average gold prices and ore grades, partially offset by the factors discussed above having a negative impact on second quarter 2008 operating results, as compared to results for the second quarter of 2007.

 

Exchange control regulations in Venezuela have historically limited our ability to repatriate cash and receive dividends or other distributions without substantial cost. Our cash balances denominated in Bolívares that are maintained in Venezuela totaled a U.S. dollar equivalent, at official exchange rates, of approximately $1.3 million at June 30, 2008 and $30.0 million at December 31, 2007. The $1.3 million held at June 30, 2008 is classified as “assets of operations held for sale” on the Condensed Consolidated Balance Sheet. Pursuant to the sale agreement, Rusoro paid us $0.9 million for the U.S. dollar equivalent of Bolívares-denominated cash balances held in Venezuela at the close of the sale, converted at official rates.

 

Prior to the sale of our Venezuelan operations, exchanging our cash held in local currency into U.S. dollars was done through specific governmental programs, or through the use of negotiable instruments at conversion rates that are higher than the official rate (parallel rate) on which we incurred foreign currency losses. During the second quarter of 2008, we exchanged the U.S. dollar equivalent of approximately $38.7 million at the official exchange rate of 2,150 Bolívares to $1.00 for approximately $25.4 million at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses of $13.3 for the difference. No such exchanges were made during the first quarter of 2008. During the second quarter and first six months of 2007, we exchanged the U.S. dollar equivalent of approximately $26.7 million and $29.8 million, respectively, at the official exchange rate of 2,150 Bolívares to $1.00 for approximately $15.2 million and $17.0 million, respectively, at open market exchange rates and in compliance with applicable regulations, incurring foreign exchange losses of $11.5 million and $12.8 million for the differences. All of the conversion losses discussed above were incurred on repatriations of cash from Venezuela, and are included in the losses from discontinued operations, net of taxes on the Consolidated Statement of Operations for those periods.

 

-31-




Corporate Matters

 

Other significant variances affecting the results of our second quarter and first six months of 2008, as compared to the same periods in 2007, were as follows:

 

 

higher general and administrative expense, by $1.0 million and $2.7 million for the three and six-month periods ended June 30, 2008, which is primarily the result of increased staffing and incentive compensation expense;

 

overall increase in exploration expense of $4.1 million and $6.4 million for the second quarter and first six months of 2008, due primarily to a surface drilling and generative exploration program in North Idaho’s Silver Valley, increased underground exploration at our Lucky Friday unit, and continued exploration activity at our San Sebastian unit in Mexico;

 

lower pre-development expense in the second quarter and first half of 2008, by $0.1 million and $1.0 million, respectively, as a result of our sale of the Hollister Development Block project in April 2007;

 

a decrease in the provision for close operations and environmental matters, by $45.0 million and $44.9, respectively, for the second quarter and first six months of 2008, compared to the same 2007 period. The decreases are a result of the $44.7 million second quarter 2007 adjustment to increase our estimated liabilities for environmental remediation in Idaho’s Coeur d’Alene Basin and the Bunker Hill Superfund Site (as further discussed in the Results of Operations section above) and closure advancement at various sites;

 

$1.0 million and $0.8 million decreases in interest income for the second quarter and first six months of 2008, compared to the 2007 periods, due to lower cash balances;

 

higher interest expense by $5.6 million for the second quarter of 2008 and $5.5 million for the first six months of 2008, compared to the same periods of 2007, due to the addition of $360 million in debt as a result of our April 16, 2008 acquisition of 70.3% of Greens Creek. See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information on the debt facility;

 

an income tax provision of $0.3 million and an income tax benefit of $3.8 million for the second quarter and first six months of 2008, compared to income tax provisions of $0.1 million and $0.3 million for the second quarter and first six months of 2007. See Note 3 of Notes to the Condensed Consolidated Financial Statements (Unaudited) for more information; and

 

$3.3 million and $6.5 million increases in preferred stock dividends when comparing the second quarter and first six months of 2008 to the same 2007 periods, due to the issuance of 2,012,500 shares of Mandatory Convertible Preferred Stock in December 2007, with the dividends for the first quarter of 2008 and the cumulative unpaid dividends for the period from issuance through December 31, 2007 payable on April 1, 2008.

 

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

 

The tables below present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) for our operations at the Lucky Friday and Greens Creek units for the three and six months ended June 30, 2008 and 2007 (in thousands, except costs per ounce). Tables in previous periods have presented gold cost per ounce, however as a result of our plan to sell all of the outstanding capital stock of El Callao and Drake-Bering, our gold operations has been reclassified as discontinued operations.

 

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

 

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

 

 

 

Total, All Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Total cash costs (1)

 

$

8,269

 

$

(2,950

)

$

6,484

 

$

(4,699

)

Divided by ounces produced

 

 

2,409

 

 

1,493

 

 

3,664

 

 

3,050

 

Total cash cost per ounce produced

 

$

3.43

 

$

(1.98

)

$

1.77

 

$

(1.54

)

Reconciliation to GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash costs

 

$

8,269

 

$

(2,950

)

$

6,484

 

$

(4,699

)

Depreciation, depletion and amortization

 

 

9,855

 

 

3,078

 

 

12,768

 

 

6,145

 

Treatment and freight costs

 

 

(23,922

)

 

(7,647

)

 

(34,776

)

 

(16,108

)

By-product credits

 

 

49,147

 

 

26,694

 

 

78,729

 

 

51,526

 

Change in product inventory

 

 

18,452

 

 

1,241

 

 

16,523

 

 

589

 

Reclamation and other costs

 

 

569

 

 

50

 

 

617

 

 

95

 

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

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