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Section 1: 10-Q (FORM 10-Q)

hl20180930_10q.htm
 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

 

Commission file number

1-8491

 

 

HECLA MINING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

77-0664171

 
 

(State or other jurisdiction of

 

(I.R.S. Employer

 
 

incorporation or organization)

 

Identification No.)

 
         
 

6500 Mineral Drive, Suite 200

     
 

Coeur d'Alene, Idaho

 

83815-9408

 
 

(Address of principal executive offices)

 

(Zip Code)

 
         

208-769-4100

(Registrant's telephone number, including area code)

 

 

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

Yes XX .    No      .

 

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

Yes XX .    No___.

 

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

Large Accelerated Filer   XX.     Accelerated Filer     .
Non-Accelerated Filer      Smaller Reporting Company     .  
Emerging growth company     .    

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     .

 

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

Yes      .    No XX.

 

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

 

Class

 

Shares Outstanding November 6, 2018

Common stock, par value

$0.25 per share

 

480,199,378

 

 

Table of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended September 30, 2018

 

INDEX*

 

   

Page

PART I - Financial Information

 
     
 

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
     
 

Condensed Consolidated Balance Sheets - September 30, 2018 and December 31, 2017

3
     
 

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended and Nine Months Ended September 30, 2018 and 2017

4
     
 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2018 and 2017

5
     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6
     
 

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

42
     
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

75
     
 

Item 4. Controls and Procedures

78
     

PART II - Other Information

 
     
 

Item 1 – Legal Proceedings

78
     
  Item 1A – Risk Factors 78
     
 

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

80
     
 

Item 4 – Mine Safety Disclosures

80
     
 

Item 6 – Exhibits

80
     
 

Signatures

81

 

 

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

 

2

Table of Contents
 

 

Part I - Financial Information

 

Item 1. Financial Statements

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

   

September 30,

2018

   

December 31,

2017

 
          Revised  

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 60,856     $ 186,107  

Investments

          33,758  

Accounts receivable:

               

Trade

    12,947       14,805  

Taxes

    19,316       10,382  

Other, net

    7,612       7,003  

Inventories:

               

Concentrates, doré, and stockpiled ore

    42,464       29,366  

Materials and supplies

    33,624       26,100  

Other current assets

    21,510       13,715  

Total current assets

    198,329       321,236  

Non-current investments

    7,190       7,561  

Non-current restricted cash and investments

    1,010       1,032  

Properties, plants, equipment and mineral interests, net

    2,487,429       1,999,311  

Non-current deferred income taxes

    1,601       1,509  

Other non-current assets and deferred charges

    14,699       14,509  

Total assets

  $ 2,710,258     $ 2,345,158  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 65,755     $ 46,549  

Accrued payroll and related benefits

    29,488       31,259  

Accrued taxes

    8,274       5,919  

Current portion of capital leases

    6,069       5,608  

Current portion of accrued reclamation and closure costs

    6,621       6,679  

Accrued interest

    15,044       5,745  

Other current liabilities

    1,205       10,371  

Total current liabilities

    132,456       112,130  

Capital leases

    8,638       6,193  

Accrued reclamation and closure costs

    99,314       79,366  

Long-term debt

    534,067       502,229  

Non-current deferred tax liability

    164,928       124,352  

Non-current pension liability

    44,097       46,628  

Other noncurrent liabilities

    4,689       12,983  

Total liabilities

    988,189       883,881  

Commitments and contingencies (Notes 3, 5, 8, 10, and 12)

               

SHAREHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

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

    39       39  

Common stock, $0.25 par value, authorized 750,000,000 shares; issued and outstanding 2018 — 479,909,466 shares and 2017 — 399,176,425 shares

    121,283       100,926  

Capital surplus

    1,872,946       1,619,816  

Accumulated deficit

    (223,280

)

    (218,089

)

Accumulated other comprehensive loss

    (28,183

)

    (23,373

)

Less treasury stock, at cost; 2018 — 5,226,791 and 2017 — 4,529,450 shares issued and held in treasury

    (20,736

)

    (18,042

)

Total shareholders’ equity

    1,722,069       1,461,277  

Total liabilities and shareholders’ equity

  $ 2,710,258     $ 2,345,158  

 

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

 

3

Table of Contents

 

 

Hecla Mining Company and Subsidiaries

 

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

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2018

   

September 30, 2017

   

September 30, 2018

   

September 30, 2017

 
            Revised             Revised  

Sales of products

  $ 143,649     $ 140,839     $ 430,617     $ 417,662  

Cost of sales and other direct production costs

    93,609       68,358       246,918       224,537  

Depreciation, depletion and amortization

    43,464       29,518       103,335       86,986  

Total cost of sales

    137,073       97,876       350,253       311,523  

Gross profit

    6,576       42,963       80,364       106,139  

Other operating expenses:

                               

General and administrative

    10,327       9,529       27,849       29,044  

Exploration

    12,411       7,255       27,609       17,622  

Pre-development

    1,195       1,757       3,615       4,061  

Research and development

    1,269       1,130       5,042       2,125  

Other operating expense

    448       134       1,767       1,590  

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

    (3,208

)

    (4,830

)

    (3,374

)

    (4,924

)

Provision for closed operations and reclamation

    1,852       2,940       4,534       5,044  

Suspension-related costs

    6,519       4,780       18,337       14,385  

Acquisition costs

    6,139             9,656       25  

Total other operating expense

    36,952       22,695       95,035       68,972  

Income from operations

    (30,376

)

    20,268       (14,671

)

    37,167  

Other income (expense):

                               

Gain (loss) on derivative contracts

    19,460       (11,226

)

    40,271       (16,548

)

Loss on disposition of investments

    (36

)

          (36

)

    (167

)

Unrealized (loss) gain on investments

    (2,207

)

    (124

)

    (2,461

)

    (73

)

Foreign exchange (loss) gain

    (2,212

)

    (4,917

)

    2,856       (10,258

)

Interest income and other (expense) income

    (346

)

    541       (294

)

    1,185  

Interest expense, net of amount capitalized

    (10,146

)

    (9,358

)

    (30,019

)

    (28,423

)

Total other expense

    4,513       (25,084

)

    10,317       (54,284

)

(Loss) income before income taxes

    (25,863

)

    (4,816

)

    (4,354

)

    (17,117

)

Income tax benefit

    2,679       5,130       1,484       17,564  

Net (loss) income

    (23,184

)

    314       (2,870

)

    447  

Preferred stock dividends

    (138

)

    (138

)

    (414

)

    (414

)

Income applicable to common shareholders

  $ (23,322

)

  $ 176     $ (3,284

)

  $ 33  

Comprehensive income:

                               

Net (loss) income

  $ (23,184

)

  $ 314     $ (2,870

)

  $ 447  

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

                      167  

Unrealized loss and amortization of prior service on pension plans

          (16

)

           

Change in fair value of derivative contracts designated as hedge transactions

    3,743       6,760       (3,533

)

    12,068  

Unrealized holding gains on investments

    3       892       13       1,483  

Comprehensive (loss) income

  $ (19,438

)

  $ 7,950     $ (6,390

)

  $ 14,165  

Basic (loss) income per common share after preferred dividends

  $ (0.05

)

  $     $ (0.01

)

  $  

Diluted (loss) income per common share after preferred dividends

  $ (0.05

)

  $     $ (0.01

)

  $  

Weighted average number of common shares outstanding - basic

    452,636       398,848       417,532       396,809  

Weighted average number of common shares outstanding - diluted

    452,636       401,258       417,532       400,176  

Cash dividends declared per common share

  $ 0.0025     $ 0.0025     $ 0.0075     $ 0.0075  

 

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

 

4

Table of Contents
 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Nine Months Ended

 
   

September 30,

2018

   

September 30,

2017

 
            Revised  

Operating activities:

               

Net (loss) income

  $ (2,870

)

  $ 447  

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

               

Depreciation, depletion and amortization

    108,814       91,255  

Loss on disposition of investments

          167  

Unrealized loss on investments

    2,461       73  

Adjustment of inventory to market value

    7,232        

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

    (3,374

)

    (4,924

)

Provision for reclamation and closure costs

    3,957       3,379  

Stock compensation

    4,672       4,943  

Deferred income taxes

    (4,637

)

    (23,467

)

Amortization of loan origination fees

    1,471       1,415  

Loss on derivative contracts

    (15,208

)

    16,718  

Foreign exchange (gain) loss

    (2,032

)

    10,520  

Other non-cash items, net

    (37

)

    (1

)

Change in assets and liabilities, net of business acquisitions:

               

Accounts receivable

    (4,424

)

    4,903  

Inventories

    (18,954

)

    (9,611

)

Other current and non-current assets

    (5,569

)

    (2,685

)

Accounts payable and accrued liabilities

    12,308       (7,759

)

Accrued payroll and related benefits

    (4,207

)

    (913

)

Accrued taxes

    845       (4,469

)

Accrued reclamation and closure costs and other non-current liabilities

    (5,238

)

    (5,876

)

Cash provided by operating activities

    75,210       74,115  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (83,285

)

    (70,390

)

Acquisition of Klondex, net of cash and restricted cash acquired

    (139,326

)

     

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

    722       151  

Insurance proceeds received for damaged property

    4,377       5,628  

Purchases of investments

    (31,971

)

    (36,916

)

Maturities of investments

    64,895       31,169  

Net cash used in investing activities

    (184,588

)

    (70,358

)

Financing activities:

               

Proceeds from sale of common stock, net of offering costs

    3,085       9,610  

Acquisition of treasury shares

    (2,694

)

    (2,993

)

Dividends paid to common shareholders

    (3,193

)

    (2,978

)

Dividends paid to preferred shareholders

    (414

)

    (414

)

Credit availability and debt issuance fees

    (2,460

)

    (476

)

Borrowings on debt

    78,024        

Repayments of debt

    (82,036

)

    (470

)

Repayments of capital leases

    (5,992

)

    (5,065

)

Net cash used in financing activities

    (15,680

)

    (2,786

)

Effect of exchange rates on cash

    (215

)

    1,051  

Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents

    (125,273

)

    2,022  

Cash, cash equivalents and restricted cash and cash equivalents at beginning of period

    187,139       171,977  

Cash, cash equivalents and restricted cash and cash equivalents at end of period

  $ 61,866     $ 173,999  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $ 7,008     $ 6,439  

Common stock issued for the acquisition of other companies

  $ 252,544     $  

Payment of accrued compensation in restricted stock units

  $ 4,863     $ 4,240  

 

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

 

5

Table of Contents

 

 

Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (in this report, "Hecla" or "the Company" or “we” or “our” or “us” refers to Hecla Mining Company and our subsidiaries, unless the context requires otherwise).  These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2017, as it may be amended from time to time.

 

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

 

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

 

On July 20, 2018, we completed the acquisition of Klondex Mines Ltd. ("Klondex"). The unaudited interim condensed consolidated financial statements included herein reflect our ownership of the assets previously held by Klondex as of the July 20, 2018 acquisition date.

 

In the third quarter of 2018, we identified errors impacting amounts reported for accumulated depreciation, depletion and amortization ("DDA") and DDA expense for our Casa Berardi unit from June 1, 2013 through June 30, 2018. Certain amounts in the condensed consolidated financial statements and notes thereto for the prior period have been revised to correct these errors. See Note 2 for more information on the errors and revisions made to amounts reported for the prior period.

 

 

Note 2. Revision of Previously Issued Financial Statements for Immaterial Misstatements

 

In the third quarter of 2018, we determined accumulated DDA and DDA expense at Casa Berardi, a business unit within our Hecla Quebec Inc. subsidiary, were understated for the periods from June 1, 2013 through June 30, 2018 as a result of errors in calculation from the date of acquisition of Casa Berardi as noted below:

 

6

 

 

i.

understatement of DDA by approximately $35.5 million in the aggregate over 5 1/2 years. The error in calculation resulted from the foreign exchange translation of accumulated DDA and DDA expense from Canadian dollars (“CAD”) to U.S. dollars (“USD”), which was incorrectly set up in the financial reporting system to use the average exchange rate for the respective reporting period, when the historical exchange rate should have been used. The CAD to USD exchange rate at June 1, 2013 was 0.9646 and has subsequently weakened over the intervening periods, resulting in an understatement of accumulated DDA and DDA expense during the periods from June 1, 2013 to June 30, 2018. The adjustments in the third quarter of 2018 to record the cumulative amounts related to this understatement for prior periods through June 30, 2018 were:

 

Condensed Consolidated Balance Sheet (Unaudited)

 

(in millions)

 

Credit - Accumulated DDA (recorded within properties, plants, equipment and mineral interests, net)

  $ (36.2

)

Debit - Inventories: concentrates, doré, and stockpiled ore

    1.1  

Debit - Accumulated deficit

    30.3  
         

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

       

Debit - DDA expense

    5.0  

Credit - Net foreign exchange gain (loss)

    (0.2

)

Net increase to net loss for the nine months ended September 30, 2018

    (4.8

)

 

 

ii.

overstatement of DDA of approximately $14.2 million in the aggregate over 5 1/2 years related to the accelerated conversion of costs from the mineral interest asset, which represents the value of the undeveloped mineral interest and is not depletable, to the mineral properties asset, which represents the value of proven and probable reserves and is depletable. The error in calculation arose from the incorrect use of fair value information available on the per ounce value at the date of acquisition and resulted in the overstatement of the proven and probable reserves asset, which is subject to depletion, and an understatement of the undeveloped mineral interest asset, both of which are categories reported within properties, plants, equipment and mineral interests, net on the balance sheet. The overstatement of the conversions to the proven and probable reserves asset during the periods from January 1, 2014 through June 30, 2018 resulted in overstatements of accumulated DDA and DDA expense in each of these periods. The adjustments in the third quarter of 2018 to record the cumulative amounts related to this overstatement for prior periods through June 30, 2018 were:

 

Condensed Consolidated Balance Sheet (Unaudited)

 

(in millions)

 

Debit - Accumulated DDA (recorded within properties, plants, equipment and mineral interests, net)

  $ 14.2  

Credit - Deferred tax liability

    (3.8

)

Credit - Accumulated deficit

    (7.7

)

         

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

       

Credit - DDA expense

    (3.7

)

Debit - Income tax provision (benefit)

    1.0  

Net decrease to net loss for the nine months ended September 30, 2018

    2.7  

 

 

We assessed the materiality of the effect of the errors on our prior quarterly and annual financial statements, both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin ("SAB") No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and concluded the errors were not material to any of our previously issued financial statements. Consequently, we will correct these errors prospectively and revise our financial statements when the consolidated balance sheets, statements of operations and comprehensive income and cash flows for such prior periods are included in future filings (the "Revisions"). The Revisions had no net impact on our sales or net cash provided by operating activities for any period presented.

 

7

 

The following tables present a summary of the impact, by financial statement line item, of the Revisions for the three months ended March 31, 2017,  June 30, 2017 and September 30, 2017, the six months ended June 30, 2017, the nine months ended September 30, 2017, as of and for the year ended December 31, 2017, and for the year ended December 31, 2016: 

 

   

Three Months Ended September 30, 2017

 

(in thousands, except per share amounts)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

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

                       

Depreciation, depletion and amortization

  $ 28,844     $ 674     $ 29,518  

Total cost of sales

    97,202       674       97,876  

Gross profit

    43,637       (674

)

    42,963  

Income (loss) from operations

    20,942       (674

)

    20,268  

Foreign exchange (loss) gain

    (4,764

)

    (153

)

    (4,917

)

Total other (expense) income

    (24,931

)

    (153

)

    (25,084

)

(Loss) income before income taxes

    (3,989

)

    (827

)

    (4,816

)

Income tax benefit (provision)

    5,401       (271

)

    5,130  

Net income

  $ 1,412     $ (1,098

)

  $ 314  

Income applicable to common shareholders

  $ 1,274     $ (1,098

)

  $ 176  

Comprehensive income

    9,048       (1,098

)

    7,950  

Basic income per common share after preferred dividends

  $     $     $  

Diluted income per common share after preferred dividends

  $     $     $  

 

 

   

Nine Months Ended September 30, 2017

 

(in thousands, except per share amounts)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

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

                       

Depreciation, depletion and amortization

  $ 83,365     $ 3,621     $ 86,986  

Total cost of sales

    307,902       3,621       311,523  

Gross profit

    109,760       (3,621

)

    106,139  

Income (loss) from operations

    40,788       (3,621

)

    37,167  

Foreign exchange (loss) gain

    (10,909

)

    651       (10,258

)

Total other (expense) income

    (54,935

)

    651       (54,284

)

(Loss) income before income taxes

    (14,147

)

    (2,970

)

    (17,117

)

Income tax benefit (provision)

    18,377       (813

)

    17,564  

Net income

  $ 4,230     $ (3,783

)

  $ 447  

Income applicable to common shareholders

  $ 3,816     $ (3,783

)

  $ 33  

Comprehensive income

    17,948       (3,783

)

    14,165  

Basic income per common share after preferred dividends

  $ 0.01     $ (0.01

)

  $  

Diluted income per common share after preferred dividends

  $ 0.01     $ (0.01

)

  $  
                         

Condensed Consolidated Statements of Cash Flows (Unaudited)

                       

Net income

  $ 4,230     $ (3,783

)

  $ 447  

Depreciation, depletion and amortization

    87,634       3,621       91,255  

Foreign exchange loss (gain)

    11,171       (651

)

    10,520  

Deferred income taxes

    (24,280

)

    813       (23,467

)

Cash provided by operating activities

  $ 74,115     $     $ 74,115  

 

8

 

   

As of and for the Year Ended December 31, 2017

 

(in thousands)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

Condensed Consolidated Balance Sheet

                       

Inventories: Concentrate, doré, and stockpiled ore

  $ 28,455     $ 911     $ 29,366  

Total current assets

    320,325       911       321,236  

Properties, plants, equipment and mineral interests, net

    2,020,021       (20,710

)

    1,999,311  

Total assets

    2,364,957       (19,799

)

    2,345,158  

Deferred tax liability

    121,546       2,806       124,352  

Total liabilities

    881,075       2,806       883,881  

Accumulated deficit

    (195,484

)

    (22,605

)

    (218,089

)

Total shareholders' equity

    1,483,882       (22,605

)

    1,461,277  

Total liabilities and shareholders' equity

    2,364,957       (19,799

)

    2,345,158  
                         

Consolidated Statements of Operation and Comprehensive (Loss) Income

                       

Depreciation, depletion and amortization

  $ 116,062     $ 4,537     $ 120,599  

Total cost of sales

    420,789       4,537       425,326  

Gross profit

    156,986       (4,537

)

    152,449  

Income (loss) from operations

    64,643       (4,537

)

    60,106  

Foreign exchange (loss) gain

    (10,300

)

    620       (9,680

)

Total other (expense) income

    (68,283

)

    620       (67,663

)

(Loss) income before income taxes

    (3,640

)

    (3,917

)

    (7,557

)

Income tax (provision) benefit

    (19,879

)

    (1,084

)

    (20,963

)

Net (loss) income

  $ (23,519

)

  $ (5,001

)

  $ (28,520

)

(Loss) income applicable to common shareholders

  $ (24,071

)

  $ (5,001

)

  $ (29,072

)

Comprehensive income (loss)

    (12,290

)

    (5,001

)

    (17,291

)

Basic (loss) income per common share after preferred dividends

  $ (0.06

)

  $ (0.01

)

  $ (0.07

)

Diluted (loss) income per common share after preferred dividends

  $ (0.06

)

  $ (0.01

)

  $ (0.07

)

                         

Condensed Consolidated Statements of Cash Flows

                       

Net (loss) income

  $ (23,519

)

  $ (5,001

)

  $ (28,520

)

Depreciation, depletion and amortization

    121,930       4,537       126,467  

Foreign exchange loss (gain)

    10,828       (620

)

    10,208  

Deferred income taxes

    18,308       1,084       19,392  

Cash provided by operating activities

  $ 115,878     $     $ 115,878  

 

 

9

 

   

Three Months Ended March 31, 2017

 

(in thousands)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

Condensed Consolidated Statements of Operation and Comprehensive Income (Loss) (Unaudited)

                       

Depreciation, depletion and amortization

  $ 28,952     $ 1,483     $ 30,435  

Total cost of sales

    107,628       1,483       109,111  

Gross profit

    34,916       (1,483

)

    33,433  

Income from operations

    15,871       (1,483

)

    14,388  

Foreign exchange gain (loss)

    (2,262

)

    2       (2,260

)

Total other expense

    (18,108

)

    2       (18,106

)

Income (loss) before income taxes

    (2,237

)

    (1,481

)

    (3,718

)

Income tax (provision) benefit

    29,071       (271

)

    28,800  

Net income

  $ 26,834     $ (1,752

)

  $ 25,082  

Income applicable to common shareholders

  $ 26,696     $ (1,752

)

  $ 24,944  

Comprehensive income

    30,038       (1,752

)

    28,286  

Basic income per common share after preferred dividends

  $ 0.07     $     $ 0.07  

Diluted income per common share after preferred dividends

  $ 0.07     $     $ 0.07  
                         

Condensed Consolidated Statements of Cash Flows (Unaudited)

                       

Net income

  $ 26,834     $ (1,752

)

  $ 25,082  

Depreciation, depletion and amortization

    29,590       1,483       31,073  

Foreign exchange (gain) loss

    506       (2

)

    504  

Deferred income taxes

    (21,234

)

    271       (20,963

)

Cash provided by operating activities

  $ 38,285     $     $ 38,285  

 

 

   

Three Months Ended June 30, 2017

 

(in thousands)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

Condensed Consolidated Statements of Operation and Comprehensive Income (Loss) (Unaudited)

                       

Depreciation, depletion and amortization

  $ 25,569     $ 1,464     $ 27,033  

Total cost of sales

    103,072       1,464       104,536  

Gross profit

    31,207       (1,464

)

    29,743  

Income from operations

    3,975       (1,464

)

    2,511  

Foreign exchange gain (loss)

    (3,883

)

    803       (3,080

)

Total other income (expense)

    (11,896

)

    803       (11,093

)

Income (loss) before income taxes

    (7,921

)

    (661

)

    (8,582

)

Income tax (provision) benefit

    (16,095

)

    (271

)

    (16,366

)

Net income (loss)

  $ (24,016

)

  $ (932

)

  $ (24,948

)

Income (loss) applicable to common shareholders

  $ (24,154

)

  $ (932

)

  $ (25,086

)

Comprehensive income (loss)

    (21,138

)

    (932

)

    (22,070

)

Basic income (loss) per common share after preferred dividends

  $ (0.06

)

  $     $ (0.06

)

Diluted income (loss) per common share after preferred dividends

  $ (0.06

)

  $     $ (0.06

)

 

10

 

   

Six Months Ended June 30, 2017

 

(in thousands)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

Condensed Consolidated Statements of Operation and Comprehensive Income (Loss) (Unaudited)

                       

Depreciation, depletion and amortization

  $ 54,521     $ 2,947     $ 57,468  

Total cost of sales

    210,700       2,947       213,647  

Gross profit

    66,123       (2,947

)

    63,176  

Income from operations

    19,846       (2,947

)

    16,899  

Foreign exchange gain (loss)

    (6,145

)

    805       (5,340

)

Total other income (expense)

    (30,004

)

    805       (29,199

)

Income (loss) before income taxes

    (10,158

)

    (2,142

)

    (12,300

)

Income tax (provision) benefit

    12,976       (542

)

    12,434  

Net income (loss)

  $ 2,818     $ (2,684

)

  $ 134  

Income (loss) applicable to common shareholders

  $ 2,542     $ (2,684

)

  $ (142

)

Comprehensive income (loss)

    8,900       (2,684

)

    6,216  

Basic income (loss) per common share after preferred dividends

  $ 0.01     $ (0.01

)

  $  

Diluted income (loss) per common share after preferred dividends

  $ 0.01     $ (0.01

)

  $  
                         

Condensed Consolidated Statements of Cash Flows (Unaudited)

                       

Net income

  $ 2,818     $ (2,684

)

  $ 134  

Depreciation, depletion and amortization

    56,908       2,947       59,855  

Foreign exchange (gain) loss

    5,201       (805

)

    4,396  

Deferred income taxes

    (22,113

)

    542       (21,571

)

Cash provided by operating activities

  $ 45,821     $     $ 45,821  

 

11

 

   

For the Year Ended December 31, 2016

 

(in thousands)

 

As Previously

Reported

   

Adjustment

   

As Revised

 

Consolidated Statements of Operation and Comprehensive (Loss) Income

                       

Depreciation, depletion and amortization

  $ 116,126     $ 7,505     $ 123,631  

Total cost of sales

    454,451       7,505       461,956  

Gross profit

    191,506       (7,505

)

    184,001  

Income (loss) from operations

    116,944       (7,505

)

    109,439  

Foreign exchange (loss) gain

    (2,926

)

    189       (2,737

)

Total other (expense) income

    (19,969

)

    189       (19,780

)

(Loss) income before income taxes

    96,975       (7,316

)

    89,659  

Income tax (provision) benefit

    (27,428

)

    (662

)

    (28,090

)

Net (loss) income

  $ 69,547     $ (7,978

)

  $ 61,569  

(Loss) income applicable to common shareholders

  $ 68,995     $ (7,978

)

  $ 61,017  

Comprehensive income (loss)

    67,576       (7,978

)

    59,598  

Basic (loss) income per common share after preferred dividends

  $ 0.18     $ (0.02

)

  $ 0.16  

Diluted (loss) income per common share after preferred dividends

  $ 0.18     $ (0.02

)

  $ 0.16  
                         

Condensed Consolidated Statements of Cash Flows

                       

Net (loss) income

  $ 69,547     $ (7,978

)

  $ 61,569  

Depreciation, depletion and amortization

    117,413       7,505       124,918  

Foreign exchange loss (gain)

    4,649       (189

)

    4,460  

Deferred income taxes

    2,112       662       2,774  

Cash provided by operating activities

  $ 225,328     $     $ 225,328  

 

 

Note 3.    Investments

 

Our current investments, which are classified as "available for sale" and consist of bonds having maturities of greater than 90 days were $33.8 million at December 31, 2017. We held no such investments as of September 30, 2018. During the first nine months of 2018 and 2017, we had purchases of such investments of $31.2 million and $35.3 million, respectively, and maturities of $64.9 million and $31.2 million, respectively. Our current investments at December 31, 2017 consisted of the following (in thousands):

 

   

December 31, 2017

 
   

Amortized

cost

   

Unrealized+ loss

   

Fair value

 

Corporate bonds

  $ 33,778     $ (20

)

  $ 33,758  

 

At September 30, 2018 and December 31, 2017, the fair value of our non-current investments was $7.2 million and $7.6 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value, and are primarily classified as “available-for-sale.” The cost basis of our non-current investments was approximately $7.9 million and $5.7 million at September 30, 2018 and December 31, 2017, respectively. In the first nine months of 2018 and 2017, we acquired marketable equity securities having a cost basis of $0.8 million and $1.6 million, respectively. During the first nine months of 2018, we recognized $2.5 million in net unrealized losses in current earnings. During the first nine months of 2017, we recognized $1.5 million in net unrealized gains in other comprehensive income and $0.1 million in net unrealized losses in current earnings.

 

 

Note 4.   Income Taxes

 

Major components of our income tax provision (benefit) for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Current:

                               

Domestic

  $     $     $ 1     $ (12,797

)

Foreign

    80       (3,959

)

    4,250       17,491  

Total current income tax provision (benefit)

    80       (3,959

)

    4,251       4,694  
                                 

Deferred:

                               

Domestic

    (3,778

)

    1,980       (3,778

)

    (13,958

)

Foreign

    1,019       (3,151

)

    (1,957

)

    (8,300

)

Total deferred income tax provision (benefit)

    (2,759

)

    (1,171

)

    (5,735

)

    (22,258

)

Total income tax provision (benefit)

  $ (2,679

)

  $ (5,130

)

  $ (1,484

)

  $ (17,564

)

 

12

 

The current income tax provisions for the three and nine months ended September 30, 2018 and 2017 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the impact of taxation in foreign jurisdictions, a valuation allowance on the majority of U.S. deferred taxes and the impact of the change in accounting method treatment of the #4 Shaft development costs in 2017.

 

As of September 30, 2018, we have a net deferred tax liability in the U.S. of $46.7 million, a net deferred tax liability in Canada of $118.1 million and a net deferred tax asset in Mexico of $1.9 million, for a consolidated worldwide net deferred tax liability of $162.9 million.

 

With the acquisition of Klondex on July 20, 2018 (see Note 14), we acquired a U.S. consolidated tax group (the "Klondex U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Legacy Hecla”). Under acquisition accounting, we recorded a net deferred tax liability of $50.1 million. For the three and nine months ended September 30, 2018, we recorded a tax benefit of $3.8 million on a net tax loss of $15.2 million in the Klondex U.S. group.

 

For Legacy Hecla, we recorded a full valuation allowance in the U.S. in December 2017 as a result of U.S. tax reform. Our circumstances at September 30, 2018 continued to support a full valuation allowance in the U.S. for Legacy Hecla. In the first quarter of 2017, we received consent from the Internal Revenue Service to permit us to take a different income tax position relating to the timing of deductions for the #4 Shaft development costs at Lucky Friday. This tax accounting method change substantially revised the timing of deductions for these costs for regular tax and Alternative Minimum Tax ("AMT") relative to our projected life of mine and projected taxable income. These timing changes caused us to revise our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance release of approximately $15 million.

 

 

 

Note 5.    Commitments, Contingencies and Obligations

 

General

 

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

 

13

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of September 30, 2018, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, has jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of September 30, 2018.

 

Lucky Friday Water Permit Matters

 

In December 2013, the EPA issued to Hecla Limited a request for information under Section 308 of the Clean Water Act directing Hecla Limited to undertake a comprehensive groundwater investigation of Lucky Friday’s tailings pond no. 3 to evaluate whether the pond is causing the discharge of pollutants via seepage to groundwater that is discharging to surface water. We completed the investigation mandated by the EPA and submitted a draft report to the agency in December 2015. We are waiting for the EPA’s response and we cannot predict what further action, if any, the agency may take.

 

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

 

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

 

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

 

14

 

The Johnny M Mine is in an area known as the San Mateo Creek Basin (“SMCB”), which is an approximately 321 square mile area in New Mexico that contains numerous legacy uranium mines and mills. The EPA is considering listing the entire SMCB on CERCLA’s National Priorities List in order to address perceived groundwater issues within the SMCB. The EE/CA discussed above relates primarily to contaminated rock and soil, not groundwater. In the event that the SMCB is listed as a Superfund site, or for other reasons, it is possible that Hecla Limited’s liability at the Johnny M Site, as well as any other sites within the SMCB at which predecessor companies of Hecla Limited may have been involved, will be greater than our current accrual of $5.6 million due to the increased scope of required remediation.

 

In July 2018, the EPA informed Hecla Limited that it and several other potentially responsible parties ("PRPs") may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated it has incurred approximately $9.6 million in response costs to date. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning the site, including the relative contributions, if any, of contamination by the various PRPs.

 

Carpenter Snow Creek and Barker-Hughesville Sites in Montana

 

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

 

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

 

In February 2017, the EPA made a formal request to Hecla Mining Company for information regarding the Barker-Hughesville Mining District Superfund site located in Judith Basin and Cascade Counties, Montana. Hecla Limited submitted a response in April 2017. The Barker-Hughesville site is located in a historic mining district, and between approximately June and December 1983, Hecla Limited was party to an agreement with another mining company under which limited exploration activities occurred at or near the site.

 

In August 2018, the EPA informed Hecla Limited that it and several other PRPs may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA did not include an amount of its alleged response costs to date. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning past or anticipated future costs at the site and the relative contributions, if any, of contamination by the various PRPs.

 

Litigation Related to Klondex Acquisition

 

Following the announcement of our proposed acquisition of Klondex, Klondex and members of the Klondex board of directors were named as defendants in five putative stockholder class actions, brought by purported stockholders of Klondex, challenging the proposed merger. The lawsuits were all filed in the United States District Court for the District of Nevada, but only three cases remain, and they are captioned: Gunderson v. Klondex Mines Ltd., et al., No. 3:18-cv-00256 (D. Nev. May 31, 2018); Nelson Baker v. Klondex Mines Ltd., et al., No. 3:18-cv-00288 (D. Nev. June 15, 2018); and Lawson v. Klondex Mines Ltd., et al., No. 3:18-cv-00284 (D. Nev. June 15, 2018). The Gunderson complaint also named Hecla Mining Company and our subsidiary now known as Klondex Mines Unlimited Liability Company (“Merger Sub”) as defendants. The other two lawsuits were subsequently dismissed.

 

15

 

The plaintiffs generally claim that Klondex issued a proxy statement that included misstatements or omissions, in violation of sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended. The Gunderson complaint also asserts a claim that the individual members of the Klondex board of directors breached their fiduciary duties of care, loyalty and good faith by authorizing the merger with Hecla for what the plaintiff asserts is inadequate consideration, an inadequate process, and with inadequate disclosures. The plaintiffs seek, among other things, to enjoin the merger, rescind the transaction or obtain rescissory damages if the merger is consummated, and recover attorneys’ fees and costs.

 

On September 21, 2018, Plaintiffs Baker and Lawson each filed motions to consolidate the remaining cases and be appointed lead plaintiff.

 

Although it is not possible to predict the outcome of litigation matters with certainty, each of Klondex, its directors, Hecla and Merger Sub believe that each of the lawsuits are without merit, and the parties intend to vigorously defend against all claims asserted.

 

In addition, on September 11, 2018, a lawsuit was filed in the Ontario (Canada) Superior Court of Justice by Waterton Nevada Splitter LLC against Hecla Mining Company, our subsidiary Klondex Mines Unlimited Liability Company and Havilah Mining Corporation, an entity that was formed to own the Canadian assets of Klondex that we did not acquire as part of the Klondex acquisition in July 2018, and of which we own approximately 13%. The lawsuit alleges that Hecla and Havilah are in breach of contract in connection with the issuance to Waterton of warrants to purchase Hecla common stock and Havilah common shares to replace warrants to purchase Klondex common shares that Waterton owned prior to the July 2018 acquisition. The lawsuit claims Hecla and Havilah issued warrants to Waterton valued at $3.7 million but that Waterton was entitled to warrants valued at $8.9 million. We believe the lawsuit is without merit and will vigorously defend it.

 

Debt

 

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

 

On March 5, 2018, we entered into a note purchase agreement pursuant to which we issued CAD$40 million (approximately USD$30.8 million at the time of the transaction) in aggregate principal amount of our Series 2018-A Senior Notes due May 1, 2021 (the “Notes”) to Ressources Québec, a subsidiary of Investissment Québec, a financing arm of the Québec government. The Notes were issued at a discount of 0.58%, and bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018. The Notes are senior and unsecured and are pari passu in all material respects with the Senior Notes, including with respect to guarantees of the Notes by certain of our subsidiaries. The net proceeds from the Notes are required to be used for development and expansion of our Casa Berardi mine.

 

See Note 10 for more information.

 

Other Commitments

 

Our contractual obligations as of September 30, 2018 included approximately $1.6 million for various costs. In addition, our open purchase orders at September 30, 2018 included approximately $0.4 million, $2.0 million, $14.2 million and $5.3 million for various capital and non-capital items at the Lucky Friday, Casa Berardi, Greens Creek and Nevada Operations units, respectively. We also have total commitments of approximately $15.7 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units (see Note 10 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of September 30, 2018, we had surety bonds totaling $181.6 million in place as financial support for future reclamation and closure costs, self-insurance, and employee benefit plans. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.

 

16

 

Other Contingencies

 

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

 

 

Note 6.    (Loss) earnings Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At September 30, 2018, there were 485,136,257 shares of our common stock issued and 5,226,791 shares issued and held in treasury, for a net of 479,909,466 shares outstanding. Basic and diluted loss per common share, after preferred dividends, was $(0.05) and $(0.01) for the three- and nine-month periods ended September 30, 2018, respectively. Basic and diluted income per common share, after preferred dividends, was $0.00 and $0.00 for the three- and nine-month periods ended September 30, 2017, respectively.

 

Diluted (loss) income per share for the three and nine months ended September 30, 2018 and 2017 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.

 

For the three-month and nine-month periods ended September 30, 2018, all restricted share units, deferred shares and warrants were excluded from the computation of diluted loss per share, as our reported loss for that period would cause them to have no effect on the calculation of loss per share. For the three-month and nine-month periods ended September 30, 2017, the calculation of diluted income per share included dilutive (i) restricted stock units that were unvested or which vested in the respective period of 901,047 and 1,857,555, respectively, and (ii) deferred shares of 1,509,159 for each period. There were no warrants outstanding during the three-month and nine-month periods ended September 30, 2017.

 

 

Note 7.    Business Segments and Sales of Products

 

We discover, acquire, develop, produce, and market concentrates and doré containing silver, gold, lead and zinc. We are currently organized and managed in five reporting segments: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, the San Sebastian unit and the Nevada Operations unit. The Nevada Operations unit was added as a result of our acquisition of Klondex in July 2018 (see Note 14 for more information).

 

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 our reportable segments for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

   

Three Months Ended
September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net sales to unaffiliated customers:

                               

Greens Creek

  $ 65,187     $ 61,062     $ 205,642     $ 191,250  

Lucky Friday

    (11

)

    199       8,253       20,022  

Casa Berardi

    52,850       53,989       164,501       139,524  

San Sebastian

    14,129       25,589       40,727       66,866  

Nevada Operations

    11,494             11,494        
    $ 143,649     $ 140,839     $ 430,617     $ 417,662  

Income (loss) from operations:

                               

Greens Creek

  $ 10,705     $ 16,575     $ 59,373     $ 46,107  

Lucky Friday

    (5,404

)

    (4,642

)

    (14,811

)

    (8,974

)

Casa Berardi

    (1,146

)

    2,208       3,118       (4,692

)

San Sebastian

    (2,381

)

    17,017       2,275       42,363  

Nevada Operations

    (13,741

)

          (13,741

)

     

Other

    (18,409

)

    (10,890

)

    (50,885

)

    (37,637

)

    $ (30,376

)

  $ 20,268     $ (14,671

)

  $ 37,167  

 

 

The following table presents identifiable assets by reportable segment as of September 30, 2018 and December 31, 2017 (in thousands):

 

   

September 30, 2018

   

December 31, 2017

 

Identifiable assets:

               

Greens Creek

  $ 651,814     $ 671,960  

Lucky Friday

    429,334       432,400  

Casa Berardi

    758,415       784,706  

San Sebastian

    47,352       62,198  

Nevada Operations

    539,410        

Other

    283,933       393,894  
    $ 2,710,258     $ 2,345,158  

 

 

Our products consist of both metal concentrates, which we sell to custom smelters and brokers, and unrefined bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. Revenue is recognized upon the completion of the performance obligations and transfer of control of the product to the customer.

 

For sales of metals from refined doré, the performance obligation is met and revenue is recognized at the time of transfer of control of the agreed-upon metal quantities to the customer by the refiner, and the transaction price is known at that time. For sales of doré, the performance obligation is met, the transaction price is known, and revenue is recognized at the time of transfer of title and control of the doré containing the agreed-upon metal quantities to the customer. Refining, selling and shipping costs related to sales of doré and metals from doré are recorded to cost of sales as incurred.

 

For concentrate sales, which we currently have at our Greens Creek and Lucky Friday units, the performance obligation is met, the transaction price can be reasonably estimated, and revenue is recognized generally at the time of shipment. Concentrates sold at our Lucky Friday unit typically leave the mine and are received by the customer within the same day. However, there is a period of time between shipment of concentrates from our Greens Creek unit and their physical receipt by the customer, and judgment is required in determining when control has been transferred to the customer for those shipments. We have determined the performance obligation is met and title is transferred to the customer upon shipment of concentrate parcels from Greens Creek because, at that time, 1) legal title is transferred to the customer, 2) the customer has accepted the parcel and obtained the ability to realize all of the benefits from the product, 3) the concentrate content specifications are known, have been communicated to the customer, and the customer has the significant risks and rewards of ownership of it, 4) it is very unlikely a concentrate parcel from Greens Creek will be rejected by a customer upon physical receipt, and 5) we have the right to payment for the parcel.

 

18

 

Judgment is also required in identifying the performance obligations for our concentrate sales. Most of our concentrate sales involve “frame contracts” with smelters that can cover multiple years and specify certain terms under which individual parcels of concentrates are sold. However, some terms are not specified in the frame contracts and/or can be renegotiated as part of annual amendments to the frame contract. We have determined parcel shipments represent individual performance obligations satisfied at a point in time when control of the shipment is transferred to the customer.

 

The consideration we receive for our concentrate sales fluctuates due to changes in metals prices between the time of shipment and final settlement with the customer. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and previously recorded sales and accounts receivable are adjusted to estimated settlement metals prices until final settlement with the customer. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur. As such, we use the expected value method to price the parcels until the final settlement date occurs, at which time the final transaction price is known. At September 30, 2018, metals contained in concentrates and exposed to future price changes totaled 1.2 million ounces of silver, 5,734 ounces of gold, 7,277 tons of zinc, and 2,447 tons of lead.  However, as discussed in Note 12, we seek to mitigate the risk of negative price adjustments by using financially-settled forward contracts for some of our sales.

 

Sales and accounts receivable for concentrate shipments are recorded net of charges for treatment, refining, smelting losses, and other charges negotiated by us with the customers, which represent components of the transaction price. Charges are estimated by us upon shipment of concentrates based on contractual terms, and actual charges typically do not vary materially from our estimates. Costs charged by customers include fixed treatment and refining costs per ton of concentrate and may include price escalators which allow the customers to participate in the increase of lead and zinc prices above a negotiated baseline. Costs for shipping concentrates to customers are recorded to cost of sales as incurred.

 

Sales of metal concentrates and metal products are made principally to custom smelters, brokers and metals traders. The percentage of sales contributed by each segment is reflected in the following table:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Greens Creek

    45

%

    43

%

    48

%

    46

%

Lucky Friday

   

%

   

%

    2

%

    5

%

Casa Berardi

    37

%

    38

%

    39

%

    33

%

San Sebastian

    10

%

    19

%

    9

%

    16

%

Nevada Operations

    8

%

   

%

    2

%

   

%

      100

%

    100

%

    100

%

    100

%

 

19

 

Sales of products by metal for the three- and nine-month periods ended September 30, 2018 and 2017 were as follows (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Silver

  $ 38,009     $ 43,228     $ 111,656     $ 140,662  

Gold

    82,628       73,603       233,308       203,279  

Lead

    7,552       6,373       27,469       28,093  

Zinc

    20,990       24,327       78,714       74,692  

Less: Smelter and refining charges

    (5,530

)

    (6,692

)

    (20,530

)

    (29,064

)

Sales of products   $ 143,649     $ 140,839     $ 430,617     $ 417,662  

 

 

The following is sales information by geographic area based on the location of smelters and brokers (for concentrate shipments) and location of parent companies (for doré sales to metals traders) for the three- and nine-month periods ended September 30, 2018 and 2017 (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Canada

  $ 83,723     $ 79,834     $ 266,915     $ 263,268  

Korea

    35,796       27,396       110,036       75,339  

Japan

    3,301       14,419       20,971       38,513  

China

          16,695       66       32,047  

United States

    15,807       3,121       24,296       12,407  

Total, excluding gains/losses on forward contracts

  $ 138,627     $ 141,465     $ 422,284     $ 421,574  

 

 

Sales by significant product type for the three- and nine-month periods ended September 30, 2018 and 2017 were as follows (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Doré and metals from doré

  $ 83,068     $ 82,764     $ 232,085     $ 219,276  

Lead concentrate

    36,728       31,548       113,211       124,553  

Zinc concentrate

    14,965       21,278       63,197       61,841  

Bulk concentrate

    3,866       5,875       13,791       15,904  

Total, excluding gains/losses on forward contracts

  $ 138,627     $ 141,465     $ 422,284     $ 421,574  

 

 

Sales of products for the three- and nine-month periods ended September 30, 2018 included net gains of $5.0 million and $8.3 million, respectively, on financially-settled forward contracts for silver, gold, lead and zinc contained in our concentrate sales. Sales of products for the three- and nine-month periods ended September 30, 2017 included net losses of $0.6 million and $3.9 million, respectively, on the forward contracts. See Note 12 for more information.

 

20

 

Sales of products to significant customers as a percentage of total sales were as follows for the three- and nine-month periods ended September 30, 2018 and 2017:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

CIBC

    26

%

    23

%

    34

%

    24

%

Scotia

    19

%

    33

%

    13

%

    26

%

Korea Zinc

    15

%

    25

%

    22

%

    20

%

Teck Metals Ltd.

    11

%

   

%

    11

%

    10

%

Trafigura

    10

%

   

%

    3

%

    4

%

Louis Dreyfus

   

%

    12

%

   

%

    4

%

 

 

Our trade accounts receivable balance related to contracts with customers was $12.9 million at September 30, 2018 and 2017 and $14.8 million at December 31, 2017, and included no allowance for doubtful accounts.

 

We have determined our contracts do not include a significant financing component. For doré sales and sales of metal from doré, payment is received at the time the performance obligation is satisfied. The amount of consideration for concentrate sales is variable, and we receive payment for a significant portion of the estimated value of concentrate parcels within a relatively short period of time after the performance obligation is satisfied.

 

We do not incur significant costs to obtain contracts, nor costs to fulfill contracts which are not addressed by other accounting standards. Therefore, we have not recognized an asset for such costs as of September 30, 2018 or December 31, 2017.

 

The sales and income (loss) from operations amounts reported above include results from our Lucky Friday segment. The Lucky Friday mine is our only operation where some of our employees are subject to a collective bargaining agreement, and the most recent agreement expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer, and on March 13, 2017 went on strike and have been on strike since that time. Production at Lucky Friday was suspended from the start of the strike until July 2017, when limited production resumed. For the first nine months of 2018 and 2017, suspension costs not related to production of $13.5 million and $11.5 million, respectively, along with $3.7 million and $2.9 million, respectively, in non-cash depreciation expense, are reported in a separate line item on our consolidated statements of operations. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations. If the strike continues for a further extended period or it is determined an eventual resolution is unlikely, it may be appropriate in the future to review the carrying value of properties, plants, equipment and mineral interests at Lucky Friday. Under such review, if estimated undiscounted cash flows from Lucky Friday were less than its carrying value, an impairment loss would be recognized for the difference between the carrying value and the estimated fair value. The carrying value of properties, plants, equipment and mineral interests at Lucky Friday as of September 30, 2018 was approximately $428.8 million. However, Lucky Friday has significant identified reserves and mineralized material and a current estimated mine life of approximately 22 years.

 

On April 30, 2018, we settled with the National Labor Relations Board ("NLRB") an unfair labor practice claim made by the union. As part of the settlement, Hecla Limited rescinded its last, best and final contract offer implemented in March 2017. We do not believe the settlement with the NLRB will resolve any of the key differences in the ongoing labor dispute. On May 4, 2018, we gave notice to the union that the parties to the labor dispute are at impasse, and implemented portions of our revised final offer presented in December 2017.

 

21

 

 

Note 8.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

   

Three Months Ended

September 30,

 
   

2018

   

2017

 

Service cost

  $ 1,252     $ 1,196  

Interest cost

    1,377       1,339  

Expected return on plan assets

    (1,634

)

    (1,462

)

Amortization of prior service cost

    15       (84

)

Amortization of net loss

    931       1,033  

Net periodic pension cost

  $ 1,941     $ 2,022  

 

 

   

Nine Months Ended

September 30,

 
   

2018

   

2017

 

Service cost

  $ 3,756     $ 3,588  

Interest cost

    4,131       4,017  

Expected return on plan assets

    (4,902

)

    (4,386

)

Amortization of prior service cost

    45       (252

)

Amortization of net loss

    2,793       3,099  

Net periodic pension cost

  $ 5,823     $ 6,066  

 

For the three- and nine-month periods ended September 30, 2018, the service cost component of net periodic pension cost is included in the same line items of our condensed consolidated financial statements as other employee compensation costs, and the net expense of $0.7 million and $2.1 million, respectively, related to all other components of net periodic pension cost is included in other (expense) income on our condensed consolidated statements of operations and comprehensive income (loss). For the three- and nine-month periods ended September 30, 2017, all components of net periodic pension cost are included in the same line items of our condensed consolidated financial statements as other employee compensation costs.

 

In April 2018 and July 2018, we made cash contributions of  $1.3 million and $1.2 million, respectively, to our defined benefit plans. In September 2018 we contributed $5.5 million in shares of our common stock. We are not required to make additional contributions to our defined benefit plans in 2018. We expect to contribute approximately $0.5 illion to our unfunded supplemental executive retirement plan during 2018.

 

 

Note 9.    Shareholders’ Equity

 

Stock-based Compensation Plans

 

We periodically grant restricted stock unit awards, performance-based share awards and shares of common stock to our employees and directors. We measure compensation cost for restricted stock units and stock grants at the closing price of our stock at the time of grant. We measure compensation cost for performance-based grants using a Monte Carlo simulation to estimate their value at grant date. Restricted stock unit and performance-based share grants vest after a specified period with compensation cost amortized over that period. Although we have no current plans to issue stock options, we may do so in the future.

 

In March 2018, the Board of Directors granted 1,237,369 shares of common stock to employees for payment of long-term incentive compensation for the period ended December 31, 2017. The shares were distributed in March 2018, and $4.9 million in expense related to the stock awards was recognized in the periods prior to March 31, 2018.

 

22

 

In June and August 2018, the Board of Directors granted the following restricted stock unit awards to employees resulting in a total expense of $7.0 million:

 

 

1,854,054 restricted stock units, with one third of those vesting in June 2019, one third vesting in June 2020, and one third vesting in June 2021;

 

96,604 restricted stock units, with one half of those vesting in June 2019 and one-half vesting in June 2020; and

 

28,721 restricted stock units that vest in June 2019.

 

An expense of $2.5 million related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the twelve months following the date of the award. An expense of $2.4 million related to the unit awards discussed above vesting in 2020 will be recognized on a straight-line basis over the twenty-four months following the date of the award. An expense of $2.2 million related to the unit awards discussed above vesting in 2021 will be recognized on a straight-line basis over the thirty-six-month period following the date of the award.

 

In June 2018, the Board of Directors granted performance-based share awards to certain executive employees. The value of the awards will be based on the ranking of the market performance of our common stock relative to the performance of the common stock of a group of peer companies over the three-year measurement period ending December 31, 2020. The number of shares to be issued will be based on the value of the awards divided by the share price at grant date. The expense related to the performance-based awards will be recognized on a straight-line base over the thirty months following the date of the award.

 

Stock-based compensation expense for restricted stock unit and performance-based grants to employees and shares issued to nonemployee directors recorded in the first nine months of 2018 totaled $4.7 million, compared to $4.9 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations and pays the obligations in cash.  As a result, in the first nine months of 2018 we withheld 697,341 shares valued at approximately $2.7 million, or approximately $3.86 per share. In the first nine months of 2017 we withheld 588,240 shares valued at approximately $3.0 million, or approximately $5.09 per share.

 

Common Stock Dividends

 

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

 

Quarterly average realized silver price

per ounce

   

Quarterly dividend

per share

   

Annualized dividend

per share

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

 

 

On November 6, 2018, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of approximately $1.2 million payable in December 2018. Because the average realized silver price for the third quarter of 2018 was $14.68 per ounce, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.

 

23

 

At-The-Market Equity Distribution Agreement

 

Pursuant to an equity distribution agreement dated February 23, 2016, we may issue and sell shares of our common stock from time to time through ordinary broker transactions having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. The terms of sales transactions under the agreement, including trading day(s), number of shares sold in the aggregate, number of shares sold per trading day, and the floor selling price per share, are proposed by us to the sales agent. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information. The agreement can be terminated by us at any time. The shares issued under the equity distribution agreement are registered under the Securities Act of 1933, as amended, pursuant to our shelf registration statement on Form S-3, which was filed with the SEC on February 23, 2016. As of September 30, 2018, we had sold 5,634,758 shares under the agreement for total proceeds of approximately $20.8 million, net of commissions of approximately $0.5 million. We sold 1,025,911 shares under the agreement during the third quarter of 2018 for total proceeds of $3.1 million, net of commissions of approximately $0.1 million.

 

Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of September 30, 2018, 934,100 shares have been purchased at an average price of $3.99 per share, leaving approximately 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at November 6, 2018, was $2.49 per share.

 

Warrants

 

As discussed in Note 14, we issued 4,136,000 warrants to purchase one share of our common stock to holders of warrants to purchase Klondex common stock under the terms of the Klondex acquisition, and all of the warrants were outstanding as of September 30, 2018. 2,068,000 of the warrants have an exercise price of $8.02 and expire in April 2032. 2,068,000 of the warrants have an exercise price of $1.57 and expire in February 2029.

 

 

Note 10.    Debt, Credit Facility and Capital Leases

 

Senior Notes

 

On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and in 2014, an additional $6.5 million aggregate principal amount of the Senior Notes were issued to one of our pension plans. The Senior Notes were subsequently exchanged for substantially identical Senior Notes registered with the SEC. The Senior Notes are governed by the Indenture, dated as of April 12, 2013, as amended (the "Indenture"), among Hecla Mining Company ("Hecla") and certain of our subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from the initial offering of the Senior Notes ($490 million) were used to partially fund the acquisition of Aurizon and for general corporate purposes, including expenses related to the Aurizon acquisition.

 

The Senior Notes are recorded net of a 2% initial purchaser discount totaling $10 million at the time of the April 2013 issuance and having an unamortized balance of $3.3 million as of September 30, 2018. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. During the nine months ended September 30, 2018 and 2017, interest expense related to the Senior Notes and amortization of the initial purchaser discount and fees related to the issuance of the Senior Notes totaled $27.2 million and $26.3 million, respectively. The interest expense related to the Senior Notes for the nine months ended September 30, 2017 was net of $0.9 million in capitalized interest, primarily related to the #4 Shaft project at our Lucky Friday unit which was completed in January 2017. Interest expense for the nine months ended September 30, 2017 also included $1.1 million in costs related to our private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.

 

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

 

The Senior Notes became redeemable in whole or in part, at any time and from time to time after May 1, 2016, on the redemption dates and at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.

 

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

 

Ressources Québec Notes

 

On March 5, 2018, we entered into a note purchase agreement pursuant to which we issued CAD$40 million (approximately USD$30.8 million at the time of the transaction) in aggregate principal amount of our Series 2018-A Senior Notes due May 1, 2021 (the “RQ Notes”) to Ressources Québec, a subsidiary of Investissment Québec, a financing arm of the Québec government. The RQ Notes were issued at a discount of 0.58%, or CAD$0.2 million, and bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018. The RQ Notes are senior and unsecured and are pari passu in all material respects with the Senior Notes, including with respect to guarantees of the RQ Notes by certain of our subsidiaries. The net proceeds from the RQ Notes are required to be used for development and expansion of our Casa Berardi mine. During the nine months ended September 30, 2018, interest expense related to the RQ Notes, including discount and origination fees, totaled $1.1 million.

 

Credit Facilities

 

In July 2018, we entered into a $200 million senior secured revolving credit facility which replaced our previous $100 million credit facility and has a term ending on June 14, 2022, provided, however, that if we do not refinance our outstanding Senior Notes due May 1, 2021 by November 1, 2020, the term of the credit facility ends on November 1, 2020. The credit facility increased to $250 million in November 2018 upon satisfaction of certain conditions, including adding certain subsidiaries of Klondex as borrowers under the credit facility and pledging the assets of those subsidiaries as additional collateral under the credit facility. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture.  Below is information on the interest rates, standby fee, and financial covenant terms under our credit facility in place as of September 30, 2018:

 

Interest rates:

         

Spread over the London Interbank Offered Rate

  2.25 - 3.25%  

Spread over alternative base rate

  1.25 - 2.25%  

Standby fee per annum on undrawn amounts

    0.50%    
           

Covenant financial ratios:

         

Senior leverage ratio (debt secured by liens/EBITDA)

 

not more than 2.50:1

 

Leverage ratio (total debt less unencumbered cash/EBITDA) (1)

 

not more than 4.50:1

 

Interest coverage ratio (EBITDA/interest expense)

 

not less than 3.00:1

 

 

(1) The leverage ratio will change to 4.00:1 effective January 1, 2020.

 

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We are also able to obtain letters of credit under the facility, and for any such letters we are required to pay a participation fee of between 2.25% and 3.25% based on our total leverage ratio, as well as a fronting fee to each issuing bank of 0.20% annually on the average daily dollar amount of any outstanding letters of credit. There were $3.0 million in letters of credit outstanding as of September 30, 2018.

 

We believe we were in compliance with all covenants under the credit agreement and no amounts were outstanding as of September 30, 2018.  We drew $47.0 million on the facility in July 2018 which we repaid in September 2018. With the exception of the $3.0 million in letters of credit outstanding, we did not have a balance drawn on the revolving credit facility as of September 30, 2018.

 

As a result of the acquisition of Klondex in July 2018 (see Note 14 for more information), we assumed Klondex's revolving credit facility balance outstanding of $35.0 million. We paid the $35.0 million balance, and the Klondex credit facility was terminated, in July 2018.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units, which we have determined to be capital leases.  At September 30, 2018, the total liability balance associated with capital leases, including certain purchase option amounts, was $14.7 million, with $6.1 million of the liability classified as current and the remaining $8.6 million classified as non-current. At December 31, 2017, the total liability balance associated with capital leases was $11.8 million, with $5.6 million of the liability classified as current and $6.2 million classified as non-current. The total obligation for future minimum lease payments was $15.7 million at September 30, 2018, with $1.0 million attributed to interest.

 

At September 30, 2018, the annual maturities of capital lease commitments, including interest, are (in thousands):

 

Twelve-month period ending September 30,

       

2019

  $ 6,182  

2020

    4,727  

2021

    3,543  

2022

    1,214  

2023

    9  

Total

    15,675  

Less: imputed interest

    (1,019

)

Net capital lease obligation

  $ 14,656  

 

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Note 11.    Developments in Accounting Pronouncements

 

Accounting Standards Updates Adopted

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 deferred the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. We adopted ASU No. 2014-09 as of January 1, 2018 using the modified-retrospective transition approach. The impact of adoption of the update to our consolidated financial statements for the nine months ended September 30, 2017 would have been a reclassification of $1.2 million in doré refining costs from sales of products to cost of sales and other direct production costs.

 

We performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it does not change the timing of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from doré are recognized, and the transaction price is known, at the time the metals sold are delivered to the customer. Concentrate revenues are generally recognized at the time of shipment. Concentrates sold at our Lucky Friday unit typically leave the mine and are received by the customer within the same day. There is a period of time between shipment of concentrates from our Greens Creek unit and their physical receipt by the customer. However, based on our assessment, we believe control of the concentrate parcels is generally obtained by the customer at the time of shipment.

 

Our concentrate sales involve variable consideration, as they are subject to changes in metals prices between the time of shipment and their final settlement. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and we then adjust the values each period until final settlement. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur.

 

Adoption of ASU No. 2014-09 involves additional disclosures, where applicable, concerning (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. See Note 7 for information on our sales of products.

 

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires entities to measure equity investments that are not accounted for under the equity method at fair value, with any changes in fair value included in current earnings, and updates certain disclosure requirements. The update is effective for fiscal years beginning after December 15, 2017. We adopted ASU No. 2016-01 as of January 1, 2018 using the modified-retrospective approach, with a cumulative-effect adjustment from accumulated other comprehensive loss to retained deficit on our balance sheet of $1.3 million, net of the income