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

hl20190331_10q.htm
 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

or

 

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITES EXCHANGE ACT OF 1934

For the transition period from                  to                 .

 

 

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 N. Mineral Drive, Suite 200

     
 

Coeur d'Alene, Idaho

 

83815-9408

 
 

Address of Principal Executive Offices

 

Zip Code

 

 

208-769-4100

Registrant's Telephone Number, Including Area Code

 

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 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:

Large accelerated filer   XX. Accelerated filer     .
Non-accelerated filer      . Smaller reporting company     .
Emerging growth company     .  

 

 

Table of Contents

 

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 Act).

Yes      .    No XX.

 

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

 

Title of each class

Trading Symbol(s)

 Name of each exchange

on which registered

Common Stock, par value $0.25 per share

HL

New York Stock Exchange

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

HL-PB

New York Stock Exchange

 

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

 

 

Class

 

Shares Outstanding May 7, 2019

Common stock, par value

$0.25 per share

 

486,232,104

 

 

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Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended March 31, 2019

 

INDEX*

 

 

Page

PART I - Financial Information  
   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
   

Condensed Consolidated Balance Sheets - March 31, 2019 and December 31, 2018

3
   

Condensed Consolidated Statements of Operations and Comprehensive Income - Three Months Ended March 31, 2019 and 2018

4
   

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018

5
   

Condensed Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31, 2019 and 2018

6
   

Notes to Condensed Consolidated Financial Statements (Unaudited)

7
   

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

34
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

62
   

Item 4. Controls and Procedures

65
   
PART II - Other Information  
   

Item 1 – Legal Proceedings

65
   

Item 1A – Risk Factors

65
   

Item 4 – Mine Safety Disclosures

68
   

Item 5 – Other Information

68
   

Item 6 – Exhibits

68
   

Signatures

70

 

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

 

 

Table of Contents

 

Part I - Financial Information

 

Item 1. Financial Statements

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets

(In thousands, except shares)

 

   

March 31, 2019

   

December 31, 2018

 
    (Unaudited)        

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 11,797     $ 27,389  

Accounts receivable:

               

Trade

    9,586       4,184  

Taxes

    16,831       14,191  

Other, net

    5,162       7,443  

Inventories:

               

Concentrates, doré, and stockpiled ore

    44,610       53,172  

Materials and supplies

    34,064       34,361  

Prepaid taxes

    13,818       12,231  

Other current assets

    8,239       11,179  

Total current assets

    144,107       164,150  

Non-current investments

    6,768       6,583  

Non-current restricted cash and investments

    1,025       1,025  

Properties, plants, equipment and mineral interests, net

    2,508,981       2,520,004  

Operating lease right-of-use assets

    20,647        

Non-current deferred income taxes

    3,058       1,987  

Other non-current assets

    10,019       10,195  

Total assets

  $ 2,694,605     $ 2,703,944  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 61,680     $ 77,861  

Accrued payroll and related benefits

    36,435       30,034  

Accrued taxes

    9,109       7,727  

Current portion of finance leases

    5,858       5,264  

Current portion of operating leases

    6,701        

Current portion of accrued reclamation and closure costs

    5,325       3,410  

Accrued interest

    15,017       5,961  

Other current liabilities

    6,696       5,937  

Total current liabilities

    146,821       136,194  

Non-current finance leases

    9,302       7,871  

Non-current operating leases

    13,964        

Accrued reclamation and closure costs

    104,186       104,979  

Long-term debt

    533,723       532,799  

Non-current deferred tax liability

    159,425       173,537  

Non-current pension liability

    49,821       47,711  

Other non-current liabilities

    6,793       9,890  

Total liabilities

    1,024,035       1,012,981  

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

               

STOCKHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

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

    39       39  

Common stock, $0.25 par value, 750,000,000 shares authorized; issued and outstanding March 31, 2019 — 482,987,752 shares and December 31, 2018 — 482,603,937 shares

    122,052       121,956  

Capital surplus

    1,882,613       1,880,481  

Accumulated deficit

    (275,188

)

    (248,308

)

Accumulated other comprehensive loss

    (38,210

)

    (42,469

)

Less treasury stock, at cost; March 31, 2019 and December 31, 2018 - 5,226,791 shares issued and held in treasury

    (20,736

)

    (20,736

)

Total stockholders’ equity

    1,670,570       1,690,963  

Total liabilities and stockholders’ equity

  $ 2,694,605     $ 2,703,944  

 

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

 

3

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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

 
   

March 31, 2019

   

March 31, 2018

 

Sales of products

  $ 152,617     $ 139,709  

Cost of sales and other direct production costs

    110,386       72,869  

Depreciation, depletion and amortization

    38,787       28,054  

Total cost of sales

    149,173       100,923  

Gross profit

    3,444       38,786  

Other operating expenses:

               

General and administrative

    9,959       7,735  

Exploration

    4,402       7,360  

Pre-development

    856       1,005  

Research and development

    403       1,436  

Other operating expense

    587       515  

Suspension-related costs

    2,778       5,017  

Acquisition costs

    13       2,507  

Provision for closed operations and environmental matters

    570       1,262  

Total other operating expense

    19,568       26,837  

(Loss) income from operations

    (16,124

)

    11,949  

Other income (expense):

               

Unrealized gain on investments

    96       310  

(Loss) gain on derivative contracts

    (1,799

)

    4,007  

Net foreign exchange (loss) gain

    (3,133

)

    2,592  

Other expense

    (1,124

)

    (56

)

Interest expense

    (10,665

)

    (9,794

)

Total other expense

    (16,625

)

    (2,941

)

(Loss) income before income taxes

    (32,749

)

    9,008  

Income tax benefit (provision)

    7,216       (768

)

Net (loss) income

    (25,533

)

    8,240  

Preferred stock dividends

    (138

)

    (138

)

(Loss) income applicable to common stockholders

  $ (25,671

)

  $ 8,102  

Comprehensive (loss) income:

               

Net (loss) income

  $ (25,533

)

  $ 8,240  

Unrealized holding losses on investments

          (31

)

Change in fair value of derivative contracts designated as hedge transactions

    4,259       (2,073

)

Comprehensive (loss) income

  $ (21,274

)

  $ 6,136  

Basic (loss) income per common share after preferred dividends

  $ (0.05

)

  $ 0.02  

Diluted (loss) income per common share after preferred dividends

  $ (0.05

)

  $ 0.02  

Weighted average number of common shares outstanding - basic

    482,829       399,322  

Weighted average number of common shares outstanding - diluted

    482,829       401,923  

 

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

 

4

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Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Three Months Ended

 
   

March 31, 2019

   

March 31, 2018

 

Operating activities:

               

Net (loss) income

  $ (25,533

)

  $ 8,240  

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

               

Depreciation, depletion and amortization

    40,267       29,490  

Unrealized gain on investments

    (96

)

    (310

)

Adjustment of inventory to market value

    1,399        

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

          (129

)

Provision for reclamation and closure costs

    1,594       1,323  

Stock compensation

    1,580       1,089  

Deferred income taxes

    (8,293

)

    (438

)

Amortization of loan origination fees

    625       449  

Loss (gain) on derivative contracts

    3,686       (9,094

)

Foreign exchange loss (gain)

    5,550       (3,399

)

Other non-cash items, net

    2       2  

Change in assets and liabilities:

               

Accounts receivable

    (5,063

)

    (7,266

)

Inventories

    3,171       (6,762

)

Other current and non-current assets

    1,124       (3,171

)

Accounts payable and accrued liabilities

    (9,496

)

    13,956  

Accrued payroll and related benefits

    7,212       (3,927

)

Accrued taxes

    1,237       218  

Accrued reclamation and closure costs and other non-current liabilities

    1,064       (3,888

)

Cash provided by operating activities

    20,030       16,383  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (33,071

)

    (17,635

)

Proceeds from disposition of properties, plants and equipment

    1       151  

Purchases of investments

          (31,182

)

Maturities of investments

          30,501  

Net cash used in investing activities

    (33,070

)

    (18,165

)

Financing activities:

               

Acquisition of treasury shares

          (1,225

)

Dividends paid to common stockholders

    (1,209

)

    (998

)

Dividends paid to preferred stockholders

    (138

)

    (138

)

Credit facility fees paid

    (39

)

     

Borrowings on debt

    58,000       31,024  

Repayments of debt

    (58,000

)

     

Repayments of finance leases

    (1,261

)

    (1,322

)

Net cash (used in) provided by financing activities

    (2,647

)

    27,341  

Effect of exchange rates on cash

    95       876  

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

    (15,592

)

    26,435  

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

    28,414       187,139  

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

  $ 12,822     $ 213,574  

Significant non-cash investing and financing activities:

               

Addition of finance lease obligations and right-of-use assets

  $ 3,498     $ 2,446  
Recognition of operating lease liabilities and right-of-use assets   $ 22,365     $  

Payment of accrued compensation in stock

  $     $ 4,863  

 

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

 

5

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Hecla Mining Company and Subsidiaries

 

 

 Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

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

 

   

Three Months Ended March 31, 2019

 
   

Series B

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Accumulated

Deficit

   

Accumulated

Other

Comprehensive

Loss, net

   

Treasury

Stock

   

Total

 

Balances, January 1, 2019

  $ 39     $ 121,956     $ 1,880,481     $ (248,308

)

  $ (42,469

)

  $ (20,736

)

  $ 1,690,963  

Net loss

                            (25,533

)

                    (25,533

)

Restricted stock units granted

                    1,579                               1,579  

Common stock dividends declared ($0.0025 per common share)

                            (1,209

)

                    (1,209

)

Series B Preferred Stock dividends declared ($0.875 per share)

                            (138

)

                    (138

)

Adjustment to fair value of warrants issued for purchase of another company

                    (325

)

                            (325

)

Common stock issued for 401(k) match (384,000 shares)

            96       878                               974  

Other comprehensive income

                                    4,259               4,259  

Balances, March 31, 2019

    39       122,052       1,882,613       (275,188

)

    (38,210

)

    (20,736

)

    1,670,570  

 

 

 

   

Three Months Ended March 31, 2018

 
   

Series B

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Accumulated

Deficit

   

Accumulated

Other

Comprehensive

Loss, net

   

Treasury

Stock

   

Total

 

Balances, January 1, 2018

  $ 39     $ 100,926     $ 1,619,816     $ (218,089

)

  $ (23,373

)

  $ (18,042

)

  $ 1,461,277  

Net income

                            8,240                       8,240  

Change in accounting for marketable equity securities

                            1,289       (1,289

)

             

Restricted stock units granted

                    1,089                               1,089  

Common stock dividends declared ($0.0025 per common share)

                            (998

)

                    (998

)

Series B Preferred Stock dividends declared ($0.875 per share)

                            (138

)

                    (138

)

Common stock issued for 401(k) match (221,018 shares)

            55       839                               894  

Common stock issued for employee incentive compensation 1,237,369 shares)

            309       4,554                       (1,225

)

    3,638  

Other comprehensive income

                                    (2,105

)

            (2,105

)

Balances, March 31, 2018

    39       101,290       1,626,298       (209,696

)

    (26,767

)

    (19,267

)

    1,471,897  

 

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

 

6

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Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (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, 2018, 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.     

 

 

 

Note 2.    Investments

 

At March 31, 2019 and December 31, 2018, the fair value of our non-current investments was $6.8 million and $6.6 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value. The cost basis of our non-current investments was approximately $7.8 million and $7.7 million at March 31, 2019 and December 31, 2018, respectively. During the quarter ended March 31, 2019, we recognized $0.1 million in net unrealized gains in current earnings. During the quarter ended March 31, 2018, we recognized $0.3 million in net unrealized gains in current earnings.

 

7

 

 

Note 3.   Income Taxes

 

Major components of our income tax benefit (provision) for the three months ended March 31, 2019 and 2018 are as follows (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

Current:

               

Domestic

  $     $  

Foreign

    (1,077 )     (1,206 )

Total current income tax benefit (provision)

    (1,077 )     (1,206 )
                 

Deferred:

               

Domestic

    2,477

 

     

Foreign

    5,816

 

    438

 

Total deferred income tax benefit (provision)

    8,293

 

    438

 

Total income tax benefit (provision)

  $ 7,216

 

  $ (768 )

 

The current income tax benefit (provision) for the three months ended March 31, 2019 and 2018 varies 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 and a valuation allowance on the majority of U.S. deferred tax assets.

 

As of March 31, 2019, we have a net deferred tax liability in the U.S. of $51.6 million, a net deferred tax liability in Canada of $107.8 million and a net deferred tax asset in Mexico of $3.1 million, for a consolidated worldwide net deferred tax liability of $156.3 million.

 

With the acquisition of Klondex Mines Ltd. ("Klondex") on July 20, 2018 (see Note 13), we acquired a U.S. consolidated tax group (the "Nevada U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Hecla U.S.”). Under acquisition accounting, we recorded a net deferred tax liability of $60.2 million. For the three months ended March 31, 2019, we recorded a tax benefit of $2.5 million in the Nevada U.S. Group. Net operating losses acquired as of the acquisition date are subject to limitation under Internal Revenue Code Section 382. However, the annual limitation is not expected to have a material impact on our ability to utilize the losses.

 

For Hecla U.S., we recorded a full valuation allowance in the U.S. in December 2017 as a result of U.S. tax reform. Our circumstances at March 31, 2019 continued to support a full valuation allowance in the U.S. for Hecla U.S.

 

 

 

Note 4.    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.

 

8

 

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.

 

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 Mine 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 must still 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.

 

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. In addition to Johnny M, Hecla Limited's predecessor was involved at other mining sites within the SMCB. 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, and for any other mine site within the SMCB at which Hecla Limited's predecessor may have operated, 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 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.

 

9

 

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, including the relative contributions of contamination by various other PRPs.

 

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 of contamination by various other PRPs.

 

Potential Claim for Indemnification Against CoCa Mines, Inc.

 

In 1991, Hecla Limited acquired CoCa Mines, Inc. (“CoCa”) and its subsidiary Creede Resources, Inc. (“CRI”). CoCa and CRI previously operated in the State of Colorado, but presently have limited assets and operations. Beginning in 2014, and most recently in January 2019, a third party has alleged that CoCa and CRI are required by a 1989 agreement to indemnify it for certain environmental costs and liabilities it may incur with respect to the Nelson Tunnel/Commodore Waste Rock Pile Superfund site in Creede, Colorado. To date, no claim for indemnification has been made against CoCa or CRI; however, in January 2019, the party alleged that it may soon reach a settlement with the EPA under CERCLA with respect to the site, at which point it would then seek reimbursement from CoCa and CRI of all amounts paid to the EPA, as well as attorneys’ fees and costs. Until any such claim is made, we cannot predict whether a liability will be incurred or the amount of any such liability; however, as noted above, both CoCa and CRI have limited assets with which to satisfy any claim.

 

Montanore Project

 

In October 2018, a court in Lincoln County, Montana found that the adit (which is an underground tunnel) which we had intended to use to develop the Montanore project trespassed on certain unpatented mining claims we do not own, but through which the adit passes. In the case, which dates back to 2008, the jury delivered a verdict against certain of our subsidiaries for $3,325,000. The subsidiaries appealed the finding of trespass and the award of damages to the Montana Supreme Court, and we believe there are strong arguments for reversal. There can be no assurance that the appeal will succeed. Further, on May 6, 2019, one of the subsidiaries received a letter from the Montana Department of Environmental Quality questioning the validity of its operating permit at Montanore in light of the trespass finding. The letter gives our subsidiary 30 days to respond. As of March 31, 2019, we have accrued $1.1 million for estimated future reclamation costs at the Montanore project, and have surety bonding in place for that amount.

 

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 several 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. On December 18, 2018, the remaining three cases were consolidated into a single case, Lawson v. Klondex Mines Ltd., et al., No. 3:18-cv-00284 (D. Nev. June 15, 2018).

 

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 plaintiffs seek, among other things, to obtain rescissory damages and recover attorneys’ fees and costs.

 

10

 

Although it is not possible to predict the outcome of litigation matters with certainty, each of Klondex and its directors 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

 

As discussed in Note 9, on April 12, 2013, we completed an offering of $500 million aggregate principal amount of 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 9 for more information.

 

Other Commitments

 

Our contractual obligations as of March 31, 2019 included approximately $4.3 million for various costs. In addition, our open purchase orders at March 31, 2019 included approximately $1.5 million, $0.4 million, $3.9 million and $2.9 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 $16.2 million relating to scheduled payments on finance leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units and total commitments of approximately $22.9 million on operating leases (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of March 31, 2019, we had surety bonds totaling $185.3 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.

 

11

 

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 5.    (Loss) Earnings Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At March 31, 2019, there were 488,214,543 shares of our common stock issued and 5,226,791 shares issued and held in treasury, for a net of 482,987,752 shares outstanding. Basic and diluted (loss) earnings per common share, after preferred dividends, was $(0.05) and $0.02 for the three-month periods ended March 31, 2019 and 2018, respectively.

 

Diluted (loss) earnings per share for the three months ended March 31, 2019 and 2018 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 months ended March 31, 2019, all outstanding restricted stock units, warrants and deferred shares were excluded from the computation of diluted loss per share, as our reported net loss for that period would cause their conversion and exercise to have no effect on the calculation of loss per share. For the three-month period ended March 31, 2018, 1,092,307 restricted stock units that were unvested during the quarter and 1,509,159 in deferred shares were included in the calculation of diluted earnings per share, and there were an additional 539,204 unvested restricted stock units and 212,602 deferred shares which were not dilutive.

 

 

 

Note 6.    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 segments, which represent our operating units: 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 13 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.

 

12

 

The following tables present information about reportable segments for the three months ended March 31, 2019 and 2018 (in thousands):

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Net sales to unaffiliated customers:

               

Greens Creek

  $ 80,129     $ 65,850  

Lucky Friday

    2,182       4,977  

Casa Berardi

    40,062       55,548  

San Sebastian

    12,600       13,334  

Nevada Operations

    17,644        
    $ 152,617     $ 139,709  

Income (loss) from operations:

               

Greens Creek

  $ 25,433     $ 23,152  

Lucky Friday

    (2,781

)

    (4,146

)

Casa Berardi

    (10,519

)

    3,250  

San Sebastian

    (1,512

)

    5,017  

Nevada Operations

    (13,991

)

     

Other

    (12,754

)

    (15,324

)

    $ (16,124

)

  $ 11,949  

 

The following table presents identifiable assets by reportable segment as of March 31, 2019 and December 31, 2018 (in thousands):

 

   

March 31, 2019

   

December 31, 2018

 

Identifiable assets:

               

Greens Creek

  $ 640,241     $ 637,386  

Lucky Friday

    440,433       437,499  

Casa Berardi

    739,978       754,248  

San Sebastian

    54,152       44,152  

Nevada Operations

    575,197       581,194  

Other

    244,604       249,465  
    $ 2,694,605     $ 2,703,944  

 

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, which we currently have at our Casa Berardi, San Sebastian and Nevada Operations units, the performance obligation is met, the transaction price is known, and revenue is recognized at the time of transfer of control of the agreed-upon metal quantities to the customer by the refiner. 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.

 

13

 

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 March 31, 2019, metals contained in concentrates and exposed to future price changes totaled 0.9 million ounces of silver, 4,096 ounces of gold, 11,108 tons of zinc, and 1,814 tons of lead.  However, as discussed in Note 11, 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 March 31,

 
   

2019

   

2018

 
                 

Greens Creek

    53

%

    46

%

Lucky Friday

    1

%

    4

%

Casa Berardi

    26

%

    40

%

San Sebastian

    8

%

    10

%

Nevada Operations

    12

%

   

%

      100

%

    100

%

 

14

 

Sales of products by metal for the thee-month periods ended March 31, 2019 and 2018 were as follows (in thousands):

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Silver

  $ 45,506     $ 35,222  

Gold

    79,679       73,044  

Lead

    9,025       9,227  

Zinc

    24,755       30,109  

Less: Smelter and refining charges

    (6,348

)

    (7,893

)

Sales of products

  $ 152,617     $ 139,709  

 

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-month periods ended March 31, 2019 and 2018 (in thousands):

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Canada

  $ 92,872     $ 88,668  

Korea

    49,300       32,703  

Japan

    8,350       13,773  

United States

    4,571       4,081  

Other

          (131

)

Total, excluding gains/losses on forward contracts

  $ 155,093     $ 139,094  

 

Sales by significant product type for the three-month periods ended March 31, 2019 and 2018 were as follows (in thousands):

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Doré and metals from doré

  $ 75,901     $ 73,492  

Lead concentrate

    49,300       34,334  

Zinc concentrate

    23,792       25,652  

Bulk concentrate

    6,100       5,616  

Total, excluding gains/losses on forward contracts

  $ 155,093     $ 139,094  

 

Sales of products for the first three months of 2019 and 2018 included net losses of $2.5 million and net gains of $0.6 million, respectively, on financially-settled forward contracts for silver, gold, lead and zinc contained in our concentrate sales.  See Note 11 for more information.

 

15

 

Sales of products to significant customers as a percentage of total sales were as follows for the three-month periods ended March 31, 2019 and 2018:

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

CIBC

    16

%

    47

%

Scotia

    29

%

    2

%

Korea Zinc

    20

%

    23

%

Teck Metals Ltd.

    15

%

    4

%

Trafigura

    12

%

   

%

Ocean Partners

   

%

    10

%

 

Our trade accounts receivable balance related to contracts with customers was $9.6 million at March 31, 2019 and $4.2 million at December 31, 2018, 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 March 31, 2019 or December 31, 2018.

 

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. In the first quarter of 2019 and 2018, suspension costs not related to production of $1.9 million and $4.1 million, respectively, along with $0.9 million in non-cash depreciation expense in each of those periods, 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 March 31, 2019 was approximately $435.9 million. However, Lucky Friday has significant identified reserves and mineralized material and a current estimated mine life of approximately 17 years.

 

16

 

 

Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Service cost

  $ 1,100     $ 1,252  

Interest cost

    1,620       1,377  

Expected return on plan assets

    (1,496

)

    (1,634

)

Amortization of prior service cost

    15       15  

Amortization of net loss

    1,097       931  

Net periodic pension cost

  $ 2,336     $ 1,941  

 

The service cost component of net periodic benefit cost is included in the same line items of our condensed consolidated financial statements as other employee compensation costs, and the net expense for the three months ended March 31, 2019 and 2018 of $1.2 million and $0.7 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 (loss) income.

 

We expect to contribute $2.2 million in cash or shares of our common stock to our defined benefit plans in 2019. We expect to contribute approximately $0.6 million to our unfunded supplemental executive retirement plan during 2019.

 

 

 

Note 8.    Stockholders’ Equity

 

Stock-based Compensation Plans

 

We periodically grant restricted stock unit awards, performance-based shares 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.

 

Stock-based compensation expense for restricted stock unit and performance-based grants to employees and shares issued to nonemployee directors totaled $1.6 million for the first three months of 2019 and $1.1 million for the first three months of 2018.

 

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 three months of 2018 we withheld 335,349 shares valued at approximately $1.2 million, or approximately $3.65 per share, with no shares withheld in the first three months of 2019.

 

17

 

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 May 7, 2019, 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 June 2019. Because the average realized silver price for the first quarter of 2019 was $15.70 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.

 

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 a shelf registration statement on Form S-3. As of March 31, 2019, we had sold 7,173,614 shares under the agreement for total proceeds of approximately $24.5 million, net of commissions of approximately $0.6 million. No shares were sold under the agreement during the first quarter of 2019.

 

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 March 31, 2019, 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 May 7, 2019, was $2.10 per share. No shares were purchased under the program during the first quarter of 2019.

 

Warrants

 

As discussed in Note 13, 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 March 31, 2019. Warrants to purchase 2,068,000 shares of common stock have an exercise price of $8.02 and expire in April 2032. Warrants to purchase 2,068,000 shares of common stock have an exercise price of $1.57 and expire in February 2029.

 

18

 

 

Note 9.    Debt, Credit Facilities and 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 was 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 $2.7 million as of March 31, 2019. 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 each of the three month periods ended March 31, 2019 and 2018, 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 $9.1 million.

 

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.  As of May 1, 2019, the redemption price is 100% of the outstanding principal amount.

 

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. Because the RQ notes are denominated in CAD, the reported USD-equivalent principal balance changes with movements in the exchange rate. 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 were required to be used for development and expansion of our Casa Berardi mine. During each of the three month periods ended March 31, 2019 and 2018, interest expense related to the RQ Notes, including discount and origination fees, totaled $0.4 million.

 

19

 

As of March 31, 2019, the annual future obligations related to our debt, including interest, were (in thousands):

 

Twelve-month period ending March 31,

 

Senior Notes

   

RQ Notes

   

Total

 

2020 (interest only)

  $ 34,822     $ 1,401     $ 36,223  

2021 (principal and interest)

    544,224       31,449     $ 575,673  

Total

    579,046       32,850       611,896  

Less: interest

    (72,546

)

    (2,919

)

  $ (75,465

)

Principal

    506,500       29,931       536,431  

Less: unamortized discount

    (2,708

)

        $ (2,708

)

Long-term debt

  $ 503,792     $ 29,931     $ 533,723  

 

Credit Facilities

 

In July 2018, we entered into a $250 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 by November 1, 2020, the term of the credit facility ends on November 1, 2020. The credit facility is collateralized by the assets of certain of our subsidiaries, 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 current credit facility as of March 31, 2019:

 

Interest rates:

         

Spread over the London Interbank Offer Rate

  2.25

-

3.25%  

Spread over alternative base rate

  1.25

-

2.25%  

Standby fee per annum on undrawn amounts

   

0.50%

   
           

Covenant financial ratios:

         

Senior leverage ratio (debt secured by liens/EBITDA)

 

not more than 2.50:1

 

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

 

not more than 4.50:1

 

Interest coverage ratio (EBITDA/interest expense)

 

not less than 3.00:1

 

 

(1) The leverage ratio changed to 5.00:1 effective April 1, 2019, will return to 4.50:1 effective October 1, 2019, and then change to 4.00:1 effective January 1, 2020.

 

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 March 31, 2019.

 

We believe we were in compliance with all covenants under the credit agreement as of March 31, 2019, and no amounts were outstanding as of that date.  We drew $58.0 million on the facility during the first quarter of 2019 and repaid that amount in the same period. There was $85.0 million drawn on the facility as of the date of this report.

 

20

 

Finance 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 finance leases.  At March 31, 2019, the total liability balance associated with the finance leases, including certain purchase option amounts, was $15.2 million, with $5.9 million of the liability classified as current and the remaining $9.3 million classified as non-current. At December 31, 2018, the total liability balance associated with finance leases was $13.1 million, with $5.3 million of the liability classified as current and the remaining $7.9 million classified as non-current. The right-of-use assets for our finance leases are recorded in properties, plants, equipment and mineral interests, net, on our condensed consolidated balance sheets and totaled $21.9 million as of March 31, 2019 and $20.0 million as of December 31, 2018, net of accumulated depreciation. Expense during the first quarter of 2019 related to finance leases included $1.6 million for amortization of the right-of-use assets and $0.2 million for interest expense. The total obligation for future minimum payments on finance leases was $16.2 million at March 31, 2019, with $1.0 million attributed to interest.

 

At March 31, 2019, the annual maturities of finance lease commitments, including interest, were (in thousands):

 

Twelve-month period ending March 31,

       

2020

  $ 5,903  

2021

    5,409  

2022

    3,754  

2023

    1,119  

Total

    16,185  

Less: imputed interest

    (1,025

)

Finance lease liability

  $ 15,160  

 

Operating Leases

 

We have entered into various lease agreements, primarily for equipment, buildings and other facilities, and land at our operating units and corporate offices, which we have determined to be operating leases.  Some of the operating leases allow for extension of the lease beyond the current term at our option. We have considered the likelihood and estimated duration of the extension options in determining the lease term for measurement of the liability and right-of-use asset. For our operating leases as of March 31, 2019, we have assumed discount rates of between 5% and 6.5%. At March 31, 2019, the total liability balance associated with the operating leases was $20.7 million, with $6.7 million of the liability classified as current and the remaining $14.0 million classified as non-current. The right-of-use assets for our operating leases are recorded as a non-current asset on our condensed consolidated balance sheets and totaled $20.6 million as of March 31, 2019. Lease expense on operating leases during the first quarter of 2019 totaled $2.1 million. The total obligation for future minimum operating lease payments, including assumed extensions beyond the current lease terms, was $22.9 million at March 31, 2019.

 

At March 31, 2019, the annual maturities of undiscounted operating lease payments, including assumed extensions beyond the current lease terms, were (in thousands):

 

 

Twelve-month period ending March 31,

       

2020

  $ 9,213  

2021

    4,960  

2022

    3,373  

2023

    2,331  

2024

    1,670  

More than 5 years

    1,352  

Total

    22,899  

Effect of discounting

    (2,234

)

Operating lease liability

  $ 20,665  

 

21

 

 

Note 10.    Developments in Accounting Pronouncements

 

Accounting Standards Updates Adopted

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modified the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update was effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We adopted the guidance effective January 1, 2019, and recognized a liability and right-of-use asset of $22.4 million as of that date for our identified operating leases. We elected the transition option to apply the new guidance as of that effective date without adjusting comparative periods presented. In the adoption of ASU No. 2016-02, we elected to not assess leases with terms less than twelve months in length. We also elected practical expedients which permitted us to forgo reassessing the following upon adoption: (i) whether any expired or existing contracts are or contain leases, (ii) the classification of leases as operating or capital under the previous accounting guidance, and (iii) treatment of initial indirect costs for any existing leases. In addition, we elected to not reassess whether land easements represent leases, as we did not treat them as leases under the previous guidance. See Note 9 for information on our leases.

 

In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements, and simplify the application of existing hedge accounting guidance. The update was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this update as of January 1, 2019 did not have a material impact on our consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in the update allow a reclassification from other comprehensive income to retained earnings for "stranded" tax effects resulting from the reduction in the historical corporate tax rate under the Tax Cuts and Jobs Act enacted in December 2017. The update was effective for fiscal years beginning after December 15, 2018. We elected to not reclassify stranded tax effects, and adoption of this update as of January 1, 2019 did not have a material impact on our consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07 Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The update involves simplification of several aspects of accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718 to include nonemployee awards. The update was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this update as of January 1, 2019 did not have a material impact on our consolidated financial statements.

 

Accounting Standards Updates to Become Effective in Future Periods

 

In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and makes additions to certain disclosure requirements with respect to fair value measurements. The update is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact of this update on our fair value measurement disclosures.

 

In August 2018, the FASB issued ASU No. 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The update removes several disclosure requirements, adds two new disclosure requirements, and clarifies other disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The update is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact of this update on our disclosures involving our defined benefit pension plans.

 

22

 

 

Note 11.    Derivative Instruments

 

Foreign Currency

 

Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are U.S. dollar ("USD")-functional entities which routinely incur expenses denominated in Canadian dollar ("CAD") and Mexican peso ("MXN"), respectively, and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of March 31, 2019, we have 130 forward contracts outstanding to buy CAD$284.1 million having a notional amount of USD$219.6 million, and 19 forward contracts outstanding to buy MXN$99.5 million having a notional amount of USD$4.9 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2019 through 2022 and have CAD-to-USD exchange rates ranging between 1.2702 and 1.3306. The MXN contracts are related to forecasted cash operating costs at San Sebastian to be incurred from 2019 through 2020 and have MXN-to-USD exchange rates ranging between 19.9400 and 20.8550. Our risk management policy provides that up to 75% of our planned cost exposure for five years into the future may be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of March 31, 2019, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $0.2 million, which is included in other current assets;

 

a current liability of $2.0 million, which is included in other current liabilities; and

 

a non-current liability of $2.7 million, which is included in other non-current liabilities.

 

Net unrealized losses of approximately $4.5 million related to the effective portion of the hedges were included in accumulated other comprehensive loss as of March 31, 2019. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $1.7 million in net unrealized gains included in accumulated other comprehensive loss as of March 31, 2019 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $0.5 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the three months ended March 31, 2019.

 

Metals Prices

 

We may at times use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in market prices. Our risk management policy allows for up to 75% of our planned metals price exposure for five years into the future, with certain other limitations, to be hedged under such programs. These instruments do, however, expose us to (i) credit risk in the form of non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we currently use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments. These contracts are not designated as hedges and are marked-to-market through earnings each period.

 

23

 

As of March 31, 2019, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $0.2 million, which is included in other current assets and is net of $0.1 million for contracts in a fair value liability position;

 

a non-current asset of $45 thousand, which is included in other non-current assets;

 

a current liability of $4.0 million, which is included in other current liabilities and is net of $0.1 million for contracts in a fair value current asset position; and

 

a non-current liability of $13 thousand, which is included in other non-current liabilities.

 

We recognized a $2.5 million net loss during the first quarter of 2019 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $1.8 million net loss during the first quarter of 2019 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net loss for the first quarter of 2019 is the result of an increase in zinc and lead prices. This program, when utilized, is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below). When those prices increase compared to the contract prices, we incur losses on the contracts.

 

The following tables summarize the quantities of metals committed under forward sales contracts at March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2019 settlements

    710       3       19,952       2,646     $ 15.46     $ 1,316     $ 1.22     $ 0.92  

Contracts on forecasted sales

                                                               

2019 settlements

                26,180       1,653       N/A       N/A     $ 1.25     $ 0.96  

2020 settlements

                276       551       N/A       N/A     $ 1.26     $ 0.96  

 

 

December 31, 2018

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2019 settlements

    842       4       18,450       2,700     $ 14.69     $ 1,260     $ 1.15     $ 0.89  

 

24

 

Credit-risk-related Contingent Features

 

Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contract. As of March 31, 2019, we have not posted any collateral related to these contracts. The fair value of derivatives in a net liability position related to these agreements was $9.0 million as of March 31, 2019, which includes accrued interest but excludes any adjustment for nonperformance risk. If we were in breach of any of these provisions at March 31, 2019, we could have been required to settle our obligations under the agreements at their termination value of $9.0 million.

 

 

 

Note 12.    Fair Value Measurement

 

Accounting guidance has established a hierarchy for inputs used to measure assets and liabilities at fair value on a recurring basis. The three levels included in the hierarchy are:

 

Level 1: quoted prices in active markets for identical assets or liabilities;

 

Level 2: significant other observable inputs; and

 

Level 3: significant unobservable inputs.

 

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

 

Description

 

Balance at

March 31, 2019

   

Balance at

December 31, 2018

 

Input

Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 11,797     $ 27,389  

Level 1

Available for sale securities:

                 

Equity securities – mining industry

    6,768       6,583  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    9,586       4,184  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other bank deposits

    1,025       1,025  

Level 1

Derivative contracts:

                 

Metal forward contracts

    207       209  

Level 2

Foreign exchange contracts

    153       23  

Level 2

Total assets

  $ 29,536     $ 39,413    
                   

Liabilities:

                 

Derivative contracts:

                 

Metal forward contracts

  $ 4,057     $ 373  

Level 2

Foreign exchange contracts

    4,649       8,595  

Level 2

Total Liabilities

  $ 8,706     $ 8,968    

 

Cash and cash equivalents consist primarily of money market funds and are valued at cost, which approximates fair value, and a small portion consists of municipal bonds having maturities of less than 90 days, which are recorded at fair value.

 

25

 

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

 

Our non-current available for sale securities consist of marketable equity securities of companies in the mining industry which are valued using quoted market prices for each security.

 

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

 

We use financially-settled forward contracts to manage exposure to changes in the exchange rate between USD and CAD and MXN, and the impact on CAD- and MXN-denominated operating costs incurred at our Casa Berardi and San Sebastian units (see Note 11 for more information). These contracts qualify for hedge accounting, with unrealized gains and losses related to the effective portion of the contracts included in accumulated other comprehensive loss, and unrealized gains and losses related to the ineffective portion of the contracts included in earnings each period. The fair value of each contract represents the present value of the difference between the forward exchange rate for the contract settlement period as of the measurement date and the contract settlement exchange rate.

 

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

 

Our Senior Notes, which were recorded at their carrying value of $503.8 million, net of unamortized initial purchaser discount at March 31, 2019, had a fair value of $508.0 million at March 31, 2019. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information.

 

26

 

 

Note 13. Acquisition of Klondex

 

On July 20, 2018, we acquired all of the issued and outstanding common shares of Klondex Mines Ltd. ("Klondex") for consideration valued at $2.27 per Klondex share (the "Arrangement"). The acquisition resulted in our 100% ownership of three land packages in northern Nevada totaling approximately 110 square miles and containing operating or previously-operating mines with a history of high-grade gold production, along with various other gold properties. We believe the acquisition has the potential to increase our annual gold production. Under the terms of the Arrangement, each holder of Klondex common shares had the option to receive either (i) $2.47 in cash per Klondex share (the “Cash Alternative”), (ii) 0.6272 of a Hecla share per Klondex share (the “Share Alternative”), or (iii) US$0.8411 in cash and 0.4136 of a Hecla share per Klondex share (the “Combined Alternative”), subject in the case of the Cash Alternative and the Share Alternative to pro-ration based on a maximum cash consideration of $153.2 million and a maximum number of Hecla shares issued of 75,276,176. Klondex shareholders also received shares of a newly formed company which holds the Canadian assets previously owned by Klondex (Havilah Mining Corporation ("Havilah")). Klondex had 180,499,319 issued and outstanding common shares prior to consummation of the Arrangement. An additional 1,549,626 Klondex common shares were issued immediately prior to consummation of the Arrangement related to conversion of in-the-money Klondex options and certain outstanding restricted share units, resulting in a total of 182,048,945 issued and outstanding Klondex common shares at the time of consummation of the Arrangement. In connection with the Arrangement, we also issued an aggregate of 4,136,000 warrants to purchase one share of our common stock (“Hecla Warrants”) to holders of warrants to purchase Klondex common shares. Of the Hecla Warrants, 2,068,000 have an exercise price of $8.02 and expire in April 2032, and 2,068,000 have an exercise price of $1.57 and expire in February 2029. In addition, we settled share-based payment awards held by Klondex directors and employees for cash of $2.0 million. Consideration for the Arrangement was cash of $161.7 million, 75,276,176 shares of our common stock valued at $242.4 million, and issuance of the Hecla Warrants valued at $9.8 million, for total consideration of $413.9 million. The Hecla Warrants were valued using the Black-Scholes model and based on the exercise price and term of the warrants, the price of our common stock at the time of issuance of the warrants, and assumptions for the discount rate and volatility and dividend rate of our common stock. The cash consideration includes $7.0 million for our subscription for common shares of Havilah and $1.5 million for settlement of certain equity compensation instruments.

 

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

 

Consideration:

       

Cash payments

  $ 161,704  

Hecla stock issued (75,276,176 shares at $3.22 per share)

    242,389  

Hecla warrants issued

    9,830  

Total consideration

  $ 413,923  
         

Fair value of net assets acquired:

       

Assets:

       

Cash

  $ 12,874  

Accounts receivable

    3,453  

Inventory - supplies

    6,564  

Inventory - finished goods, in-process material and stockpiled ore

    10,088  

Other current assets

    2,583  

Properties, plants, equipment and mineral interests

    512,807  

Non-current investments

    1,596  

Non-current restricted cash and investments

    9,504  

Total assets

    559,469  

Liabilities:

       

Accounts payable and accrued liabilities

    17,799  

Accrued payroll and related benefits

    10,352  

Accrued taxes

    421  

Lease liability

    2,080  

Debt

    35,086  

Asset retirement obligation

    19,571  

Deferred tax liability

    60,237  

Total liabilities

    145,546  

Net assets

  $ 413,923  

 

27

 

The allocation of purchase price above is preliminary, as the valuation of certain components of properties, plants, equipment and mineral interests, along with the related deferred tax balances, are under review and subject to change. In the first quarter of 2019, we adjusted the previously-reported preliminary allocation of purchase price by decreasing (i) Inventory - finished goods, in-process material and stockpiled ore, (ii) Properties, plants, equipment and mineral interests, and (iii) Non-current deferred tax liability by $0.2 million, $8.7 million, and $9.1 million, respectively, and increasing Accounts payable and accrued liabilities by $0.5 million. We are currently undertaking a review of spending at the Nevada operations which may result in the following changes at the Fire Creek mine: a reduction in capital spending; ceasing current production and only developing to spirals 9,10 and 11; or a temporary cessation of all mine operations at Fire Creek. As a result, the values of certain components of properties, plants, equipment and mineral interests could be adjusted in the second quarter of 2019 when we expect to finalize the allocation of the Klondex purchase price. The outcome of the review may constitute a triggering event requiring assessment of the carrying value of our long-lived assets at Fire Creek with the potential to impact near-term estimated cash flows. The mineral interests at Fire Creek have a preliminary carrying value of approximately $220 million, of which approximately $46 million is depletable. We may recognize an impairment, which could be material, if the carrying value of the assets exceeds the estimated future undiscounted cash flows expected to result from their use and eventual disposition.

 

 

 

Note 14.   Guarantor Subsidiaries

 

Presented below are Hecla’s unaudited interim condensed consolidating financial statements as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended, resulting from the guarantees by certain of Hecla's subsidiaries (the "Guarantors") of the Senior Notes and RQ Notes (see Note 9 for more information). The Guarantors consist of the following of Hecla's 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Mines Management, Inc.; Newhi, Inc.; Montanore Minerals Corp.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; Hecla Juneau Mining Company; Klondex Holdings Inc.; Klondex Gold & Silver Mining Co.; Klondex Midas Holdings Limited; Klondex Aurora Mine Inc.; and Klondex Hollister Mine Inc. We completed the initial offering of the Senior Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014. We issued the RQ Notes on March 5, 2018.

 

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

 

 

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

 

 

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

 

 

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

 

28

 

 

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

 

 

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

 

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

 

Unaudited Interim Condensed Consolidating Balance Sheets

 

   

As of March 31, 2019

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 3,401     $ 3,269     $ 5,127     $     $ 11,797  

Other current assets

    6,359       61,293       64,732       (74

)

    132,310  

Properties, plants, and equipment - net

    1,913       1,792,578       714,490             2,508,981  

Intercompany receivable (payable)

    162,575       (342,867

)

    (182,748

)

    363,040        

Investments in subsidiaries

    1,554,448                   (1,554,448

)

     

Other non-current assets

    278,379       23,540       (115,696

)

    (144,706

)

    41,517  

Total assets

  $ 2,007,075     $ 1,537,813     $ 485,905     $ (1,336,188

)

  $ 2,694,605  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ (247,045

)

  $ 118,535     $ 49,545     $ 225,786     $ 146,821  

Long-term debt

    533,723       19,682       3,584             556,989  

Non-current portion of accrued reclamation

          90,083       14,103             104,186  

Non-current deferred tax liability

          71,173       95,778       (7,526

)

    159,425  

Other non-current liabilities

    49,827       5,871       916             56,614  

Stockholders' equity

    1,670,570       1,232,469       321,979       (1,554,448

)

    1,670,570  

Total liabilities and stockholders' equity

  $ 2,007,075     $ 1,537,813     $ 485,905     $ (1,336,188 )   $ 2,694,605  

 

29

 

   

As of December 31, 2018

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 6,265     $ 8,661     $ 12,463     $     $ 27,389  

Other current assets

    6,388       69,574       60,868       (69

)

    136,761  

Properties, plants, and equipment - net

    1,913       1,795,994       722,097             2,520,004  

Intercompany receivable (payable)

    171,905       (222,815

)

    (171,834

)

    222,744        

Investments in subsidiaries

    1,577,564                   (1,577,564

)

     

Other non-current assets

    276,641       9,030       (122,969

)

    (142,912

)

    19,790  

Total assets

  $ 2,040,676     $ 1,660,444     $ 500,625     $ (1,497,801

)

  $ 2,703,944  

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ (234,133

)

  $ 118,863     $ 45,922     $ 205,542     $ 136,194  

Long-term debt

    532,799       141,870       1,989       (135,988

)

    540,670  

Non-current portion of accrued reclamation

          94,602       10,377             104,979  

Non-current deferred tax liability

          64,639       98,689       10,209       173,537  

Other non-current liabilities

    51,047       5,659       895             57,601  

Stockholders' equity

    1,690,963       1,234,811       342,753       (1,577,564

)

    1,690,963  

Total liabilities and stockholders' equity

  $ 2,040,676     $ 1,660,444     $ 500,625     $ (1,497,801

)

  $ 2,703,944  

 

30

 

Unaudited Interim Condensed Consolidating Statements of Operations

 

   

Three Months Ended March 31, 2019

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (2,477

)

  $ 102,432     $ 52,662     $     $ 152,617  

Cost of sales

    (461

)

    (66,869

)

    (43,056

)

          (110,386

)

Depreciation, depletion, amortization

          (20,872

)

    (17,915

)

          (38,787

)

General and administrative

    (4,393

)

    (5,111

)

    (455

)

          (9,959

)

Exploration and pre-development

    (16

)

    (1,544

)

    (3,698

)

          (5,258

)

Research and development

          (353

)

    (50

)

          (403

)

Loss on derivative contracts

    (1,799

)

                      (1,799

)

Acquisition costs

    42       (55

)

                (13

)

Equity in earnings of subsidiaries

    (22,433

)

                22,433        

Other (expense) income

    6,004       (5,730

)

    (12,642

)

    (6,393

)

    (18,761

)

(Loss) income before income taxes

    (25,533

)

    1,898       (25,154

)

    16,040       (32,749

)

(Provision) benefit from income taxes

          (3,916

)

    4,739       6,393       7,216  

Net (loss) income

    (25,533

)

    (2,018

)

    (20,415

)

    22,433       (25,533

)

Preferred stock dividends

    (138

)

                      (138

)

(Loss) income applicable to common stockholders

    (25,671

)

    (2,018

)

    (20,415

)

    22,433       (25,671

)

Net (loss) income

    (25,533

)

    (2,018

)

    (20,415

)

    22,433       (25,533

)

Changes in comprehensive (loss) income

    4,259                         4,259  

Comprehensive (loss) income

  $ (21,274

)

  $ (2,018

)

  $ (20,415

)

  $ 22,433     $ (21,274

)

 

31

 

   

Three Months Ended March 31, 2018

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ 615     $ 70,211     $ 68,883     $     $ 139,709  

Cost of sales

    475       (34,701

)

    (38,643

)

          (72,869

)

Depreciation, depletion, amortization

          (11,260

)

    (16,794

)

          (28,054

)

General and administrative

    (3,833

)

    (3,448

)

    (454

)

          (7,735

)

Exploration and pre-development

    (55

)

    (1,939

)

    (6,371

)

          (8,365

)

Research and development

          (482

)

    (954

)

          (1,436

)

Gain on derivative contracts

    4,007                         4,007  

Acquisition costs

    (2,360

)

          (147

)

          (2,507

)

Equity in earnings of subsidiaries

    17,768                   (17,768

)

     

Other (expense) income

    (8,377

)

    (6,794

)

    6,917       (5,488

)

    (13,742

)

Income (loss) before income taxes

    8,240       11,587       12,437       (23,256

)

    9,008  

(Provision) benefit from income taxes

          (5,488

)

    (768

)

    5,488       (768

)

Net income (loss)

    8,240       6,099       11,669       (17,768

)

    8,240  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    8,102       6,099       11,669       (17,768

)

    8,102  

Net income (loss)

    8,240       6,099       11,669       (17,768

)