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

hl20190930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

[X]

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

For the quarterly period ended September 30, 2019

 

or

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 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

 

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 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___.

 

 

Table of Contents

 

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     .

 

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.

 

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

 

Class

 

Shares Outstanding November 5, 2019

Common stock, par value $0.25 per share

 

495,540,493

 

 

Table of Contents

 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended September 30, 2019

 

INDEX*

 

 

   

Page

PART I - Financial Information

 
     
 

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 
     
 

Condensed Consolidated Balance Sheets - September 30, 2019 and December 31, 2018

3

     
 

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended and Nine Months Ended September 30, 2019 and 2018

5

     
 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2019 and 2018

7

     
 

Condensed Consolidated Statements of Changes in Stockholders' Equity Three Months Ended and Nine Months Ended September 30, 2019 and 2018

8

     
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

10

     
 

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

39

     
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

77

     
 

Item 4. Controls and Procedures

79

     

PART II - Other Information

 
     
 

Item 1 – Legal Proceedings

80

     
 

Item 1A – Risk Factors

80

     
 

Item 4 – Mine Safety Disclosures

80

     
 

Signatures

86

 

 

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

 

2

Table of Contents

 

Part I - Financial Information

 

Item 1. Financial Statements

 

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

   

September 30,

2019

   

December 31,

2018

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 32,995     $ 27,389  

Accounts receivable:

               

Trade

    6,222       4,184  

Taxes

    22,902       14,191  

Other, net

    8,056       7,443  

Inventories:

               

Concentrates, doré, and stockpiled ore

    63,164       53,172  

Materials and supplies

    35,087       34,361  

Prepaid taxes

    100       12,231  

Other current assets

    10,400       11,179  

Total current assets

    178,926       164,150  

Non-current investments

    7,349       6,583  

Non-current restricted cash and investments

    1,025       1,025  

Properties, plants, equipment and mineral interests, net

    2,455,511       2,520,004  

Operating lease right-of-use assets

    17,313        

Non-current deferred income taxes

    3,701       1,987  

Other non-current assets and deferred charges

    9,353       10,195  

Total assets

  $ 2,673,178     $ 2,703,944  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 57,860     $ 77,861  

Accrued payroll and related benefits

    23,147       30,034  

Accrued taxes

    2,160       7,727  

Current portion of finance leases

    5,704       5,264  

Current portion of operating leases

    5,864        

Current portion of accrued reclamation and closure costs

    7,457       3,410  

Accrued interest

    15,039       5,961  
Deferred revenue     20,084        

Other current liabilities

    8,528       5,937  

Total current liabilities

    145,843       136,194  

Non-current finance leases

    8,569       7,871  

Non-current operating leases

    11,466        

Accrued reclamation and closure costs

    103,821       104,979  

Long-term debt

    584,618       532,799  

Non-current deferred tax liability

    143,442       173,537  

Non-current pension liability

    50,662       47,711  

Other non-current liabilities

    8,113       9,890  

Total liabilities

    1,056,534       1,012,981  

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

           

SHAREHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

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

    39       39  

Common stock, $0.25 par value, 750,000,000 authorized shares; issued 2019 — 496,538,038 shares and 2018 — 487,830,728 shares

    124,133       121,956  

Capital surplus

    1,897,363       1,880,481  

Accumulated deficit

    (343,958

)

    (248,308

)

Accumulated other comprehensive loss

    (37,958

)

    (42,469

)

Less treasury stock, at cost; 2019 — 6,287,271 and 2018 — 5,226,791 shares issued and held in treasury

    (22,975

)

    (20,736

)

Total shareholders’ equity

    1,616,644       1,690,963  

Total liabilities and shareholders’ equity

  $ 2,673,178     $ 2,703,944  

 

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

 

3

Table of Contents

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2019

   

September 30,

2018

   

September 30,

2019

   

September 30,

2018

 
                                 

Sales of products

  $ 161,532     $ 143,649     $ 448,321     $ 430,617  

Cost of sales and other direct production costs

    95,878       93,609       311,202       246,918  

Depreciation, depletion and amortization

    50,774       43,464       139,038       103,335  

Total cost of sales

    146,652       137,073       450,240       350,253  

Gross profit

    14,880       6,576       (1,919

)

    80,364  

Other operating expenses:

                               

General and administrative

    7,978       10,327       26,855       27,849  

Exploration

    4,808       12,411       13,556       27,609  

Pre-development

    881       1,195       2,535       3,615  

Research and development

    53       1,269       614       5,042  

Other operating expense

    437       448       1,681       1,767  

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

    24       (3,208

)

    4,666       (3,374

)

Provision for closed operations and reclamation

    1,907       1,852       3,529       4,534  

Suspension-related costs

    3,722       6,519       8,766       18,337  

Acquisition costs

    183       6,139       593       9,656  

Total other operating expense

    19,993       36,952       62,795       95,035  

Income (loss) from operations

    (5,113

)

    (30,376

)

    (64,714

)

    (14,671

)

Other income (expense):

                               

(Loss) gain on derivative contracts

    (4,718

)

    19,460       (2,719

)

    40,271  

Gain (loss) on disposition of investments

    927       (36

)

    927       (36

)

Unrealized loss on investments

    (126

)

    (2,207

)

    (1,159

)

    (2,461

)

Foreign exchange gain (loss)

    773       (2,212

)

    (6,741

)

    2,856  

Other expense

    (1,096

)

    (346

)

    (3,407

)

    (294

)

Interest expense

    (11,777

)

    (10,146

)

    (33,777

)

    (30,019

)

Total other (expense) income

    (16,017

)

    4,513       (46,876

)

    10,317  

Loss before income taxes

    (21,130

)

    (25,863

)

    (111,590

)

    (4,354

)

Income tax benefit

    1,614       2,679       20,009       1,484  

Net loss

    (19,516

)

    (23,184

)

    (91,581

)

    (2,870

)

Preferred stock dividends

    (138

)

    (138

)

    (414

)

    (414

)

Loss applicable to common shareholders

  $ (19,654

)

  $ (23,322

)

  $ (91,995

)

  $ (3,284

)

Comprehensive loss:

                               

Net loss

  $ (19,516

)

  $ (23,184

)

  $ (91,581

)

  $ (2,870

)

Change in fair value of derivative contracts designated as hedge transactions

    (3,288

)

    3,743       4,511       (3,533

)

Unrealized holding gains on investments

          3             13  

Comprehensive loss

  $ (22,804

)

  $ (19,438

)

  $ (87,070

)

  $ (6,390

)

Basic loss per common share after preferred dividends

  $ (0.04

)

  $ (0.05

)

  $ (0.19

)

  $ (0.01

)

Diluted loss per common share after preferred dividends

  $ (0.04

)

  $ (0.05

)

  $ (0.19

)

  $ (0.01

)

Weighted average number of common shares outstanding - basic

    489,971       452,636       486,298       417,532  

Weighted average number of common shares outstanding - diluted

    489,971       452,636       486,298       417,532  

Cash dividends declared per common share

  $ 0.0025     $ 0.0025     $ 0.0075     $ 0.0075  

 

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

 

4

Table of Contents

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Nine Months Ended

 
   

September 30,

2019

   

September 30,

2018

 
                 

Operating activities:

               

Net loss

  $ (91,581

)

  $ (2,870

)

Non-cash elements included in net loss:

               

Depreciation, depletion and amortization

    143,040       108,814  

Gain on disposition of investments

    (927

)

     

Unrealized loss on investments

    1,159       2,461  

Adjustment of inventory to market value

    1,399       7,232  

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

    4,666       (3,374

)

Provision for reclamation and closure costs

    5,298       3,957  

Stock compensation

    4,758       4,672  

Deferred income taxes

    (26,616

)

    (4,637

)

Amortization of loan origination fees

    1,919       1,471  

Loss (gain) on derivative contracts

    5,824       (15,208

)

Foreign exchange loss (gain)

    6,263       (2,032

)

Other non-cash items, net

          (37

)

Change in assets and liabilities, net of business acquisitions:

               

Accounts receivable

    (10,215

)

    (4,424

)

Inventories

    (6,501 )     (18,954

)

Other current and non-current assets

    14,913       (5,569

)

Accounts payable and accrued liabilities

    5,616

 

    12,308  

Accrued payroll and related benefits

    4,506       (4,207

)

Accrued taxes

    (5,733

)

    845  

Accrued reclamation and closure costs and other non-current liabilities

    5,821       (5,238

)

Cash provided by operating activities

    63,609       75,210  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (97,338

)

    (83,285

)

Acquisition of Klondex, net of cash and restricted cash acquired

          (139,326

)

Proceeds from sale of investments

    1,760        

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

    86       722  

Insurance proceeds received for damaged property

          4,377  

Purchases of investments

    (389

)

    (31,971

)

Maturities of investments

          64,895  

Net cash used in investing activities

    (95,881

)

    (184,588

)

Financing activities:

               

Proceeds from sale of common stock, net of offering costs

          3,085  

Acquisition of treasury shares

    (2,239

)

    (2,694

)

Dividends paid to common shareholders

    (3,655

)

    (3,193

)

Dividends paid to preferred shareholders

    (414

)

    (414

)

Credit availability and debt issuance fees

    (587

)

    (2,460

)

Borrowings on debt

    245,000       78,024  

Repayments of debt

    (195,000

)

    (82,036

)

Repayments of finance leases

    (5,484

)

    (5,992

)

Net cash provided by (used in) financing activities

    37,621       (15,680

)

Effect of exchange rates on cash

    257       (215

)

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

    5,606       (125,273

)

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

  $ 34,020     $ 61,866  

Significant non-cash investing and financing activities:

               

Addition of finance lease obligations

  $ 6,506     $ 7,008  

Recognition of operating lease liabilities and right-of-use assets

  $ 22,365     $  

Common stock issued for the acquisition of other companies

  $     $ 252,544  

Payment of accrued compensation in stock

  $ 8,274     $ 4,863  

Marketable equity securities received for sale of mineral interest

  $ 2,257     $  

 

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

 

5

Table of Contents

 

 

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 September 30, 2019

 
   

Series B

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Accumulated

Deficit

   

Accumulated

Other

Comprehensive

Loss, net

   

Treasury

Stock

   

Total

 

Balances, July 1, 2019

  $ 39     $ 123,701     $ 1,895,617     $ (323,079

)

  $ (34,670

)

  $ (22,380

)

  $ 1,639,228  

Net loss

                            (19,516

)

                    (19,516

)

Restricted stock units granted

                    1,206                               1,206  

Restricted stock units distributed (1,164,000 shares)

            291       (291

)

                    (595

)

    (595

)

Common stock dividends declared ($0.0025 per common share)

                            (1,225

)

                    (1,225

)

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

                            (138

)

                    (138

)

Common stock issued for 401(k) match (562,000 shares)

            141       831                               972  

Other comprehensive loss

                                    (3,288

)

            (3,288

)

Balances, September 30, 2019

  $ 39     $ 124,133     $ 1,897,363     $ (343,958

)

  $ (37,958

)

  $ (22,975

)

  $ 1,616,644  

 

 

   

Three Months Ended September 30, 2018

 
   

Series B

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Accumulated

Deficit

   

Accumulated

Other

Comprehensive

Loss, net

   

Treasury

Stock

   

Total

 

Balances, July 1, 2018

  $ 39     $ 101,643     $ 1,628,440     $ (198,762

)

  $ (31,929

)

  $ (20,736

)

  $ 1,478,695  

Net loss

                            (23,184

)

                    (23,184

)

Restricted stock units granted

                    1,638                               1,638  

Common stock issued for cash, net of offering costs (1,026,000 shares)

            256       2,830                               3,086  

Common stock dividends declared ($0.0025 per common share)

                            (1,196

)

                    (1,196

)

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

                            (138

)

                    (138

)

Common stock issued to directors (162,000 shares)

            40       553                               593  

Common stock issued to pension plans (1,871,000 shares)

            468       5,032                               5,500  

Common stock issued for 401(k) match (226,000 shares)

            57       728                               785  

Common stock and warrants issued for purchase of another company (75,276,000 shares)

            18,819       233,725                               252,544  

Other comprehensive income

                                    3,746               3,746  

Balances, September 30, 2018

  $ 39     $ 121,283     $ 1,872,946     $ (223,280

)

  $ (28,183

)

  $ (20,736

)

  $ 1,722,069  

 

6

Table of Contents

 

   

Nine Months Ended September 30, 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

                            (91,581

)

                    (91,581

)

Restricted stock units granted

                    4,303                               4,303  

Restricted stock units distributed (1,164,000 shares)

            291       (291

)

                    (636

)

    (636

)

Common stock dividends declared ($0.0075 per common share)

                            (3,655

)

                    (3,655

)

Series B Preferred Stock dividends declared ($2.625 per share)

                            (414

)

                    (414

)

Common stock issued for 401(k) match (1,307,000 shares)

            327       2,425                               2,752  

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

                    (325

)

                            (325

)

Common stock issued for employee incentive compensation (3,597,380 shares)

            899       7,375                       (1,603

)

    6,671  

Common stock issued to pension plans (2,384,000 shares)

            597       3,003                               3,600  

Common stock issued to directors (253,000 shares)

            63       392                               455  

Other comprehensive income

                                    4,511               4,511  

Balances, September 30, 2019

  $ 39     $ 124,133     $ 1,897,363     $ (343,958

)

  $ (37,958

)

  $ (22,975

)

  $ 1,616,644  

 

 

   

Nine Months Ended September 30, 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 loss

                            (2,870

)

                    (2,870

)

Change in accounting for marketable equity securities

                            1,289       (1,289

)

             

Restricted stock units granted

                    4,043                               4,043  

Restricted stock unit distributions (1,079,000 shares)

            270       (270

)

                    (1,386

)

    (1,386

)

Common stock issued to directors (162,000 shares)

            40       553                               593  

Common stock dividends declared ($0.0075 per common share)

                            (3,196

)

                    (3,196

)

Series B Preferred Stock dividends declared ($2.625 per share)

                            (414

)

                    (414

)

Common stock issued for 401(k) match (778,000 shares)

            195       2,663                               2,858  

Common stock issued for cash, net of offering costs (1,026,000 shares)

            256       2,830                               3,086  

Common stock issued to pension plans (1,871,000 shares)

            468       5,032                               5,500  

Common stock issued for employee incentive compensation 1,237,000 shares)

            309       4,554                       (1,308

)

    3,555  

Common stock and warrants issued for purchase of another company (75,276,000 shares)

            18,819       233,725                               252,544  

Other comprehensive loss

                                    (3,521

)

            (3,521

)

Balances, September 30, 2018

  $ 39     $ 121,283     $ 1,872,946     $ (223,280

)

  $ (28,183

)

  $ (20,736

)

  $ 1,722,069  

 

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

 

7

Table of Contents

 

 

Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (in this report, "Hecla" or "the Company" or “we” or “our” or “us” refers to Hecla Mining Company and our subsidiaries, unless the context requires otherwise).  These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 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 September 30, 2019 and December 31, 2018, the fair value of our non-current investments was $7.3 million and $6.6 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value, and are primarily classified as “available-for-sale.” The cost basis of our non-current investments was approximately $9.6 million and $7.7 million at September 30, 2019 and December 31, 2018, respectively. In the first nine months of 2019 and 2018, we acquired marketable equity securities having a cost basis of $2.6 million and $0.8 million, respectively. In the first nine months of 2019, we sold marketable equity securities having a cost basis of $0.9 million for proceeds of $1.8 million, resulting in a gain of $0.9 million. During the first nine months of 2019 and 2018, we recognized $1.2 million and $2.5 million, respectively, in net unrealized losses in current earnings.

 

8

Table of Contents

 

 

Note 3.   Income Taxes

 

Major components of our income tax benefit (provision) for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Current:

                               

Domestic

  $ (315

)

  $     $ (317

)

  $ (1

)

Foreign

    (2,467

)

    (80

)

    (5,260

)

    (4,250

)

Total current income tax benefit (provision)

    (2,782

)

    (80

)

    (5,577

)

    (4,251

)

                                 

Deferred:

                               

Domestic

    2,652       3,778       10,585       3,778  

Foreign

    1,744       (1,019

)

    15,001       1,957  

Total deferred income tax benefit (provision)

    4,396       2,759       25,586       5,735  

Total income tax benefit (provision)

  $ 1,614     $ 2,679     $ 20,009     $ 1,484  

 

The current income tax benefits (provisions) for the three and nine months ended September 30, 2019 and 2018 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the impact of taxation in foreign jurisdictions and a valuation allowance on the majority of U.S. deferred tax assets.

 

As of September 30, 2019, we have a net deferred tax liability in the U.S. of $43.1 million, a net deferred tax liability in Canada of $100.3 million and a net deferred tax asset in Mexico of $3.7 million, for a consolidated worldwide net deferred tax liability of $139.7 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 $59.5 million. For the three and nine months ended September 30, 2019, we recorded tax benefits of $2.4 million and $10.3 million, respectively, 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 September 30, 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.

 

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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 $5.9 million, on the basis that it is the most appropriate response action under CERCLA. In October 2019, the EPA published the EE/CA for a 30-day public notice comment period (which may be extended), and the agency is expected to make a final decision on the appropriate response action after the 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, and in October 2019 we increased that amount to $5.9 million, with the increase representing estimated costs to begin implementation of the remedy in 2020. It is possible that Hecla Limited’s liability will be more than $5.9 million, and any increase in liability could 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 (Superfund) 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 $5.9 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.

 

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In June 2011, the EPA informed Hecla Limited that it believes Hecla Limited, 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 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.

 

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. Between 2014 and 2019, a PRP 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. On October 30, 2019, the PRP filed a lawsuit in Mineral County, Colorado alleging, among other things, that CoCa and CRI are in breach of contract for failure to indemnify the PRP for its liability to the U.S. under CERCLA with respect to the site. In addition, the lawsuit names Hecla Limited as a defendant in its role as the shareholder of CoCa. The PRP seeks in excess of $5 million in damages, including attorneys’ fees and costs. The lawsuit will be vigorously defended and we believe strong defenses exist against all claims made therein and, as noted above, both CoCa and CRI have limited assets with which to satisfy any claim.

 

Montanore Project

 

We face several issues in attempting to advance the Montanore project. In October 2018, a court in Lincoln County, Montana found that the adit (which is an underground tunnel) which we intend 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. On May 6, 2019, one of the subsidiaries received a letter from the Montana Department of Environmental Quality ("DEQ") questioning the validity of its operating permit at Montanore in light of the trespass finding. Our subsidiary responded by explaining that we do not believe the two issues are related. There has been no response to date from DEQ. On July 24, 2019, a Montana state court issued an order vacating Montanore's water discharge permit, which was renewed effective as of May 1, 2014, and remanded the matter back to DEQ. That order has been appealed to the Montana Supreme Court. As of September 30, 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.

 

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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.

 

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.

 

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, 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.

 

On May 24, 2019, a purported Hecla stockholder filed a putative class action lawsuit in U.S. District Court for the Southern District of New York against Hecla and certain of our executive officers, one of whom is also a director. The complaint, purportedly brought on behalf of all purchasers of Hecla common stock from March 19, 2018 through and including May 8, 2019, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks, among other things, damages and costs and expenses. Specifically, the complaint alleges that Hecla, under the authority and control of the individual defendants, made certain material false and misleading statements and omitted certain material information regarding Hecla’s Nevada Operations unit. The complaint alleges that these misstatements and omissions artificially inflated the market price of Hecla common stock during the class period, thus purportedly harming investors. A second suit was filed on June 19, 2019, alleging virtually identical claims. We cannot predict the outcome of these lawsuits or estimate damages if plaintiffs were to prevail. We believe that these claims are without merit and intend to defend them vigorously.

 

Related to the above described class action lawsuits, Hecla has been named as a nominal defendant in a shareholder derivative lawsuit which names as defendants members of Hecla’s board of directors and certain officers. The case was filed on July 12, 2019 in the U.S. District Court for the District of Delaware. In general terms, the suit alleges (i) violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and (ii) breaches of fiduciary duties by the individual defendants and seeks damages, purportedly on behalf of Hecla.

 

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.

 

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On March 5, 2018, we entered into a note purchase agreement pursuant to which we issued $40 million Canadian dollars ("CAD") (approximately $30.8 million U.S. dollars ("USD") 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 September 30, 2019 included approximately $1.3 million for various costs. In addition, our open purchase orders at September 30, 2019 included approximately $1.8 million, $1.4 million, $4.3 million and $0.5 million for various capital and non-capital items at the Lucky Friday, Casa Berardi, Greens Creek and Nevada Operations units, respectively. We also have total commitments of approximately $15.2 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 $17.4 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 September 30, 2019, we had surety bonds totaling $191.8 million and letters of credit totaling $38.5 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.

 

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 Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share.  At September 30, 2019, there were 496,538,038 shares of our common stock issued and 6,287,271 shares issued and held in treasury, for a net of 490,250,767 shares outstanding.  Basic and diluted loss per common share, after preferred dividends, was $(0.04) and $(0.19) for the three- and nine-month periods ended September 30, 2019, respectively.  Basic and diluted loss per common share, after preferred dividends, was $(0.05) and $(0.01) for the three- and nine-month periods ended September 30, 2018, respectively.

 

Diluted loss per share for the three and nine months ended September 30, 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-month and nine-month periods ended September 30, 2019 and 2018, all restricted share units, deferred shares and warrants were excluded from the computation of diluted loss per share, as our reported loss for those periods would cause them to have no effect on the calculation of loss per share.

 

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Note 6.    Business Segments and Sales of Products

 

We discover, acquire and develop mines and other mineral interests and produce and market concentrates, carbon material 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.

 

The following tables present information about our reportable segments for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 

   

Three Months Ended
September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net sales to unaffiliated customers:

                               

Greens Creek

  $ 59,015     $ 65,187     $ 194,542     $ 205,642  

Lucky Friday

    4,017       (11

)

    11,150       8,253  

Casa Berardi

    53,453       52,850       139,015       164,501  

San Sebastian

    15,435       14,129       39,028       40,727  

Nevada Operations

    29,612       11,494       64,586       11,494  
    $ 161,532     $ 143,649     $ 448,321     $ 430,617  

Income (loss) from operations:

                               

Greens Creek

  $ 17,556     $ 10,705     $ 52,130     $ 59,373  

Lucky Friday

    (3,727

)

    (5,404

)

    (8,779

)

    (14,811

)

Casa Berardi

    (380

)

    (1,146

)

    (26,262

)

    3,118  

San Sebastian

    1,077       (2,381

)

    (2,358

)

    2,275  

Nevada Operations

    (8,346

)

    (13,741

)

    (43,812

)

    (13,741

)

Other

    (11,293

)

    (18,409

)

    (35,633

)

    (50,885

)

    $ (5,113

)

  $ (30,376

)

  $ (64,714

)

  $ (14,671

)

 

The following table presents identifiable assets by reportable segment as of September 30, 2019 and December 31, 2018 (in thousands):

 

   

September 30, 2019

   

December 31, 2018

 

Identifiable assets:

               

Greens Creek

  $ 648,420     $ 637,386  

Lucky Friday

    438,946       437,499  

Casa Berardi

    717,631       754,248  

San Sebastian

    50,549       44,152  

Nevada Operations

    558,219       581,194  

Other

    259,413       249,465  
    $ 2,673,178     $ 2,703,944  

 

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Our products consist of metal concentrates and carbon material, which we sell to custom smelters, brokers and third-party processors, 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 carbon sales, the performance obligation is met, the transaction price is known, and revenue is recognized generally at the time of arrival at the customer's facility.

 

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.

 

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

 

The consideration we receive for our concentrate sales fluctuates due to changes in metals prices between the time of shipment and final settlement with the customer. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and previously recorded sales and accounts receivable are adjusted to estimated settlement metals prices until final settlement with the customer. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur. As such, we use the expected value method to price the parcels until the final settlement date occurs, at which time the final transaction price is known. At September 30, 2019, metals contained in concentrates and exposed to future price changes totaled 2.9 million ounces of silver, 8,831 ounces of gold, 10,737 tons of zinc, and 6,344 tons of lead.  However, as discussed in Note 11, we seek to mitigate the risk of negative price adjustments by using financially-settled forward and put option 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.

 

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Sales of metal con