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

hl20200331_10q.htm
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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

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

  For the quarterly period ended March 31, 2020

 

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 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

 

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  ☒.    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  ☒.    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 ☒. Accelerated filer  ☐.
Non-accelerated filer  ☐.  Smaller reporting company .
Emerging growth company  .  

                     

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

 

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

Yes  .    No ☒.

 

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 5, 2020

Common stock, par value
$0.25 per share

 

526,124,158

 

 

 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended March 31, 2020

 

INDEX*

 

 

 

 

Page

PART I - Financial Information 

 

       

 

 

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 

       

 

 

Condensed Consolidated Balance Sheets - March 31, 2020 and December 31, 2019

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended March 31, 2020 and 2019

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 and 2019

5

       
   

Condensed Consolidated Statements of Changes in Stockholders' Equity - Three Months Ended March 31, 2020 and 2019

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

       
    Forward-Looking Statements 29

 

 

 

 

 

 

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

29

 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

58

 

 

 

 

 

 

Item 4. Controls and Procedures

61

 

 

 

 

PART II - Other Information

 

 

 

 

 

 

 

Item 1 – Legal Proceedings

61

 

 

 

 

   

Item 1A – Risk Factors

61

       
   

Item 4 – Mine Safety Disclosures

62

       

 

 

Item 6 – Exhibits

62

 

 

 

 

 

 

Signatures

63

 

 

 

 

 

 

 

 

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

 

 

2

 

 

Part I - Financial Information

 

Item 1. Financial Statements

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

   

March 31,
2020

   

December 31,

2019

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 215,715     $ 62,452  

Accounts receivable:

               

Trade

    6,062       11,952  

Taxes

    12,547       20,048  

Other, net

    9,188       6,421  

Inventories:

               

Concentrates, doré, and stockpiled ore

    39,450       30,364  

Materials and supplies

    35,672       35,849  

Prepaid taxes

    5,114       107  

Other current assets

    18,794       11,931  

Total current assets

    342,542       179,124  

Non-current investments

    4,919       6,207  

Non-current restricted cash and investments

    1,053       1,025  

Properties, plants, equipment and mineral interests, net

    2,393,187       2,423,698  

Operating lease right-of-use assets

    14,909       16,381  

Non-current deferred income taxes

    3,007       3,537  

Other non-current assets and deferred charges

    4,507       7,336  

Total assets

  $ 2,764,124     $ 2,637,308  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 49,437     $ 57,716  

Accrued payroll and related benefits

    34,478       26,916  

Accrued taxes

    5,842       4,776  

Current portion of finance leases

    5,391       5,429  

Current portion of operating leases

    4,792       5,580  

Current portion of accrued reclamation and closure costs

    5,277       4,581  

Accrued interest

    4,305       5,804  

Other current liabilities

    7,661       6,172  

Total current liabilities

    117,183       116,974  

Non-current finance leases

    5,810       7,214  

Non-current operating leases

    10,139       10,818  

Accrued reclamation and closure costs

    97,509       103,793  

Long-term debt - Senior Notes

    469,021       504,729  

Long-term debt - revolving credit facility

    210,000        

Non-current deferred tax liability

    126,237       138,282  

Non-current pension liability

    57,309       56,219  

Other non-current liabilities

    14,033       6,856  

Total liabilities

    1,107,241       944,885  

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 authorized shares; issued March 31, 2020 — 529,534,568 shares and December 31, 2019 — 529,182,994 shares

    132,381       132,292  

Capital surplus

    1,976,033       1,973,700  

Accumulated deficit

    (371,958 )     (353,331 )

Accumulated other comprehensive loss

    (56,645 )     (37,310 )

Less treasury stock, at cost; March 31, 2020 and December 31, 2019 - 6,287,271 shares issued and held in treasury

    (22,967 )     (22,967 )

Total stockholders’ equity

    1,656,883       1,692,423  

Total liabilities and stockholders’ equity

  $ 2,764,124     $ 2,637,308  

 

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

 

3

 

 

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

 
   

March 31, 2020

   

March 31, 2019

 

Sales of products

  $ 136,925     $ 152,617  

Cost of sales and other direct production costs

    85,887       110,386  

Depreciation, depletion and amortization

    39,666       38,787  

Total cost of sales

    125,553       149,173  

Gross profit

    11,372       3,444  

Other operating expenses:

               

General and administrative

    8,939       9,959  

Exploration

    2,530       4,402  

Pre-development

    535       856  

Research and development

          403  

Other operating expense

    915       587  

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

    (104 )      

Ramp-up and suspension costs

    12,996       2,778  

Acquisition costs

    5       13  

Provision for closed operations and environmental matters

    516       570  

Total other operating expense

    26,332       19,568  

Loss from operations

    (14,960 )     (16,124 )

Other income (expense):

               

Unrealized (loss) gain on investments

    (978 )     96  

Gain (loss) on derivative contracts

    7,893       (1,799 )

Net foreign exchange gain (loss)

    6,636       (3,133 )

Other expense

    (527 )     (1,124 )

Interest expense

    (16,311 )     (10,665 )

Total other expense

    (3,287 )     (16,625 )

Loss before income taxes

    (18,247 )     (32,749 )

Income tax benefit

    1,062       7,216  

Net loss

    (17,185 )     (25,533 )

Preferred stock dividends

    (138 )     (138 )

Loss applicable to common stockholders

  $ (17,323 )   $ (25,671 )

Comprehensive loss:

               

Net loss

  $ (17,185 )   $ (25,533 )

Change in fair value of derivative contracts designated as hedge transactions

    (19,335 )     4,259  

Comprehensive loss

  $ (36,520 )   $ (21,274 )

Basic loss per common share after preferred dividends

  $ (0.03 )   $ (0.05 )

Diluted loss per common share after preferred dividends

  $ (0.03 )   $ (0.05 )

Weighted average number of common shares outstanding - basic

    523,215       482,829  

Weighted average number of common shares outstanding - diluted

    523,215       482,829  

Cash dividends per common share

  $ 0.0025     $ 0.0025  

 

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

 

4

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Three Months Ended

 
   

March 31, 2020

   

March 31, 2019

 

Operating activities:

               

Net loss

  $ (17,185 )   $ (25,533 )

Non-cash elements included in net loss:

               

Depreciation, depletion and amortization

    41,630       40,267  

Unrealized loss (gain) on investments

    978       (96 )

Adjustment of inventory to market value

          1,399  

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

    (104 )      

Provision for reclamation and closure costs

    1,548       1,594  

Stock compensation

    1,219       1,580  

Deferred income taxes

    (3,252 )     (8,293 )

Amortization of loan origination fees and loss on extinguishment of debt

    2,140       625  

(Gain) loss on derivative contracts

    (10,437 )     3,686  

Foreign exchange (gain) loss

    (8,066 )     5,550  

Other non-cash items, net

          2  

Change in assets and liabilities:

               

Accounts receivable

    9,955       (5,063 )

Inventories

    (6,602 )     3,171  

Other current and non-current assets

    (2,642 )     1,124  

Accounts payable and accrued liabilities

    (11,879 )     (9,496 )

Accrued payroll and related benefits

    9,495       7,212  

Accrued taxes

    1,332       1,237  

Accrued reclamation and closure costs and other non-current liabilities

    (3,203 )     1,064  

Cash provided by operating activities

    4,927       20,030  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (19,870 )     (33,071 )

Proceeds from disposition of properties, plants and equipment

    154       1  

Net cash used in investing activities

    (19,716 )     (33,070 )

Financing activities:

               

Dividends paid to common stockholders

    (1,304 )     (1,209 )

Dividends paid to preferred stockholders

    (138 )     (138 )

Credit facility fees paid

    (458 )     (39 )

Borrowings on debt

    679,500       58,000  

Repayments of debt

    (506,500 )     (58,000 )

Repayments of finance leases

    (1,284 )     (1,261 )

Net cash provided by (used in) financing activities

    169,816       (2,647 )

Effect of exchange rates on cash

    (1,736 )     95  

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

    153,291       (15,592 )

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

    63,477       28,414  

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

  $ 216,768     $ 12,822  

Supplemental disclosure of cash flow information:

               

Cash paid for interest

  $ 13,984     $ 672  

Significant non-cash investing and financing activities:

               

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

  $     $ 3,498  

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

  $     $ 22,365  

 

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

 

5

 

 

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, 2020

 
   

Series B
Preferred
Stock

   

Common
Stock

   

Additional
Paid-In
Capital

   

Accumulated
Deficit

   

Accumulated
Other
Comprehensive
Loss, net

   

Treasury
Stock

   

Total

 

Balances, January 1, 2020

  $ 39     $ 132,292     $ 1,973,700     $ (353,331 )   $ (37,310 )   $ (22,967 )   $ 1,692,423  

Net loss

                        (17,185 )                 (17,185 )

Restricted stock units granted

                1,219       0                   1,219  

Common stock dividends declared ($0.0025 per common share)

                      (1,304 )                 (1,304 )

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

                      (138 )                 (138 )

Common stock issued for 401(k) match (352,000 shares)

          89       1,114                         1,203  

Other comprehensive income

                            (19,335 )           (19,335 )

Balances, March 31, 2020

  $ 39     $ 132,381     $ 1,976,033     $ (371,958 )   $ (56,645 )   $ (22,967 )   $ 1,656,883  

 

 

   

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 )

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

          96       878                         974  

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

                (325 )                       (325 )

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  

 

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

 

6

 

 

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, 2019, 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.

 

The 2019 novel strain of coronavirus ("COVID-19") was characterized as a global pandemic by the World Health Organization on March 11, 2020, and COVID-19 has resulted in travel restrictions and business slowdowns or shutdowns in affected areas.  In late March 2020, the Government of Quebec ordered the mining industry to reduce to minimum operations as part of the fight against the COVID-19 virus, causing us to suspend our Casa Berardi operations from approximately March 24 until April 15, when limited mining operations resumed.  In early April, the Government of Mexico issued a similar order causing us to suspend our San Sebastian operations through April 30, and the order was subsequently extended to May 30. In addition, restrictions imposed by the State of Alaska in late March have caused us to revise the normal operating procedures for staffing operations at Greens Creek. These suspension orders impacted us in the first quarter of 2020 by curtailing our expected production of gold at Casa Berardi by approximately 5,200 ounces, along with the related revenue, and we anticipate our gold production and revenue at Casa Berardi will be impacted in the second quarter of 2020 at a similar or slightly higher level.  We continued to incur costs at Casa Berardi while operations were suspended and will also incur suspension costs at San Sebastian, although at lower levels than during full production.  At Casa Berardi, suspension costs in the first quarter of 2020 totaled $0.9 million.  In addition, we have incurred costs of approximately $0.2 million per week related to quarantining employees at Greens Creek, which started in late March 2020.  It is possible that the changes at Casa Berardi, San Sebastian or Greens Creek (or at any other operation) could continue to have an adverse impact on operations or 2020 financial results, including materially so, beyond the second quarter of 2020 if restrictions continue longer than anticipated or become broader.

 

We have taken precautionary measures to mitigate the impacts of COVID-19, including implementing operational plans and practices and increasing our cash reserves through a draw-down of our revolving credit facility (see Note 9 for more information). As long as they are required, the operational practices implemented could have an adverse impact on our operating results due to deferred production and revenues or additional costs.  We continue to monitor the rapidly evolving situation and guidance from federal, state, local and foreign governments and public health authorities and may take additional actions based on their recommendations. The extent of the impact of COVID-19 on our business and financial results will also depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on prices, demand, creditworthiness and other market conditions and governmental reactions, all of which are highly uncertain.   

 

 

 

Note 2.    Investments

 

At March 31, 2020 and December 31, 2019, the fair value of our non-current investments was $4.9 million and $6.2 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 $9.2 million and $9.8 million at March 31, 2020 and December 31, 2019, respectively. During the quarter ended March 31, 2020, we recognized $1.0 million in net unrealized losses in current earnings. During the quarter ended March 31, 2019, we recognized $0.1 million in net unrealized gains in current earnings.

  

7

 

 

Note 3.   Income Taxes

 

Major components of our income tax benefit for the three months ended March 31, 2020 and 2019 are as follows (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Current:

               

Domestic

  $ (732 )   $  

Foreign

    (2,069 )     (1,077 )

Total current income tax provision

    (2,801 )     (1,077 )
                 

Deferred:

               

Domestic

    1,250       2,477  

Foreign

    2,613       5,816  

Total deferred income tax benefit

    3,863       8,293  

Total income tax benefit

  $ 1,062     $ 7,216  

 

The income tax benefit for the three months ended March 31, 2020 and 2019 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.

 

In 2018, we acquired through the acquisition of Klondex Mines Ltd. a U.S. consolidated tax group ("Nevada U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Hecla U.S.”).  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, 2020 continued to support a full valuation allowance in the U.S. for Hecla U.S.

 

As of March 31, 2020, we have a net deferred tax liability in the Nevada U.S. Group of $37.0 million, a net deferred tax liability in Canada of $89.2 million and a net deferred tax asset in Mexico of $3.0 million, for a consolidated worldwide net deferred tax liability of $123.2 million.

 

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law.  The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.  The CARES Act has not had a material impact on the Company as of March 31, 2020; however we will continue to examine the impacts the CARES Act may have on our business.

 

 

 

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.

 

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 $6.1 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, 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 $6.1 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 $6.1 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 appears to have deferred consideration of listing the SMCB site on CERCLA’s National Priorities List (Superfund) by removing the site from its emphasis list, and is working with various potentially responsible parties ("PRPs") at the site in order to study and potentially address perceived groundwater issues within the SMCB. The EE/CA discussed above relates primarily to contaminated rock and soil at the Johnny M site, not groundwater and not elsewhere within the SMCM site. 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 $6.1 million due to the increased scope of required remediation.

 

In July 2018, the EPA informed Hecla Limited that it and several other PRPs may be liable for cleanup of the SMCB 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.

 

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 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. In 2016, without admitting any liability, Hecla Limited, CoCa and CRI entered into a Consent Decree with the United States and the State of Colorado settling any regulatory liability they may have had at the site. 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.

 

Litigation Related to Klondex Acquisition

 

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 February 19, 2020, we completed an offering of $475 million aggregate principal amount of 7.25% Senior Notes due 2028.  The net proceeds from the offering of the Senior Notes were used, together with cash on hand, to redeem all of our previously-outstanding 6.875% Senior Notes that were due in 2021 and had a principal balance of $506.5 million.  Interest on the Senior Notes is payable on February 15 and August 15 of each year, commencing August 15, 2020.

 

 

Other Commitments

 

Our contractual obligations as of March 31, 2020 included approximately $2.3 million for various costs. In addition, our open purchase orders at March 31, 2020 included approximately $2.3 million, $0.6 million, $3.3 million and $0.6 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 $11.9 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 $16.1 million relating to payments 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, 2020, we had surety bonds totaling $181.3 million and letters of credit totaling $28.7 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 March 31, 2020, there were 529,534,568 shares of our common stock issued and 6,287,271 shares issued and held in treasury, for a net of 523,247,297 shares outstanding. Basic and diluted loss per common share, after preferred dividends, was $(0.03) and $(0.05) for the three-month periods ended March 31, 2020 and 2019, respectively.

 

Diluted loss per share for the three months ended March 31, 2020 and 2019 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, 2020 and 2019, all outstanding restricted stock units, warrants and deferred shares were excluded from the computation of diluted loss per share, as our reported net losses for those periods would cause their conversion and exercise to have no effect on the calculation of loss per share.

 

 

 

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.

 

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 months ended March 31, 2020 and 2019 (in thousands):

 

   

Three Months Ended
March 31,

 
   

2020

   

2019

 

Net sales to unaffiliated customers:

               

Greens Creek

  $ 53,833     $ 80,129  

Lucky Friday

    2,830       2,182  

Casa Berardi

    46,172       40,062  

San Sebastian

    9,927       12,600  

Nevada Operations

    24,163       17,644  
    $ 136,925     $ 152,617  

Income (loss) from operations:

               

Greens Creek

  $ 4,117     $ 25,433  

Lucky Friday

    (8,120 )     (2,781 )

Casa Berardi

    (3,880 )     (10,519 )

San Sebastian

    679       (1,512 )

Nevada Operations

    2,889       (13,991 )

Other

    (10,645 )     (12,754 )
    $ (14,960 )   $ (16,124 )

 

The following table presents identifiable assets by reportable segment as of March 31, 2020 and December 31, 2019 (in thousands):

 

   

March 31,

2020

   

December 31,

2019

 

Identifiable assets:

               

Greens Creek

  $ 631,246     $ 639,047  

Lucky Friday

    488,854       440,615  

Casa Berardi

    698,433       703,511  

San Sebastian

    35,254       48,294  

Nevada Operations

    522,899       528,466  

Other

    387,438       277,375  
    $ 2,764,124     $ 2,637,308  

 

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 sales of carbon material, 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 March 31, 2020, metals contained in concentrate sales and exposed to future price changes totaled 2.1 million ounces of silver, 6,602 ounces of gold, 11,376 tons of zinc, and 3,721 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.

 

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

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Greens Creek

    39

%

    53

%

Lucky Friday

    2

%

    1

%

Casa Berardi

    34

%

    26

%

San Sebastian

    7

%

    8

%

Nevada Operations

    18

%

    12

%

      100

%

    100

%

 

 

Sales of products by metal for the thee-month periods ended March 31, 2020 and 2019 were as follows (in thousands):

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Silver

  $ 37,572     $ 45,506  

Gold

    90,694       79,679  

Lead

    6,420       9,025  

Zinc

    17,308       24,755  

Less: Smelter and refining charges

    (15,069 )     (6,348 )

Sales of products

  $ 136,925     $ 152,617  

 

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, 2020 and 2019 (in thousands):

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Canada

  $ 54,333     $ 92,872  

Korea

    26,607       49,300  

Japan

    6,121       8,350  

China

    13,921        

United States

    35,185       4,571  

Other

    (922 )      

Total, excluding gains/losses on forward contracts

  $ 135,245     $ 155,093  

 

Sales by significant product type for the three-month periods ended March 31, 2020 and 2019 were as follows (in thousands):

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Doré and metals from doré

  $ 67,327     $ 75,449  

Carbon material

    19,368       452  

Lead concentrate

    34,154       49,300  

Zinc concentrate

    10,820       23,792  

Bulk concentrate

    3,576       6,100  

Total, excluding gains/losses on forward contracts

  $ 135,245     $ 155,093  

 

Sales of products for the first three months of 2020 and 2019 included net gains of $1.7 million and net losses of $2.5 million, respectively, on financially-settled forward and put option contracts for silver, gold, lead and zinc contained in our sales.  See Note 11 for more information.

 

 

Sales of products to significant customers as a percentage of total sales were as follows for the three-month periods ended March 31, 2020 and 2019:

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

CIBC

    30

%

    16

%

Korea Zinc

    19

%

    20

%

Asahi

    17

%

    2

%

Scotia

    15

%

    29

%

IXM

    10

%

   

%

Teck Metals Ltd.

    2

%

    15

%

Trafigura

   

%

    12

%

 

Our trade accounts receivable balance related to contracts with customers was $6.1 million at March 31, 2020 and $12.0 million at December 31, 2019, 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. Payment for carbon sales is received within a relatively short period of time after 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, 2020 or December 31, 2019.

 

 

 

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, 2020 and 2019 (in thousands):

 

   

Three Months Ended
March 31,

 
   

2020

   

2019

 

Service cost

  $ 1,334     $ 1,100  

Interest cost

    1,404       1,620  

Expected return on plan assets

    (1,872 )     (1,496 )

Amortization of prior service cost

    29       15  

Amortization of net loss

    1,163       1,097  

Net periodic pension cost

  $ 2,058     $ 2,336  

 

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, 2020 and 2019 of $0.7 million and $1.2 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.

 

In April 2020, we contributed $0.4 million in shares of our common stock to our defined benefit plans, and expect to contribute an additional $5.8 million in cash or shares of our common stock in 2020.  We expect to contribute approximately $0.6 million to our unfunded supplemental executive retirement plan during 2020.

 

15

 

 

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.

 

In March 2020, the Board of Directors granted 2,800,062 shares of common stock to employees for payment of long-term incentive compensation for the period ended December 31, 2019. The shares were distributed in April 2020, and $5.1 million in expense related to the stock awards was recognized in the periods prior to March 31, 2020.

 

Stock-based compensation expense for restricted stock unit and performance-based grants to employees and shares issued to nonemployee directors totaled $1.2 million for the first three months of 2020 and $1.6 million for the first three months of 2019.

 

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 February 21, 2020, 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 $1.3 million paid in March 2020. Because the average realized silver price for the fourth quarter of 2019 was $17.47 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.

 

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, 2020, 934,100 shares had 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 5, 2020, was $2.64 per share. No shares were purchased under the program during the first quarter of 2020.

 

Warrants

 

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, 2020. 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.

 

16

 

 

Note 9.    Debt, Credit Facility and Leases

 

Senior Notes

 

On February 19, 2020, we completed an offering of $475 million in aggregate principal amount of our 7.25% Senior Notes due February 15, 2028 ("Senior Notes") under our shelf registration statement previously filed with the SEC. The Senior Notes are governed by the Indenture, dated as of February 19, 2020, among Hecla Mining Company ("Hecla") and certain of our subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee. On March 19, 2020, the net proceeds from the offering of the Senior Notes ($469.5 million) were used, together with cash on hand, to redeem all of our previously-outstanding 6.875% Senior Notes that were due in 2021 and had a principal balance of $506.5 million ("2021 Notes").

 

The Senior Notes are recorded net of a 1.16% initial purchaser discount totaling $5.5 million at the time of the February 2020 issuance. The discount and issuance costs had an unamortized balance of $6.0 million as of March 31, 2020.  The Senior Notes bear interest at a rate of 7.25% per year from the date of 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 February 15 and August 15 of each year, commencing August 15, 2020. During each of the three month periods ended March 31, 2020 and 2019, interest expense on the statement of operations and comprehensive loss related to the Senior Notes and 2021 Notes and amortization of the initial purchaser discount and fees related to the issuance of the Senior Notes and 2021 Notes totaled $13.7 million and $9.1 million, respectively. Interest expense for the three month period ended March 31, 2020 included amounts recorded for (i) interest recognized on both the Senior Notes and 2021 Notes for an overlapping period of approximately one month, as the Senior Notes were issued on February 19, 2020 and the 2021 Notes were redeemed on March 19, 2020, and (ii) $1.7 million in unamortized initial purchaser discount on the 2021 Notes upon redemption. As of March 31, 2020, the long-term debt balance on the Senior Notes was $469.0 million, consisting of the principal amount of $475.0 million less $6.0 million in amortized discount and issuance costs. As of December 31, 2019, the long-term debt balance on the 2021 Notes was $504.7 million, consisting of the total principal amount of $506.5 million less $1.8 million in amortized discount.

 

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 will be redeemable in whole or in part, at any time and from time to time on or after February 15, 2023, on the redemption dates and at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.  Prior to February 15, 2023, we may redeem some or all of the Senior Notes at a redemption price of 100% of the principal amount, plus accrued interest, if any, to the redemption date, plus a "make whole" premium. We may redeem up to 35% of the Senior Notes before February 15, 2023 with the net cash proceeds of certain equity offerings.

 

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 were denominated in CAD, the reported USD-equivalent principal balance changed with movements in the exchange rate. The RQ Notes were issued at a discount of 0.58%, or CAD$0.2 million, and bore 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 were senior and unsecured and were pari passu in all material respects with the 2021 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. In December 2019, we prepaid the obligation related to the RQ Notes through issuance of approximately 10.7 million shares of our common stock having a total value of approximately CAD$43.8 million (approximately USD$33.5 million). During the three months ended March 31, 2019, interest expense related to the RQ Notes, including discount and origination fees, totaled $0.4 million.

 

 

Credit Facility

 

In July 2018, we entered into a $250 million senior secured revolving credit facility which replaced our previous $100 million credit facility. The facility has a term ending on February 7, 2023. The credit facility is collateralized by the assets of or shares of common stock held in our material subsidiaries, including those owning the Casa Berardi mine and our Nevada operations, and by our joint venture interests holding 100% ownership of 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, 2020:

 

Interest rates:

       

Spread over the London Interbank Offered Rate

  2.25 - 4.00%

Spread over alternative base rate

  1.25 - 3.00%

Standby fee per annum on undrawn amounts

  0.5625 - 1.00%

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 4.25:1

Interest coverage ratio (EBITDA/interest expense)

 

not less than 3.00:1

 

(1) The leverage ratio will change to 4.00:1 effective July 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 4.00% of the amount of the letters of credit 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 $28.7 million in letters of credit outstanding as of March 31, 2020.

 

We believe we were in compliance with all covenants under the credit agreement as of March 31, 2020.  We drew $210.0 million on the facility during the first quarter of 2020, and that amount was outstanding as of March 31, 2020 and the date of this report.

 

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, 2020, the total liability balance associated with finance leases, including certain purchase option amounts, was $11.2 million, with $5.4 million of the liability classified as current and the remaining $5.8 million classified as non-current. At December 31, 2019, the total liability balance associated with finance leases was $12.6 million, with $5.4 million of the liability classified as current and the remaining $7.2 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 $19.1 million as of March 31, 2020 and $20.6 million as of December 31, 2019, net of accumulated depreciation. Expense during the first quarter of 2020 and 2019 related to finance leases included $1.5 million and $1.6 million, respectively, for amortization of the right-of-use assets and $0.1 million and $0.2 million, respectively, for interest expense. The total obligation for future minimum payments on finance leases was $11.9 million at March 31, 2020, with $0.7 million attributed to interest. Our finance leases as of March 31, 2020 had a weighted average remaining lease term of approximately 1.7 years and a weighted average discount rate of approximately 5.9%.

 

 

At March 31, 2020, the annual maturities of finance lease commitments, including interest, were (in thousands):

 

Twelve-month period ending March 31,

       

2021

  $ 5,712  

2022

    4,065  

2023

    1,785  

2024

    299  

Total

    11,861  

Less: imputed interest

    (660 )

Finance lease liability

  $ 11,201  

 

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, 2020, we have assumed discount rates of between 5% and 6.5%, and the weighted average discount rate was 6.5%. At March 31, 2020, the total liability balance associated with the operating leases was $14.9 million, with $4.8 million of the liability classified as current and the remaining $10.1 million classified as non-current. At December 31, 2019, the total liability balance associated with the operating leases was $16.4 million, with $5.6 million of the liability classified as current and the remaining $10.8 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 $14.9 million as of March 31, 2020 and $16.4 million as of December 31, 2019. Lease expense for operating leases during the first quarter of 2020 and 2019 totaled $1.9 million and $2.1 million, respectively. The total obligation for future minimum operating lease payments, including assumed extensions beyond the current lease terms, was $16.1 million at March 31, 2020. The weighted-average remaining lease term for our operating leases as of March 31, 2020 was approximately 4.6 years.

 

At March 31, 2020, 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,

       

2021

  $ 4,441  

2022

    3,656  

2023

    2,704  

2024

    2,001  

2025

    547  

More than 5 years

    2,733  

Total

    16,082  

Effect of discounting

    (1,151 )

Operating lease liability

  $ 14,931  

 

 

 

Note 10.    Developments in Accounting Pronouncements

 

Accounting Standards Updates Adopted

 

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update changes how entities will record credit losses from an "incurred loss" approach to an "expected loss" approach. The update was adopted as of January 1, 2020, and its adoption did not have a material impact on our consolidated financial statements.

 

 

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 was adopted as of January 1, 2020, and its adoption 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. 2018-14 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 ending 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.

 

In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update contains a number of provisions intended to simplify the accounting for income taxes. 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 consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The update is effective as of March 12, 2020 through December 31, 2022. We are evaluating the impact of this update on our consolidated financial statements.

 

 

 

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 dollars ("CAD") and Mexican pesos ("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 initiated a similar program with respect to 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, 2020, we have 155 forward contracts outstanding to buy a total of CAD$345.0 million having a notional amount of USD$262.9 million, and 2 forward contracts outstanding to buy a total of MXN$3.2 million having a notional amount of USD$0.2 million.  The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2020 through 2024 and have CAD-to-USD exchange rates ranging between 1.2702 and 1.3785.  The MXN contracts are related to forecasted cash operating costs at San Sebastian to be incurred for 2020 and have MXN-to-USD exchange rates ranging between 20.8125 and 20.8450.  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, 2020, we recorded the following balances for the fair value of the contracts:

 

 

a current liability of $7.5 million, which is included in other current liabilities; and

 

a non-current liability of $12.0 million, which is included in other non-current liabilities.

 

Net unrealized losses of approximately $19.7 million related to the effective portion of the hedges were included in accumulated other comprehensive loss as of March 31, 2020. 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 $7.0 million in net unrealized losses included in accumulated other comprehensive loss as of March 31, 2020 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $0.9 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, 2020. No net unrealized gains or losses related to ineffectiveness of the hedges were included in current earnings for the three months ended March 31, 2020.

 

 

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 covered under such programs that would establish a ceiling for prices to be realized on future metals sales. 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 Greens Creek concentrate shipments between the time of shipment and final settlement. In addition, we use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future Greens Creek concentrate shipments. The following tables summarize the quantities of metals committed under forward sales contracts at March 31, 2020 and December 31, 2019:

 

March 31, 2020

 

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

                                                               

2020 settlements

    45             21,330       7,441     $ 17.82       N/A     $ 0.91     $ 0.78  

Contracts on forecasted sales

                                                               

2020 settlements

                      5,842       N/A       N/A       N/A     $ 0.98  

 

 

December 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

                                                               

2020 settlements

    2,556       10       21,550       5,159     $ 17.20     $ 1,481     $ 1.04     $ 0.88  

Contracts on forecasted sales

                                                               

2020 settlements

                441       11,740       N/A       N/A     $ 1.13     $ 0.98  

 

In June 2019, we began using financially-settled put option contracts to manage the exposure of our forecasted future gold and silver sales to potential declines in market prices for those metals. These put contracts give us the option, but not the obligation, to realize established prices on quantities of silver and gold to be sold in the future. The following table summarizes the quantities of metals for which we have entered into put contracts and the average exercise prices as of March 31, 2020 and December 31, 2019:

 

March 31, 2020

 

Ounces under contract (in 000's)

   

Average price per ounce

 
   

Silver

   

Gold

   

Silver

   

Gold

 
   

(ounces)

   

(ounces)

   

(ounces)

   

(ounces)

 

Contracts on forecasted sales

                               

2020 settlements

    2,840       95     $ 16.00     $ 1,482  

 

 

December 31, 2019

 

Ounces under contract (in 000's)

   

Average price per ounce

 
   

Silver

   

Gold

   

Silver

   

Gold

 
   

(ounces)

   

(ounces)

   

(ounces)

   

(ounces)

 

Contracts on forecasted sales

                               

2020 settlements

    5,700       130     $ 15.73     $ 1,435  

 

In April 2020, we entered into additional put contracts which establish the minimum price at which we can sell gold relating to forecasted production for a portion of 2020 at $1,600 per ounce. These contracts have total premiums of approximately $1.7 million to be paid upon maturity.

 

These forward and put option contracts are not designated as hedges and are marked-to-market through earnings each period.  

 

As of March 31, 2020, we recorded the following balances for the fair value of the forward and put option contracts held at that time:

 

 

a current asset of $8.8 million, which is included in other current assets and is net of $0.8 million for contracts in a fair value liability position; and

 

a current liability of $0.1 million, which is included in other current liabilities and is net of $0.4 million for contracts in a fair value current asset position.

 

We recognized a $1.7 million net gain during the first quarter of 2020 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net gain recognized on the contracts offsets losses related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $7.9 million net gain during the first quarter of 2020 on the contracts utilized to manage exposure to prices for forecasted future sales. The net gain on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future sales, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net gain for the first quarter of 2020 is the result of a decrease in silver, gold, zinc and lead prices. These programs, when utilized and the contracts are not settled prior to their maturity dates, are designed to mitigate the impact of potential future declines in silver, gold, lead and zinc prices from the price levels established in the contracts (see average price information above). When those prices increase compared to the contracts, we incur losses on the contracts.

 

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, 2020, 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 $20.7 million as of March 31, 2020, which includes accrued interest but excludes any adjustment for nonperformance risk. If we were in breach of any of these provisions at March 31, 2020, we could have been required to settle our obligations under the agreements at their termination value of $20.7 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, 2020

   

Balance at
December 31, 2019

 

Input
Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 215,715     $ 62,452  

Level 1

Equity securities:

                 

Equity securities – mining industry

    4,919       6,207  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    6,062       11,952  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other bank deposits

    1,053       1,025  

Level 1

Derivative contracts:

                 

Metal forward and put option contracts

    8,811        

Level 2

Foreign exchange contracts

          1,184  

Level 2

Total assets

  $ 236,560     $ 82,820    
                   

Liabilities:

                 

Derivative contracts:

                 

Metal forward and put option contracts

  $ 69     $ 5,777  

Level 2

Foreign exchange contracts

    19,471       1,437  

Level 2

Total Liabilities

  $ 19,540     $ 7,214    

 

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.

 

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 sold from doré 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 and put option contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our forecasted future sales (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 forward 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. The fair value of each put option contract is measured using the Black-Scholes pricing model, with inputs for the period-end metal price and assumed metal price volatility and discount rate.

 

Our Senior Notes, which were recorded at their carrying value of $469.0 million, net of unamortized initial purchaser discount and issuance costs at March 31, 2020, had a fair value of $418.5 million at March 31, 2020. 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.

 

 

 

Note 13.   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 of the Senior 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.; Klondex Hollister Mine Inc; and Hecla Quebec, Inc.. We completed the offering of the Senior Notes on February 19, 2020 under our shelf registration statement previously filed with the SEC.

 

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 condensed 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.

 

 

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