THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 2002
Commission File No. 1-8491
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HECLA MINING COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 82-0126240
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 208-769-4100
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
- ---------------------------------------------- which each class is registered
Common Stock, par value $0.25 per share ) ------------------------------
)
Preferred Share Purchase Rights for )
Series A Junior Participating )
Preferred Stock, par value $0.25 per share )
)
Series B Cumulative Convertible Preferred )
Stock, par value $0.25 per share ) New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_. No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes _X_. No ___.
The aggregate market value of the Registrant's voting Common Stock held
by nonaffiliates was $412,835,348 as of February 28, 2003. There were
109,377,249 shares of the Registrant's Common Stock outstanding as of February
28, 2003.
Documents incorporated by reference herein:
To the extent herein specifically referenced in Part III, the
information contained in the Proxy Statement for the 2002 Annual Meeting of
Shareholders of the Registrant, which will be filed with the Commission pursuant
to Regulation 14A within 120 days of the end of the Registrant's 2002 fiscal
year is incorporated herein by reference. See Part III.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements contained in this report (including information
incorporated by reference) are forward-looking statements that reflect our
current expectations and projections about our future results, performance,
prospects and opportunities. We have tried to identify these forward-looking
statements by using words such as "may," "will," "expect," "anticipate,"
"believe," "intend," "plan," "estimate" and similar expressions. These
forward-looking statements are based on information currently available to us
and are subject to a number of risks, uncertainties and other factors that could
cause our actual results, performance, prospects or opportunities to differ
materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties and other factors include, but are not
limited to, those set forth under Item 1 - Business - Risk Factors.
Other matters, including unanticipated events and conditions, also may
cause our actual future results to differ materially from these forward-looking
statements. There can be no assurance that our expectations will prove to be
correct and undue reliance should not be placed on these forward-looking
statements. All of these forward-looking statements are based on our
expectations as of the date of this filing. Except as required by federal
securities laws, we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Part I
Item 1. Business
INTRODUCTION
Hecla Mining Company, a Delaware corporation, was originally
incorporated in 1891 and is principally engaged in the exploration, development,
mining and processing of silver, gold, lead and zinc, and owns or has interests
in a number of precious and nonferrous metals properties. In this report, "we"
or "our" refer to Hecla Mining Company and/or our affiliates and subsidiaries.
We believe we are one of the world's low cost producers in the precious
metals mining industry. We believe we have earned a reputation as one of the
world's best narrow-vein, hard rock, underground mining companies, based on our
expertise developed during more than a century of operating underground mines.
Our strategy for growth is to focus our efforts and resources on expanding our
precious metals reserves through exploration efforts, primarily on properties we
currently own. We will also consider acquisition opportunities as a component of
our growth strategy.
Our principal producing metals properties during 2002 included:
o the San Sebastian silver mine, located in the State of Durango, Mexico,
and 100% owned by us through our wholly owned subsidiary, Minera Hecla,
S.A. de C.V. (Minera Hecla). The mine is 56 miles northeast of the city
of Durango on concessions acquired through our
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acquisition of Monarch Resources Investments Limited in June 1999.
During 2002, San Sebastian contributed $23.5 million, or 22%, to our
consolidated sales;
o the La Camorra gold mine, located in the eastern Venezuelan State of
Bolivar, approximately 120 miles southeast of Puerto Ordaz, and 100%
owned by us through our wholly owned subsidiary, Minera Hecla
Venezolana, C.A. La Camorra has been a producing mine for us since
October 1999 through our acquisition of Monarch Resources Investments
Limited. During 2002, La Camorra contributed $49.2 million, or 47%, to
our consolidated sales;
o the Greens Creek silver mine, a 29.73% owned joint-venture arrangement
with Kennecott Greens Creek Mining Company (KGCMC), the manager of the
mine, and Kennecott Juneau Mining Company (KJMC), both wholly owned
subsidiaries of Kennecott Minerals. The Greens Creek mine is located on
Admiralty Island, near Juneau, Alaska, and has been in production since
1989, with a temporary shutdown from April 1993 through July 1996.
Greens Creek is a large polymetallic deposit containing silver, zinc,
gold and lead. During 2002, Greens Creek contributed $23.3 million, or
22%, to our consolidated sales;
o the Lucky Friday mine, a 100% owned, deep underground silver and lead
mine located in northern Idaho. Lucky Friday has been a producing mine
for us since 1958. During 2002, Lucky Friday contributed $9.6 million,
or 9%, to consolidated sales.
For the year ended December 31, 2002, we reported net income of
approximately $8.6 million (before undeclared preferred stock dividends of $23.3
million), or $0.11 per share of common stock, compared to net income of
approximately $2.3 million (before undeclared preferred stock dividends of $8.1
million), or $0.03 per share of common stock, for the year ended December 31,
2001.
For additional information, see Item 7, Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations.
Our principal executive offices are located at 6500 N. Mineral Drive,
Suite 200, Coeur d'Alene, Idaho 83815-9408, telephone (208) 769-4100. Our web
site address is www.hecla-mining.com. Copies of our annual, quarterly and recent
reports and amendments to these reports are available on our website free of
charge.
A glossary of certain terms, under "Glossary of Certain Mining Terms,"
appears at the end of this Item 1.
PRODUCTS AND SEGMENTS
Sales of metal concentrates and metal products are made principally to
custom smelters and metals traders. We are organized and managed primarily on
the basis of our principle products being produced from our operating units. The
La Camorra mine is the only unit included in the gold segment. Production from
all other mines are considered to be in the silver segment, since they
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are primarily silver producers. The percentage of sales contributed by each
segment is reflected in the following table:
Year
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Product/Segment 2002 2001 2000
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Silver 53.4% 51.4% 58.4%
Gold 46.6% 48.6% 41.6%
For financial information with respect to our business segments and
geographic areas, refer to Notes 2 and 11 of Notes to Consolidated Financial
Statements.
The table below summarizes our production and average cash operating
cost, average total cash cost and average total production cost per ounce for
silver and gold, as well as average metals prices for each period indicated:
Year
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2002 2001 2000
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Silver (ounces)(1) 8,681,293 7,434,290 7,998,677
Gold (ounces)(2) 239,633 194,742 146,038
Lead (tons)(1) 18,291 28,378 39,430
Zinc (tons)(1) 26,134 23,664 25,054
Average cost per ounce of silver produced:
Cash operating cost(3,4) $ 2.16 $ 3.55 $ 4.02
Total cash cost(3,4) $ 2.25 $ 3.57 $ 4.02
Total production cost(3,4) $ 3.68 $ 5.09 $ 5.49
Average cost per ounce of gold produced:
Cash operating cost(5) $ 137 $ 133 $ 208
Total cash cost(5) $ 137 $ 133 $ 211
Total production cost(5) $ 206 $ 200 $ 275
Industrial minerals (tons shipped)(6) 9,588 260,716 1,268,579
Average metals prices:
Silver - Handy & Harman ($/oz.) $ 4.63 $ 4.36 $ 5.00
Gold - Realized ($/oz.) $ 303 $ 280 $ 284
Gold - London Final ($/oz.) $ 310 $ 272 $ 279
Lead - LME Cash ($/pound) $ 0.205 $ 0.216 $ 0.206
Zinc - LME Cash ($/pound) $ 0.353 $ 0.402 $ 0.512
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(1) The increase in silver production from 2001 to 2002 was principally a
result of increased production from the San Sebastian mine, which
commenced production in May 2001 and reached full production during
the second quarter of 2002, offset by reduced production at the Lucky
Friday mine, where operations were reduced in October 2001. Decreased
lead production from 2001 to 2002 is principally due to reduced
production at the Lucky Friday mine. Increased zinc production in
2002 compared to 2001 is due to increased mill throughput at Greens
Creek during 2002. The decrease in silver, lead and zinc production
from 2000 to 2001 was principally due to decreased tons mined at
Lucky Friday, partly offset by an increase in tons mined at the
Greens Creek mine and at the San Sebastian mine.
(2) The increase in gold production from 2001 to 2002 was principally due
to increased production of over 25,000 ounces at the San Sebastian
mine, and over 15,000 ounces at the La Camorra mine primarily due to
improvements to the crushing, milling and adsorption capacities,
allowing for increases in tons milled (20% improvement) and gold
ounces produced. The increase in gold production from 2000 to 2001
was principally due to increased production at the La Camorra mine
(59,000 ounces) due to an average higher gold grade and an 18%
increase in tons processed during 2001, and increased production at
the San Sebastian mine, partly offset by decreased production of
24,000 ounces at the Rosebud mine due to the completion of operations
during the third quarter 2000.
(3) For the years ended December 31, 2002 and 2001, approximately $0.8
million and $0.4 million of costs, respectively, at the Lucky Friday
mine were classified as care-and-maintenance costs and included in
the determination of the costs per ounce at Lucky Friday. Excluding
the $0.8 million and $0.4 million in costs, the cash operating, total
cash and total production costs per ounce total $2.07, $2.16 and
$3.59, respectively, for 2002, and $3.49, $3.52 and $5.04,
respectively, for 2001.
(4) The low costs per silver ounce during 2002, compared to 2001, are due
in part to significant by-product credits from increased gold
production in the silver segment and an increase in the average gold
price. Costs per ounce amounts are calculated pursuant to standards
of the Gold Institute.
(5) Costs per ounce of gold are based on the gold produced by the gold
segment only. Gold produced in the silver segment (San Sebastian and
Greens Creek) is treated as a by-product credit in calculating silver
costs per ounce.
(6) The decrease in industrial minerals tons shipped from 2001 to 2002 is
due to the sale of the K-T Group in March 2001, as well as the sale
of the pet operations of the Colorado Aggregate division (CAC) of
MWCA, Inc., our wholly owned subsidiary, in March 2002. The decrease
in industrial minerals tons shipped from 2000 to 2001 was principally
due to the sale of the K-T Group in March 2001.
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EXPLORATION
We conduct exploration activities from our operating units and review
proposals and results from our headquarters in Coeur d'Alene, Idaho. We own or
control patented and unpatented mining claims, fee land, mineral concessions and
state and private leases in the United States, Mexico, Venezuela and other South
American countries. Our strategy regarding reserve replacement is to concentrate
our efforts on: (1) existing operations where an infrastructure already exists;
(2) other properties presently being developed; and (3) advanced-stage
exploration properties that have been identified as having potential for
additional discoveries principally in the United States, Mexico and Venezuela.
We intend to focus on low-cost properties that yield high returns and we
continuously evaluate opportunities to acquire additional properties.
Mineral exploration, particularly for silver and gold, is highly
speculative in nature, involves many risks and frequently is nonproductive.
There can be no assurance that our mineral exploration efforts will be
successful. Once mineralization is discovered, it may take a number of years
from the initial phases of drilling until production is possible, during which
time the economic feasibility of production may change. Substantial expenditures
are required to establish ore reserves through drilling, to determine
metallurgical processes to extract the metals from the ore and, in the case of
new properties, to construct mining and processing facilities. As a result of
these uncertainties, no assurance can be given that our exploration programs
will result in the expansion or replacement of existing ore reserves that are
being depleted by current production.
In March 2002, we were informed by CVG-Minerven (a Venezuelan
government-owned gold mining company) that we had been awarded the Block B
exploration and mining lease near El Callao in the Venezuelan State of Bolivar.
Block B is a 1,795-hectare land position in the historic El Callao gold district
that includes the historic Chile, Laguna and Panama mines which produced over
1.5 million ounces of gold between 1921 and 1946. For further information, see
Note 4 of Notes to Consolidated Financial Statements.
In August 2002, through our wholly owned subsidiary, Hecla Ventures
Corporation, we entered into an earn-in agreement with Rodeo Creek Gold, Inc., a
wholly owned subsidiary of Great Basin Gold Ltd. (Great Basin), to acquire a 50%
interest in an area of Great Basin's Ivanhoe high-grade gold property, which is
referred to as the Hollister Development Block and is located on the Carlin
Trend in Nevada. An "earn-in" agreement is an agreement under which a party must
take certain actions in order to "earn" an interest in an entity. In order to
receive the interest, we are required to complete a multi-stage exploration and
development program leading to commercial production. For further information,
see Note 4 of Notes to Consolidated Financial Statements.
Exploration expenditures for the three years ended December 31, 2002,
2001 and 2000, were approximately $5.8 million, $2.2 million and $6.3 million,
respectively. Our near-term exploration plan consists of exploring for
additional reserves at, or in the vicinity of, our San Sebastian mine in Mexico;
the La Camorra mine, the Block B and Canaima properties in Venezuela; the Greens
Creek mine in Alaska; and the Hollister Development Block in Nevada.
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Exploration expenditures for 2003 are estimated to be in the range of $10.0
million to $15.0 million.
REGULATION OF MINING ACTIVITY
Our U.S. mining operations are subject to inspection and regulation by
the Mine Safety and Health Administration of the Department of Labor (MSHA)
under provisions of the Federal Mine Safety and Health Act of 1977. MSHA
directives have had no material adverse impact on our results of operations or
financial condition and we believe that we are substantially in compliance with
the regulations promulgated by MSHA.
All of our exploration, development and production activities in the
United States, Mexico and South America are subject to regulation by
governmental agencies under one or more of the various environmental laws. These
laws address emissions to the air, discharges to water, management of wastes,
management of hazardous substances, protection of natural resources, protection
of antiquities and reclamation of lands which are disturbed. We believe that we
are in compliance with applicable environmental regulations. Many of the
regulations also require permits to be obtained for our activities. These
permits normally are subject to public review processes resulting in public
input prior to agency approval of the activity. While these laws and regulations
govern how we conduct many aspects of our business, our management does not
believe they have a material adverse effect on our results of operations or
financial condition at this time. Our projects are evaluated considering the
cost and impact of environmental regulation on the proposed activity. New laws
and regulations are evaluated as they develop to determine the impact on, and
changes necessary to, our operations. It is possible that future changes in
these laws or regulations could have a significant impact on some portion of our
business, causing those activities to be economically reevaluated at that time.
We believe an adequate provision has been made for the reclamation of mine waste
and mill tailings at all of our operating and nonoperating properties in a
manner that complies with current applicable federal and state environmental
requirements.
Environmental laws and regulations may also have an indirect impact on
us, such as increased cost for electrical power. Charges by smelters, to which
we sell our metallic concentrates and products, have substantially increased
over the past several years due to requirements that smelters meet revised
environmental quality standards. We have no control over the smelters'
operations or their compliance with environmental laws and regulations. If the
smelting capacity available to us was significantly reduced because of
environmental requirements or otherwise, it is possible that our silver
operations could be adversely affected.
Our U.S. operations may also be subject to both the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(CERCLA or Superfund), which regulates and establishes liability for the release
of hazardous substances, and the Endangered Species Act (ESA), which identifies
endangered species of plants and animals and regulates activities to protect
these species and their habitats. See Item 1A - Risk Factors "We face
substantial governmental regulation and environmental risks."
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LEGISLATION
From time to time, the U.S. Congress considers proposed amendments to
the General Mining Law of 1872, as amended, which governs mining claims and
related activities on Federal lands. There was no significant activity with
respect to mining law reform in Congress during 2002. The extent of any such
future changes is not known and the potential impact on us as a result of
Congressional action is difficult to predict. Although a majority of our
existing U.S. mining operations occur on private or patented property, changes
to the General Mining Law, if adopted, could adversely affect our ability to
economically develop mineral resources on federal lands.
EMPLOYEES
As of December 31, 2002, we employed 720 people, including people
employed with our subsidiaries.
GLOSSARY OF CERTAIN MINING TERMS
* CASH OPERATING COSTS -- Includes all direct and indirect operating cash costs
incurred at each operating mine, excluding royalties and mine production
taxes.
* DORE -- Unrefined gold and silver bullion bars consisting of approximately
90% precious metals which will be further refined to almost pure metal.
* MINERALIZED MATERIAL -- A mineralized body which has been delineated by
appropriately spaced drilling and/or underground sampling to support a
sufficient tonnage and average grade of metals.
* ORE -- A mixture of valuable minerals and gangue (valueless minerals) from
which at least one of the minerals or metals can be extracted at a profit.
* OREBODY -- A continuous, well-defined mass of material of sufficient ore
content to make extraction economically feasible.
* PRIMARY DEVELOPMENT -- The initial access to an orebody through adits,
shafts, declines and winzes.
* PROVEN AND PROBABLE ORE RESERVES -- Reserves that reflect estimates of the
quantities and grades of mineralized material at our mines which we believe
can be recovered and sold at prices in excess of the total cash cost
associated with extracting and processing the ore. The estimates are based
largely on current costs and on prices and demand for our products. Mineral
reserves are stated separately for each of our mines based upon factors
relevant to each mine. Reserves represent diluted in-place grades and do not
reflect losses in the recovery process. Our estimates of Proven and Probable
reserves for the Lucky Friday mine, the San Sebastian mine and the La Camorra
mine are based on the following metals prices:
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December 31,
2002 2001
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Silver $ 4.75 $ 5.10
Gold $ 300 $ 300
Lead $ 0.21 $ 0.24
Zinc $ 0.44 $ 0.48
Proven and Probable ore reserves for the Lucky Friday, San Sebastian and La
Camorra mines are calculated and reviewed in-house and are subject to
periodic audit by others, although audits are not performed on an annual
basis.
Proven and Probable ore reserves for the Greens Creek mine are based on
calculations of reserves provided to us by the operator of Greens Creek that
have been reviewed but not independently confirmed by us. Kennecott Greens
Creek Mining Company's estimates of Proven and Probable ore reserves for the
Greens Creek mine as of December 2002 and 2001 are derived from successive
generations of reserve and feasibility analyses for different areas of the
mine each using a separate assessment of metals prices. The weighted average
prices used were:
December 31,
2002 2001
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Silver $ 5.00 $ 4.92
Gold $ 300 $ 309
Lead $ 0.24 $ 0.25
Zinc $ 0.46 $ 0.49
Changes in reserves represent general indicators of the results of efforts to
develop additional reserves as existing reserves are depleted through
production. Grades of ore fed to process may be different from stated reserve
grades because of variation in grades in areas mined from time to time,
mining dilution and other factors. Reserves should not be interpreted as
assurances of mine life or of the profitability of current or future
operations. Our Proven and Probable ore reserves are sensitive to price
changes, although we do not believe that a 10% increase or decrease in
estimated metals prices would have a significant impact on Proven and
Probable ore reserves at our La Camorra, San Sebastian and Greens Creek
mines.
* PROBABLE RESERVES -- Reserves for which quantity and grade and/or quality are
computed from information similar to that used for Proven reserves, but the
sites for inspection, sampling and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although lower
than that for Proven reserves, is high enough to assume continuity between
points of observation.
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* PROVEN RESERVES -- Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade
and/or quality are computed from the results of detailed sampling, and (b)
the sites for inspection, sampling and measurement are spaced so closely and
the geologic character is so well-defined that size, shape, depth and mineral
content of reserves are well established.
* RESERVES -- That part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination.
* SECONDARY DEVELOPMENT -- The preparation of the orebody for production
through crosscuts, raises and stope preparation.
* STOPE -- An underground excavation from which ore has been extracted either
above or below mine level.
* TOTAL CASH COSTS -- Includes all direct and indirect operating cash costs
incurred at each operating mine.
* TOTAL PRODUCTION COSTS -- Includes total cash costs, as defined, plus
depreciation, depletion, amortization and reclamation accruals relating to
each operating mine.
* TOTAL PRODUCTION COSTS PER OUNCE -- Calculated based upon total production
costs, as defined, net of by-product revenues earned from all metals other
than the primary metal produced at each mine, divided by the total ounces of
the primary metal produced.
* UNPATENTED MINING CLAIM -- A parcel of property located on federal lands
pursuant to the General Mining Law and the requirements of the state in which
the unpatented claim is located, the paramount title of which remains with
the federal government. The holder of a valid, unpatented lode-mining claim
is granted certain rights including the right to explore and mine such claim
under the General Mining Law.
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RISK FACTORS
The following risks and uncertainties, together with other information
set forth in this Form 10-K, should be carefully considered by current and
future investors in our securities. Any of the following risks could materially
adversely affect our business, financial condition or operating results and
could negatively impact the value of our common stock.
ALTHOUGH WE HAD OPERATING PROFITS IN 2002 AND 2001, WE HAVE INCURRED A TOTAL OF
$168.7 MILLION OF LOSS APPLICABLE TO COMMON SHAREHOLDERS IN THE PAST FIVE YEARS
AND THERE CAN BE NO ASSURANCE THAT OUR OPERATIONS WILL REMAIN PROFITABLE.
Our net income improved in 2002 and 2001 as a result, in large part, of
increased gold production, lower silver and gold production costs, lower
interest expense, a gain on the sale of our subsidiary, Kentucky-Tennessee Clay
Company and, recently, increased gold prices. Prior to 2001, we incurred net
losses for each of the prior ten years. Many of the factors affecting our
operating results are beyond our control, including expectations with respect to
the rate of inflation, the relative strength of the United States dollar and
certain other currencies, interest rates, global or regional political or
economic crises, global or regional demand, speculation, and sales by central
banks and other holders and producers of gold and silver in response to these
factors, and we cannot foresee whether our operations will continue to generate
sufficient revenue for us to be profitable. While silver and gold prices
improved in 2002 over average prices in 2001, there can be no assurance such
prices will continue at or above such levels.
OUR PREFERRED STOCK HAS A LIQUIDATION PREFERENCE OF $50 PER SHARE, OR $37.7
MILLION, PLUS DIVIDENDS IN ARREARS OF APPROXIMATELY $6.6 MILLION.
This means that if we were liquidated as of January 2, 2003, holders of
our preferred stock would be entitled to receive approximately $44.3 million
from any liquidation proceeds before holders of our common stock would be
entitled to receive any proceeds.
WE ARE CURRENTLY INVOLVED IN ONGOING LITIGATION THAT MAY ADVERSELY AFFECT US.
There are several ongoing lawsuits in which we are involved. If any of
these cases results in a substantial monetary judgment against us or is settled
on unfavorable terms, our results of operations, financial condition and cash
flows could be materially adversely affected. For example, we may ultimately
incur environmental remediation costs substantially in excess of the amounts we
have accrued and the plaintiffs in environmental proceedings may be awarded
substantial damages (which costs and damages we may not be able to recover from
our insurers). See Note 8 of Notes to Consolidated Financial Statements.
OUR EARNINGS MAY BE AFFECTED BY METALS PRICE VOLATILITY.
The majority of our revenues is derived from the sale of silver, gold,
lead and zinc and, as a result, our earnings are directly related to the prices
of these metals. Silver, gold, lead and zinc prices fluctuate widely and are
affected by numerous factors including:
* expectations for inflation;
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* speculative activities;
* relative exchange rate of the U.S. dollar;
* global and regional demand and production;
* political and economic conditions; and
* production costs in major producing regions.
These factors are beyond our control and are impossible for us to
predict. If the market prices for these metals fall below our costs to produce
them for a sustained period of time, we will experience losses and may have to
discontinue development or mining at one or more of our properties.
In the past, we have used limited hedging techniques to reduce our
exposure to price volatility, but we may not be able to do so in the future. See
"Our hedging activities could expose us to losses."
The following table sets forth the average daily closing prices of the
following metals for 1985, 1990, 1995, 1998 and each year thereafter through
2002.
1985 1990 1995 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- -------- -------- --------
Silver(1)
(per oz.) $ 6.14 $ 4.82 $ 5.19 $ 5.53 $ 5.25 $ 5.00 $ 4.39 $ 4.63
Gold(2)
(per oz.) 317.26 383.46 384.16 294.16 278.77 279.03 271.00 309.97
Lead(3)
(per lb.) 0.18 0.37 0.29 0.24 0.23 0.21 0.22 0.21
Zinc(4)
(per lb.) 0.36 0.69 0.47 0.46 0.49 0.51 0.40 0.35
- -----------------------------
(1) Handy & Harman
(2) London Final
(3) London Metals Exchange -- Cash
(4) London Metals Exchange -- Special High Grade -- Cash
On February 28, 2003, the closing prices for silver, gold, lead and
zinc were $4.64 per ounce, $345.45 per ounce, $0.21 per pound, and $0.36 per
pound, respectively.
THE VOLATILITY OF METALS PRICES MAY ADVERSELY AFFECT OUR DEVELOPMENT AND
EXPLORATION EFFORTS.
Our ability to produce silver and gold in the future is dependent upon
our exploration efforts, and our ability to develop new ore reserves. If prices
for these metals decline, it may not be economically feasible for us to continue
our development of a project or to continue commercial production at some of our
properties.
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OUR DEVELOPMENT OF NEW OREBODIES MAY COST MORE AND PROVIDE LESS RETURN THAN WE
ESTIMATED.
Our ability to sustain or increase our current level of production of
metals partly depends on our ability to develop new orebodies and/or expand
existing mining operations. Before we can begin a development project, we must
first determine whether it is economically feasible to do so. This determination
is based on estimates of several factors, including:
* reserves;
* expected recovery rates of metals from the ore;
* facility and equipment costs;
* capital and operating costs of a development project;
* future metals prices;
* comparable facility and equipment costs; and
* anticipated climate conditions.
Development projects may have no operating history upon which to base
these estimates, and these estimates are based in large part on our
interpretation of geological data, a limited number of drill holes and other
sampling techniques. As a result, actual cash operating costs and returns from a
development project may differ substantially from our estimates as a result of
which it may not be economically feasible to continue with a development
project.
OUR ORE RESERVE ESTIMATES MAY BE IMPRECISE.
Our ore reserve figures and costs are primarily estimates and are not
guarantees that we will recover the indicated quantities of these metals.
Reserves are estimates made by our technical personnel and no assurance can be
given that the estimate of the amount of metal or the indicated level of
recovery of these metals will be realized. Reserve estimation is an interpretive
process based upon available data. Our reserve estimates for properties that
have not yet started may change based on actual production experience. Further,
reserves are valued based on estimates of costs and metals prices. The economic
value of ore reserves may be adversely affected by:
* declines in the market price of the various metals we mine;
* increased production or capital costs; or
* reduced recovery rates.
Short-term operating factors relating to our ore reserves, such as the
need to sequentially develop orebodies and the processing of new or different
ore grades, may adversely affect our profitability. We may use forward sales
contracts and other hedging techniques to partially
-13-
offset the effects of a drop in the market prices of the metals we mine.
However, if the price of metals that we produce declines substantially below the
levels used to calculate reserves for an extended period, we could experience:
* delays in new project development;
* increased net losses;
* reduced cash flow;
* reductions in reserves; and
* possible write-down of asset values.
OUR AVAILABLE CASH AND CASH FLOWS MAY BE INADEQUATE TO FUND EXPANSION PROJECTS.
We currently believe that our cash on hand, cash proceeds from an
underwritten public offering completed in January 2003, future cash flows from
operations, amounts available under existing loan agreements and/or future debt
or equity security issuances will be adequate to fund our:
* anticipated minimum capital expenditure requirements;
* idle property expenditures;
* debt service; and
* exploration expenditures.
Although we believe existing cash and cash equivalents are adequate, we
cannot project the cash impact of possible future investment opportunities or
acquisitions, and our operating properties may require more cash than
forecasted.
OUR MINERAL EXPLORATION EFFORTS MAY NOT BE SUCCESSFUL.
We must continually replace ore reserves depleted by production. Our
ability to expand or replace depleted ore reserves depends on the success of our
exploration program. Mineral exploration, particularly for silver and gold, is
highly speculative. It involves many risks and is often nonproductive. Even if
we find a valuable deposit of minerals, it may be several years before
production is possible. During that time, it may become economically unfeasible
to produce those minerals. Establishing ore reserves requires us to make
substantial capital expenditures and, in the case of new properties, to
construct mining and processing facilities. As a result of these costs and
uncertainties, we may not be able to expand or replace our existing ore reserves
as they are depleted by current production.
-14-
OUR JOINT DEVELOPMENT AND OPERATING ARRANGEMENTS MAY NOT BE SUCCESSFUL.
We often enter into joint venture arrangements in order to share the
risks and costs of developing and operating properties. For instance, our Greens
Creek mine is operated through a joint venture arrangement. In a typical joint
venture arrangement, we own a percentage of the assets in the joint venture.
Under the agreement governing the joint venture relationship, each party is
entitled to indemnification from each other party and is only liable for the
liabilities of the joint venture in proportion to its interest in the joint
venture. However, if a party fails to perform its obligations under the joint
venture agreement, we could incur losses in excess of our pro-rata share of the
joint venture. In the event any party so defaults, the joint venture agreement
provides certain rights and remedies to the remaining participants, including
the right to sell the defaulting party's percentage interest and use the
proceeds to satisfy the defaulting party's obligations. We currently believe
that our joint venture partners will meet their obligations.
WE FACE STRONG COMPETITION FROM OTHER MINING COMPANIES FOR THE ACQUISITION OF
NEW PROPERTIES.
Mines have limited lives and as a result, we continually seek to
replace and expand our reserves through the acquisition of new properties. In
addition, there is a limited supply of desirable mineral lands available in the
United States and other areas where we would consider conducting exploration
and/or production activities. Because we face strong competition for new
properties from other mining companies, some of whom have greater financial
resources than we do, we may be unable to acquire attractive new mining
properties on terms that we consider acceptable.
THE TITLES TO SOME OF OUR PROPERTIES MAY BE DEFECTIVE.
Unpatented mining claims constitute a significant portion of our
undeveloped property holdings. The validity of these unpatented mining claims is
often uncertain and may be contested. In accordance with mining industry
practice, we do not generally obtain title opinions until we decide to develop a
property. Therefore, while we have attempted to acquire satisfactory title to
our undeveloped properties, some titles may be defective.
In Mexico, there is ongoing litigation concerning a lien that predates
acquisition of the Velardena mill by our subsidiary, Minera Hecla, S.A. de C.V.
For additional information, see Note 8 of Notes to Consolidated Financial
Statements.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS AND HAZARDS ASSOCIATED WITH
THE MINING INDUSTRY.
Our business is subject to a number of risks and hazards including:
* environmental hazards;
* political and country risks;
* industrial accidents;
-15-
* labor disputes;
* unusual or unexpected geologic formations;
* cave-ins;
* explosive rock failures; and
* flooding and periodic interruptions due to inclement or hazardous
weather conditions.
Such risks could result in:
* damage to or destruction of mineral properties or producing facilities;
* personal injury;
* environmental damage;
* delays in mining;
* monetary losses; and
* legal liability.
For some of these risks, we maintain insurance to protect against these
losses at levels consistent with our historical experience and industry
practice. However, we may not be able to maintain this insurance, particularly
if there is a significant increase in the cost of premiums. Insurance against
environmental risks is generally either unavailable or too expensive for us and
other companies in our industry, and, therefore, we do not maintain
environmental insurance. To the extent we are subject to environmental
liabilities, we would have to pay for these liabilities. Moreover, in the event
that we are unable to fully pay for the cost of remedying an environmental
problem, we might be required to suspend operations or enter into other interim
compliance measures.
OUR FOREIGN OPERATIONS, INCLUDING OUR OPERATIONS IN VENEZUELA, ARE SUBJECT TO
ADDITIONAL INHERENT RISKS.
We currently conduct mining operations in Mexico and Venezuela and have
exploration projects in Mexico and South America. We anticipate we will continue
to conduct significant operations in those and other international locations in
the future. Because we conduct operations internationally, we are subject to
political and economic risks such as:
* the effects of local political and economic developments;
* exchange controls and export or sale restrictions;
* currency fluctuations;
-16-
* expropriation; and
* taxation and laws or policies of foreign countries and the United
States affecting trade, investment and taxation.
Consequently, our exploration, development and production activities
outside of the United States may be substantially affected by factors beyond our
control, any of which could materially adversely affect our financial position
or results of operations.
Venezuela, the site of our La Camorra mine, recently experienced
political unrest in the form of street marches and demands that the current
president hold a referendum to determine whether to remove him from office. An
approximate two-month long general strike commenced in December 2002 and
continued into February 2003. The result of the strike included shortages of oil
and gas supplies in Venezuela and a severe economic downturn. We continued to
operate the La Camorra mine during the general strike and were able to obtain
adequate supplies, including oil and gas for our operations. The general strike
in Venezuela ended in early February, but oil and gas operations are not up to
full capacity. Although we believe we will be able to manage and operate our La
Camorra mine and related exploration projects successfully, due to the strike
and its ramifications on supplies of oil, gas and other products, there can be
no assurance that we will be able to operate without interruptions to our
operations.
Following the general strike in Venezuela, the Venezuelan government
announced its intent to implement exchange controls on foreign currency
transactions. Rules and regulations regarding the implementation of exchange
controls in Venezuela have not been finalized as of the date of this filing.
Exchange controls may require us to convert United States dollars into foreign
currency. Management is currently monitoring the finalization of exchange
controls in Venezuela, and there can be no assurance that the implementation of
exchange controls will not adversely affect our operations in Venezuela.
OUR OPERATIONS ARE SUBJECT TO CURRENCY FLUCTUATIONS.
Currency fluctuations may affect the cash flow which we will realize
from our operations since our products are sold in world markets in United
States dollars. There can be no assurance that foreign exchange fluctuations
will not materially adversely affect our financial performance and results of
operations.
For additional discussion of exchange controls in Venezuela, see the
discussion above under "Our foreign operations, including our operations in
Venezuela, are subject to additional inherent risks."
WE ARE REQUIRED TO OBTAIN GOVERNMENTAL PERMITS IN ORDER TO CONDUCT MINING
OPERATIONS.
In the ordinary course of business, mining companies are required to
seek governmental permits for expansion of existing operations or for the
commencement of new operations. Obtaining the necessary governmental permits is
a complex and time-consuming process involving numerous jurisdictions and often
involving public hearings and costly undertakings on our part. The duration and
success of our efforts to obtain permits are contingent upon many variables not
within our control. Obtaining environmental protection permits, including the
-17-
approval of reclamation plans, may increase costs and cause delays depending on
the nature of the activity to be permitted and the interpretation of applicable
requirements implemented by the permitting authority. There can be no assurance
that all necessary permits will be obtained and, if obtained, that the costs
involved will not exceed those that we previously estimated. It is possible that
the costs and delays associated with the compliance with such standards and
regulations could become such that we would not proceed with the development or
operation of a mine or mines.
WE FACE SUBSTANTIAL GOVERNMENTAL REGULATION AND ENVIRONMENTAL RISKS.
Our business is subject to extensive federal, state and local laws and
regulations governing development, production, labor standards, occupational
health, waste disposal, use of toxic substances, environmental regulations, mine
safety and other matters. We have been, and are currently involved in lawsuits
in which we have been accused of violating environmental laws, and we may be
subject to similar lawsuits in the future. See Note 8 of Notes to Consolidated
Financial Statements. New legislation and regulations may be adopted at any time
that results in additional operating expense, capital expenditures or
restrictions and delays in the mining, production or development of our
properties.
We maintain reserves for costs associated with mine closure,
reclamation of land and other environmental matters. At December 31, 2002, our
reserves for these matters totaled $49.7 million. We anticipate that we will
make expenditures relating to these reserves over the next five to ten years.
Future expenditures related to closure, reclamation and environmental
expenditures are difficult to estimate due to:
* the early stage of our investigation;
* the uncertainties relating to the costs and remediation methods that
will be required in specific situations;
* the possible participation of other potentially responsible parties;
and
* changing environmental laws, regulations and interpretations.
It is possible that, as new information becomes available, changes to
our estimates of future closure, reclamation and environmental contingencies
could materially adversely affect our future operating results.
Various laws and permits require that financial assurances be in place
for certain environmental and reclamation obligations and other potential
liabilities. We currently have in place such financial assurances in the form of
surety bonds. As of December 31, 2002, we also had set aside as restricted
investments approximately $6.4 million as collateral for these bonds. The amount
of the financial assurances and the amount required to be set aside by us as
collateral for these financial assurances are dependent upon a number of
factors, including our financial condition, reclamation cost estimates,
development of new projects and the total dollar value of financial assurances
in place. There can be no assurance that we will be able to maintain or add to
our current level of financial assurances.
-18-
OUR HEDGING ACTIVITIES COULD EXPOSE US TO LOSSES.
From time to time, we engage in hedging activities, such as forward
sales contracts and commodity put and call option contracts, to minimize the
effect of declines in metals prices on our operating results. While these
hedging activities may protect us against low metals prices, they may also limit
the price we can receive on hedged products. As a result, we may be prevented
from realizing possible revenues in the event that the market price of a metal
exceeds the price stated in a forward sale or call option contract. We are also
subject to posting margins if the margin free limit of $10.0 million in the
aggregate for all our contracts is exceeded. As of December 31, 2002, if we
closed out our existing hedge contract positions, we would have to pay our
counterparties $6.5 million. In addition, we may experience losses if a
counterparty fails to purchase under a contract when the contract price exceeds
the spot price of a commodity.
OUR BUSINESS DEPENDS ON GOOD RELATIONS WITH OUR EMPLOYEES.
Certain of our employees are represented by unions. At December 31,
2002, there were 65 hourly employees at the Lucky Friday mine. The United
Steelworkers of America is the bargaining agent for the Lucky Friday hourly
employees. The current labor agreement expires on June 16, 2003. At December 31,
2002, there were 136 hourly and 46 salaried employees at the San Sebastian mine
and Velardena mill. The National Mine and Mill Workers Union represents process
plant hourly workers at San Sebastian. Under Mexican labor law, wage adjustments
are negotiated annually and other contract terms every two years. The contract
at San Sebastian is due for negotiation of wages in July 2003 and for wages and
other terms in July 2004. At December 31, 2002, there were 346 hourly and 41
salaried employees at our La Camorra gold mine, most of whom are represented by
the Mine Workers Union. The contract with respect to La Camorra will expire in
March 2004. We anticipate that we will be able to negotiate a satisfactory
contract with each union, but there can be no assurance that this can be done
without a disruption to production.
OUR STOCKHOLDER RIGHTS PLAN AND PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
OUR BY-LAWS AND DELAWARE LAW COULD DELAY OR DETER TENDER OFFERS OR TAKEOVER
ATTEMPTS THAT MAY OFFER A PREMIUM FOR OUR COMMON STOCK.
Our stockholder rights plan and provisions in our certificate of
incorporation, our by-laws and Delaware law could make it more difficult for a
third party to acquire control of us, even if that transaction would be
beneficial to stockholders. These impediments include:
* the rights issued in connection with the stockholder rights plan
that will substantially dilute the ownership of any person or group
that acquires 15% or more of our outstanding common stock unless the
rights are first redeemed by our board of directors, in its
discretion. Furthermore, our board of directors may amend the terms
of these rights, in its discretion, including an amendment to lower
the acquisition threshold to any amount greater than 10% of the
outstanding common stock;
* the classification of our board of directors into three classes
serving staggered three-year terms;
-19-
* the ability of our board of directors to issue shares of preferred
stock with rights as it deems appropriate without stockholder
approval;
* a requirement that special meetings of our board of directors may be
called only by our chief executive officer or a majority of our
board of directors;
* a provision that special meetings of stockholders may only be called
pursuant to a resolution approved by a majority of our entire board
of directors;
* a prohibition against action by written consent of our stockholders;
* a requirement that our board members may only be removed for cause
and by an affirmative vote of at least 80% of the outstanding voting
stock;
* a requirement that our stockholders comply with advance-notice
provisions to bring director nominations or other matters before
meetings of our stockholders;
* a prohibition against certain business combinations with an acquirer
of 15% or more of our common stock for three years after such
acquisition unless the stock acquisition or the business combination
is approved by our board prior to the acquisition of the 15%
interest, or after such acquisition our board and the holders of
two-thirds of the other common stock approve the business
combination; and
* a prohibition against our entering into some business combinations
with interested stockholders without the affirmative vote of the
holders of at least 80% of the voting power of the then outstanding
shares of voting stock.
The existence of the stockholder rights plan and these provisions may
deprive stockholders of an opportunity to sell our stock at a premium over
prevailing prices. The potential inability of our stockholders to obtain a
control premium could adversely affect the market price for our common stock.
WE ARE DEPENDENT ON KEY PERSONNEL.
We are currently dependent upon the ability and experience of our
executive officers and there can be no assurance that we will be able to retain
all of such officers. The loss of one or more of the officers could have a
material adverse effect on our operations. We also compete with other companies
both within and outside the mining industry in connection with the recruiting
and retention of qualified employees knowledgeable in mining operations.
In December 2002, Arthur Brown announced he would retire as Chief
Executive Officer effective in May 2003. Subject to formal board approval, we
expect he will be succeeded by Phillips S. Baker, Jr. currently our President,
Chief Operating Officer and Chief Financial Officer. Mr. Brown will remain as
Chairman of the Board.
-20-
OUR CURRENT AND FUTURE CASH POSITION MAY NOT PROVIDE US WITH SUFFICIENT
LIQUIDITY.
We had cash and cash equivalents at December 31, 2002, of approximately
$19.5 million. In addition, in January 2003, we announced the completion of an
underwritten public offering for 23.0 million shares of common stock, which
resulted in net proceeds of approximately $91.2 million in cash to us.
We believe cash requirements over the next twelve months will be funded
through a combination of current cash, proceeds from the January 2003 public
offering, future cash flows from operations, amounts available under existing
loan agreements and/or future debt or equity security issuances. Although we
believe existing cash and cash equivalents are adequate, we cannot project the
cash impact of possible future investment opportunities or acquisitions, and our
operating properties may require more cash than forecasted.
-21-
Item 2. Properties
SILVER SEGMENT
THE LUCKY FRIDAY MINE
Since 1958, we have operated the Lucky Friday mine (100% owned), a deep
underground silver and lead mine located in the Coeur d'Alene Mining District in
northern Idaho. The principal ore-bearing structure at the Lucky Friday mine
through 1997 was the Lucky Friday vein, a fissure vein typical of many in the
Coeur d'Alene Mining District. The orebody is located in the Revett Formation,
which is known to provide excellent host rocks for a number of orebodies in the
Coeur d'Alene District. The Lucky Friday vein strikes northeasterly and dips
steeply to the south with an average width of six to seven feet. Its principal
ore minerals are galena and tetrahedrite with minor amounts of sphalerite and
chalcopyrite. The ore occurs as a single continuous orebody in and along the
Lucky Friday vein. The major part of the orebody has extended from the
1,200-foot level to and below the 6,020-foot level.
During 1991, we discovered several mineralized structures containing
some high-grade silver ores in an area known as the Gold Hunter property,
approximately 5,000 feet northwest of the then existing Lucky Friday workings.
We control the Gold Hunter property under a long-term operating agreement that
entitles us, as operator, to an 81.48% interest in the net profits from
operations from the Gold Hunter properties. We will be obligated to pay a
royalty after we have recouped our costs to explore and develop the properties.
As of December 31, 2002, unrecouped costs totaled approximately $32.6 million.
The principal mining method at the Lucky Friday mine is ramp access,
cut and fill. This method utilizes rubber-tired equipment to access the veins
through ramps developed outside of the orebody. Once a cut is taken along the
strike of the vein, it is backfilled with cemented tailings and the next cut is
accessed, either above or below, from the ramp system.
The ore produced from the mine is processed in a 1,100-ton-per-day
conventional flotation mill. In 2002, ore was processed at a rate of
approximately 525 tons per day. The flotation process produces both a
silver-lead concentrate and a zinc concentrate. During 2002, mill recovery
totaled approximately 94% silver, 93% lead and 75% zinc. All silver, lead and
zinc concentrate production during 2002 was shipped to Teck Cominco's smelter in
Trail, British Columbia, Canada.
In the fourth quarter of 2000, due to continuing low silver and lead
prices, our management and board of directors deferred the decision to approve
additional capital expenditures, which are needed to develop the next area of
the mine, and recorded an adjustment of $31.2 million to reduce the carrying
value of the Lucky Friday mine plant, property and equipment. In 2001, due to
low metals prices, we made the decision to reduce the level of mining activity
at the Lucky Friday mine to approximately 30% of full production. During 2002,
mining activity was approximately 50% of full production. We estimate that with
minimal additional development the mine can sustain the lower production levels
through 2004, as long as the cost of operating is less than putting the property
on care and maintenance.
-22-
Information with respect to the Lucky Friday mine's production, average
cost per ounce of silver produced and Proven and Probable ore reserves for the
past three years is set forth in the table below:
Years
--------------------------------------------
Production 2002 2001 2000
- ------------------------- ----------- ----------- -----------
Ore milled (tons) 159,651 239,330 321,719
Silver (ounces) 2,004,404 3,224,373 5,011,507
Gold (ounces) 206 415 537
Lead (tons) 10,091 20,984 31,946
Zinc (tons) 2,259 2,789 3,107
Average Cost per Ounce
of Silver Produced
- -------------------------
Cash operating costs(1) $ 4.97 $ 5.27 $ 5.02
Total cash costs(1) $ 4.97 $ 5.27 $ 5.02
Total production costs(1) $ 5.49 $ 6.05 $ 5.83
Proven and Probable
Ore Reserves(2,3,4) 12/31/02 12/31/01 12/31/00
- ------------------------- ---------- ---------- ----------
Total tons -- -- 1,322,270
Silver (ounces per ton) -- -- 16.7
Lead (percent) -- -- 10.7
Zinc (percent) -- -- 1.4
Contained silver (ounces) -- -- 22,089,451
Contained lead (tons) -- -- 141,380
Contained zinc (tons) -- -- 18,546
- --------------------------
(1) Beginning in the fourth quarter of 2001, the Lucky Friday began a
recalculation of costs per ounce which eliminated costs classified as
care-and-maintenance. Approximately $0.4 million and $0.8 million,
respectively, of costs were classified as care-and-maintenance in the
fourth quarter of 2001 and for the year ended December 31, 2002, and
included in the determination of the costs per ounce at Lucky Friday.
Excluding the $0.4 million and $0.8 million, the cash operating, total
cash and total production costs per ounce total $5.14, $5.14 and
$5.92, respectively, for 2001, and $4.57, $4.57 and $5.09,
respectively, for 2002.
(2) For Proven and Probable ore reserve assumptions and definitions, see
Glossary of Certain Mining Terms.
-23-
(3) Reserves are in-place material that incorporate estimates of the
amount of waste which must be mined along with the ore and expected
mining recovery. Mill recoveries are expected to be 93% for silver,
90% for lead and 50% for zinc.
(4) As of December 31, 2002 and 2001, it was determined the Lucky Friday
mineralized material did not meet all the criteria established for
disclosure of reserves by the Securities and Exchange Commission's
Industry Guide 7. At December 31, 2002, the estimated mineralized
material included 1,082,000 tons with 13.2 ounces per ton silver, 8.5%
lead and 1.7% zinc. At December 31, 2001, the estimated mineralized
material included 1,205,180 tons with 14.2 ounces per ton silver, 9.4%
lead and 1.6% zinc.
Ultimate reclamation activities contemplated include stabilization of
tailings ponds and waste rock areas. There were no final reclamation activities
performed in 2002.
The net book value of the Lucky Friday mine property and its associated
plant and equipment was approximately $1.0 million as of December 31, 2002. At
December 31, 2002, there were 86 employees at the Lucky Friday mine. The United
Steelworkers of America is the bargaining agent for the Lucky Friday hourly
employees. The current labor agreement expires on June 16, 2003. Avista
Corporation supplies electrical power to the Lucky Friday mine.
For a description of a legal claim involving Lucky Friday mine, see
Part 1, Item 3 - Legal Proceedings.
THE GREENS CREEK MINE
At December 31, 2002, we held a 29.73% interest in the Greens Creek
mine, located on Admiralty Island, near Juneau, Alaska, through a joint-venture
arrangement with Kennecott Greens Creek Mining Company (KGCMC), the manager of
the mine, and Kennecott Juneau Mining Company (KJMC), both wholly owned
subsidiaries of Kennecott Minerals. The Greens Creek mine is a polymetallic
deposit containing silver, zinc, gold and lead.
Greens Creek lies within the Admiralty Island National Monument, an
environmentally sensitive area. The Greens Creek property includes 17 patented
lode claims and one patented millsite claim, in addition to property leased from
the U.S. Forest Service. Greens Creek also has title to mineral rights on 7,500
acres of federal land adjacent to the mine properties. The entire project is
accessed and served by 13 miles of road and consists of the mine, an ore
concentrating mill, a tailings impoundment area, a ship-loading facility, camp
facilities and a ferry dock.
Pursuant to a 1996 land exchange agreement, the joint venture
transferred private property equal to a value of $1.0 million to the U.S. Forest
Service and received access to approximately 7,500 acres of land with potential
mining resources surrounding the existing mine. Production from new ore
discoveries on the exchange lands will be subject to the federal royalties
included in the land exchange agreement. The federal royalties are based on a
defined calculation that is similar to the calculation of net smelter return and
are equal to 0.75% or 3% of
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the calculated amount depending on the value of the ore extracted. The royalty
is 3% if the average value of the ore during a year is greater than $120 per ton
of ore, and 0.75% if the value is $120 per ton or less. The benchmark of $120
per ton is escalated annually by the Gross Domestic Product until the year 2016.
Currently, Greens Creek is mining approximately 2,000 tons per day
underground from the 200 South, the Southwest and West ore zones. Ore from the
underground trackless mine is milled at the mine site. The mill produces
silver/gold dore and lead, zinc and bulk concentrates. The dore is marketed to a
precious metal refiner and the three concentrate products are predominantly sold
to a number of major smelters worldwide. Concentrates are shipped from a marine
terminal located on Admiralty Island about nine miles from the mine site. The
Greens Creek mine uses electrical power provided by diesel-powered generators
located on-site.
The employees at the Greens Creek mine are employees of Kennecott
Greens Creek Mining Company and are not represented by a bargaining agent. At
December 31, 2002, our interest in the net book value of the Greens Creek mine
property and its associated plant and equipment was approximately $57.0 million.
The Greens Creek deposit consists of zinc, lead, and iron sulfides and
copper-silver sulfides and sulfosalts with substantial contained silver and gold
values. The deposit has a vein-like to blanket-like form of variable thickness.
The ore is thought to have been laid down by an "exhalative" process (i.e.,
volcanic-related rifts or vents deposited base and precious metals onto an ocean
floor). Subsequently, the mineralization was folded and faulted by multiple
generations of tectonic events.
Kennecott Greens Creek Mining Company's geology and engineering staff
computes the estimated ore reserves for the Greens Creek mine with technical
support from Rio Tinto Zinc. We review geologic interpretation and reserve
methodology, but the reserve compilation is not independently confirmed by us in
its entirety. Information with respect to our 29.73% share of production,
average costs per ounce of silver produced and Proven and Probable ore reserves
is set forth in the following table.
Years (reflects 29.73% interest)
-----------------------------------------------
Production 2002 2001 2000
- ------------------------- --------- --------- ---------
Ore milled (tons) 218,072 195,646 184,178
Silver (ounces) 3,244,495 3,259,915 2,754,067
Gold (ounces) 30,531 26,041 24,882
Zinc (tons) 23,875 20,875 21,947
Lead (tons) 8,200 7,394 7,484
-25-
Average Cost per Ounce
of Silver Produced
- -------------------------
Cash operating costs $ 1.76 $ 2.41 $ 2.20
Total cash costs $ 1.81 $ 2.41 $ 2.20
Total production costs $ 4.28 $ 4.79 $ 4.87
Proven and Probable
Ore Reserves (1,2,3,4) 12/31/02 12/31/01 12/31/00
- ------------------------- --------- --------- ---------
Total tons 2,095,703 2,256,663 2,977,198
Silver (ounces per ton) 14.9 16.7 15.7
Gold (ounces per ton) 0.13 0.13 0.13
Zinc (percent) 11.4 11.6 11.9
Lead (percent) 4.2 4.6 4.4
Contained silver (ounces) 31,252,609 37,627,765 46,663,068
Contained gold (ounces) 268,603 299,456 396,891
Contained zinc (tons) 238,029 262,455 353,698
Contained lead (tons) 88,574 103,220 131,515
- -------------------------
(1) For Proven and Probable ore reserve assumptions and definitions, see
Glossary of Certain Mining Terms.
(2) Ore reserves represent in-place material, diluted and adjusted for
expected mining recovery. Mill recoveries of ore reserve grades are
expected to be 74% for silver, 64% for gold, 81% for zinc and 69% for
lead.
(3) The changes in reserves in 2002 versus 2001 were due to a) changes in
forecast metals prices; b) reassessments of metal contents and expected
mining recoveries of certain orebodies; and c) removal of some material
from reserves until new reserve estimates and mining plans are
completed in 2003. Proven and Probable reserves at the Greens Creek
mine are based on average drill spacing of 50 to 100 feet. Cutoff grade
assumptions vary by orebody and are developed based on reserve prices,
anticipated mill recoveries and smelter payables and cash operating
costs. Cutoff grades range from $70 per short ton net smelter return to
$100 per short ton net smelter return.
(4) The changes in reserves in 2001 versus 2000 were due to production,
downward revisions of reserves due to lower assumed metals prices and
reassessment of reserves based on new drilling and a new mine plan for
the Central West orebody.
THE SAN SEBASTIAN MINE
The San Sebastian mine is located in the State of Durango, Mexico, and
is 100% owned by us through a subsidiary, Minera Hecla. The mine is 56 miles
northeast of the city of Durango
-26-
on concessions acquired through our acquisition of Monarch Resources Investments
Limited in 1999. The processing plant is located near Velardena, Durango,
Mexico, and was acquired in April 2001. Concession holdings cover over
100-square miles including the mine site and multiple outlying active
exploration areas.
Ore production during 2001 consisted of surface mining and bulk
sampling from four vein systems and underground mine development of the Francine
vein. Underground development started in May 2001, and surface mining ceased
during the fourth quarter of 2001. Limited underground ore production from
development started in September and increased gradually as stopes were
developed during the remainder of 2001. Underground mining production reached
full production (approximately 450 short tons per day) during the second quarter
of 2002. The current mine plan for the Francine vein produces ore through 2004
and into the first quarter of 2005. Exploration is active on the Francine vein
and other nearby vein systems to expand ore reserves.
San Sebastian is a high-grade silver mine with significant gold
credits. Several epithermal veins exist within the San Sebastian Valley and in
the mine area. Known veins include the Francine vein, Profesor vein, Middle vein
and North vein systems. These veins are hosted within a series of shales with
interbedded fine-grained sandstones interpreted to belong to the Cretaceous
Caracol Formation.
Our Cerro Pedernalillo exploration project, located about six
kilometers from the Francine vein, has discovered three veins covering more than
1.5 kilometers in length. Our Cerro Pedernalillo drilling project has
intersected significant ore values, with approximately 28% of the drill
intercepts in the Don Sergio vein above mine cutoff grade over a two-meter
horizontal width.
The Francine vein strikes northwest and dips southwest and is located
on the southwestern limb of a doubly plunging anticline. The Francine vein
ranges in true thickness from more than 4.0 meters to less than 0.5 meters and
consists of several episodes of banded quartz, silica-healed breccias and minor
amounts of calcite. The vein is oxidized to a depth of approximately 100
vertical meters and the wall rocks contain an alteration halo of less than 2
meters next to the vein. Mineralization within the oxidized portion of the vein
contains limonite, hematite, silver halides and various copper carbonates.
Higher-grade gold and silver mineralization is associated with disseminated
hematite and limonite after pyrite and chalcopyrite, copper carbonates including
malachite and azurite and hydrous copper silicates including chrysocolla. Native
gold occurs associated with hematite and limonite. Mineralization in the sulfide
portion of the Francine vein contains pyrite, chalcopyrite, sphalerite, galena,
native silver, argentite and trace amounts of aguilarite.
Access to the underground workings is through a ramp from the surface
connecting one or more levels, excavated at a -15% grade. Ore is mined by
cut-and-fill stoping. Ore is extracted from the stopes using rubber-tired
equipment and hauled to the surface in trucks. Subeconomic material is used to
backfill and stabilize mined-out stopes. Electric power is purchased from
Comision Federal de Electridad (federal electric company). Water is supplied
from mine
-27-
dewatering or hauled from a local reservoir. A conversion from contractor mining
to owner mining began in late January 2003.
Ore is hauled in trucks by a contractor to the processing plant. The
process plant is a conventional leach / counter-current decantation / Merrill
Crowe precipitation circuit. The ore is crushed in a two-staged crushing plant
consisting of a primary jaw, a secondary cone crusher and a double-deck
vibrating screen. The grinding circuit includes a primary ball mill and cyclone
classifiers. The ground ore is thickened followed by agitated leaching and four
stages of counter-current decantation to wash solubilized silver and gold from
the pulp. The solution bearing silver and gold is then clarified, deaerated and
zinc dust added to precipitate silver and gold which is recovered in plate and
frame filters. Precipitate is dried and then shipped to a third-party refiner.
Commencing in the fourth quarter of 2002, over one-half of the precipitate has
been refined into dore before being shipped to a third-party refiner.
The plant was constructed in 1994 and is capable of processing
approximately 550 short tons per day. Site infrastructure includes a water
supply system, maintenance shop, warehouse, laboratory and various offices.
Electric power is purchased from Comision Federal de Electridad (federal
electric company).
At December 31, 2002, the net book value of the San Sebastian mine
property and its associated plant and equipment was $8.1 million. Capital
improvements were approximately $1.8 million during 2002 and included a modern
tailings disposal facility, leach circuit expansion, CIC (carbon in column)
scavenger recovery circuit and refinery improvements.
As of December 31, 2002, reclamation and closure accruals of $1.0
million have been established.
For a description of a legal claim relating to our Velardena mill, see
Note 8 of Notes to Consolidated Financial Statements.
At December 31, 2002, there were 136 hourly and 46 salaried employees
at the San Sebastian mine and Velardena mill. The National Mine and Mill Workers
Union represents process plant hourly workers at San Sebastian. Under Mexican
labor law, wage adjustments are negotiated annually and other contract terms
every two years. The contract is due for negotiation of wages in July 2003 and
for wages and other terms in July 2004.
Information with respect to the San Sebastian mine's production,
average cost per ounce of silver produced and Proven and Probable ore reserves
are set forth in the table below.
Year Year
---------- ----------
Production 2002 2001
-------------------------- ---------- ----------
Ore milled (tons) 156,532 69,779
Silver (ounces) 3,432,394 950,002
Gold (ounces) 41,510 15,983
-28-
Average Cost per Ounce
of Silver Produced (1)
--------------------------
Cash operating costs $ 0.91 $ 1.64
Total cash costs $ 1.09 $ 1.81
Total production costs $ 2.06 $ 2.89
Proven and Probable
Ore Reserves (2,3,4) 12/31/02 12/31/01
-------------------------- ---------- ----------
Total tons 369,556 304,222
Silver (ounces per ton) 23.7 28.20
Gold (ounces per ton) 0.24 0.30
Contained silver (ounces) 8,761,109 8,579,060
Contained gold (ounces) 88,269 91,267
--------------------------
(1) The low costs per silver ounce during 2002, compared to 2001,
are due in part to significant by-product credits from increased
gold production. Costs per ounce amounts are calculated pursuant
to standards of the Gold Institute. For the years ended December
31, 2002 and 2001, gold by-product credits were approximately
$3.76 per silver ounce and $4.61 per silver ounce, respectively.
(2) For Proven and Probable ore reserve assumptions and definitions,
see Glossary of Certain Mining Terms.
(3) Ore reserves represent in-place material, diluted and adjusted
for expected mining recovery. Mill recoveries of ore reserve
grades are expected to be approximately 90% for gold and 91% for
silver. Payable recoveries by smelters and refiners for
precipitate sales of gold and silver produced are expected to be
97.0% for silver and 98.5% for gold. Payable recoveries by
smelters and refiners for dore sales of gold and silver produced
are expected to be 99.75% for silver and 99.50% for gold. Proven
and Probable reserves at the San Sebastian mine are based on
drill spacing of 35 meters. Cutoff grade assumptions are
developed based on a gold price of $280 and a silver price of
$4.50, anticipated mill recoveries, royalties and cash operating
costs. Cutoff grades at San Sebastian are $34 per tonne net
production value.
(4) The increase in Proven and Probable ore reserves from 2001 to
2002 is the result of: a) incorporation of new definition
drilling information in the estimate of reserves; and b) a new
mine plan.
-29-
GOLD SEGMENT
THE LA CAMORRA MINE
The La Camorra mine is located in the eastern Venezuelan State of
Bolivar, approximately 120 miles southeast of Puerto Ordaz. It is 100% owned by
us through a Venezuelan subsidiary, Minera Hecla Venezolana, C.A., and has been
a producing mine for us since October 1999. We acquired the La Camorra mine in
June 1999 with the acquisition of Monarch Resources Investments Limited
(Monarch).
La Camorra is a high-grade underground gold mine that exploits two
shear-zone hosted quartz veins. It lies in the Botanamo greenstone belt of the
Precambrian Guayana Shield and is hosted by the Caballape Group of
volcaniclastics. The formations most likely date from Archean to Proterozoic age
and consist primarily of intermediate volcanics with subordinate metasediments.
Within the La Camorra concession, the gold mineralization is associated with the
near vertical Main and Betzy quartz veins occurring in a west-northwest,
east-southeast shear zone within medium- to coarse-grained pyroclastics.
Gold occurs both as free particles in quartz and attached to or
included in pyrite. Locally, gold is also seen on chloritic partings.
In 1998, a core drilling program was initiated by Monarch to test the
depth extension of the ore zones below the 400-meter level. We believe the
results of that program, and subsequent drill programs we have carried out,
confirm that ore-grade mineralization extends to depths below the levels to
which the current mine reserves have been delineated.
In 2002, a mid-level core drilling program was undertaken to explore
and define ore between the 400- and 500-meter levels within the mine. Based upon
this drill program, a further deep drill program began in December 2002 to
explore the Main and Betzy veins at depths down to the 575-meter level.
In addition, we control nine other exploration concessions near the La
Camorra mine, encompassing 8,000 hectares. Exploration drilling was conducted on
two of these concessions during 2002, Isbelia and Canaima. Work was concentrated
at Canaima to undertake a prefeasibility diamond drill program and a
hydrogeological and geotechnical investigation, which continued at year end.
Access to the underground workings at the La Camorra mine is through a
ramp from the surface connecting one or more levels, excavated at a -15% grade.
Ore is mined primarily by longhole stoping. Ore is extracted from the stopes
using rubber-tired equipment and hauled to the surface in mine haulage trucks.
Subeconomic material is used to backfill and stabilize mined-out stopes. The
mine is currently producing over 500 tons of ore per day.
The process plant uses a conventional carbon-in-leach process. The ore
is crushed with a three-stage system consisting of a primary jaw crusher with
secondary and tertiary cone crusher with a multi-deck vibrating screen. The
grinding circuit includes a primary and a secondary ball
-30-
mill. The ground ore is mixed with a cyanide solution and clarified, followed by
countercurrent carbon-in-leach gold adsorption. The carbon is then stripped and
the gold recovered and poured into gold bars for shipment to a refiner. Mill
recovery averages over 95%.
The plant was constructed in 1994 and is capable of processing
approximately 600 tons per day. Site infrastructure includes a water supply
system, maintenance shop, warehouse, living quarters, a dining facility,
administration building and a National Guard post. We also share a housing
facility located near the town of El Callao with units for approximately 50
families. Mine electric power is purchased from Eleoriente (a state-owned
electric company). Diesel-powered electric generators are available on-site for
operation of critical equipment during power outages. At December 31, 2002, the
net book value of the La Camorra mine property and its associated plant and
equipment was approximately $20.3 million.
Our reclamation plan has been approved by the Ministry of Environment
and Natural Resources. Planned activities include regrading and revegetation of
disturbed areas. A reclamation and closure accrual of $1.3 million was
established as of December 31, 2002.
At December 31, 2002, there were 346 hourly and 41 salaried employees
at our La Camorra gold mine, most of whom are represented by the Mine Workers
Union. The contract with respect to La Camorra will expire in March 2004.
Information with respect to the La Camorra mine's production, average
costs per ounce of gold produced and Proven and Probable ore reserves is set
forth in the table below.
Year
-----------------------------------------------
Production 2002 2001 2000
- ------------------------- --------- --------- ---------
Ore processed (tons) 194,960 163,139 138,216
Gold (ounces) 167,386 152,303 92,848
Average Cost per Ounce
of Gold Produced
- -------------------------
Cash operating costs $ 137 $ 133 $ 188
Total cash costs $ 137 $ 133 $ 188
Total production costs $ 206 $ 200 $ 246
Proven and Probable
Ore Reserves(1,2,3) 12/31/02 12/31/01 12/31/00
- ------------------------- --------- --------- ---------
Total tons 453,224 482,238 591,464
Gold (ounces per ton) 0.910 0.867 0.634
Contained gold (ounces) 412,332 418,050 375,200
- -------------------------
-31-
(1) For Proven and Probable ore reserve assumptions, including assumed
metals prices, see Glossary of Certain Mining Terms.
(2) The decrease in tons of Proven and Probable ore reserves in 2002
compared to 2001 is due to the depletion of reserves by mining,
subsequently offset by the addition of new reserves based on new
diamond drilling below the current mining front. Proven and
Probable ore reserves at the La Camorra mine are based on drill
spacing of 30 to 50 meters and closely spaced chip sample
information. Cutoff grade assumptions are developed based on
reserve prices, anticipated mill recoveries and cash operating
costs. The cutoff grade at La Camorra is 8 grams per tonne.
(3) The decrease in tons of Proven and Probable ore reserves in 2001
compared to 2000 is due to mining, offset by: 1) conversion of
mineralization to reserves based on new development and drilling;
and 2) addition of newly delimited mineralization from development
and drilling to reserve. Ore grade and contained metal improvements
in reserve are attributable to a change in reserve methodology in
2001 compared to 2000 based on very favorable mill/model
reconciliation and operations experience with the orebodies.
DISCONTINUED OPERATIONS
During 2000, in furtherance of our determination to focus our
operations on silver and gold mining and to raise cash to reduce debt and
provide working capital, our board of directors made the decision to sell our
industrial minerals segment. At that time, our principal industrial minerals
assets consisted of ball clay operations in Kentucky, Tennessee and Mississippi;
kaolin operations in South Carolina and Georgia; feldspar operations in North
Carolina; a clay slurry plant in Monterrey, Mexico; and specialty aggregate
operations (primarily scoria) in southern Colorado. We conducted these
operations through four wholly owned subsidiaries: (1) Kentucky-Tennessee Clay
Company, which operated our ball clay and kaolin divisions; (2) K-T Feldspar
Corporation, which operated the feldspar business; (3) K-T Clay de Mexico, S.A.
de C.V., which operated the clay slurry plant business; and (4) MWCA, Inc.,
which operates our specialty aggregate business. Based upon the 2000 decision to
sell the industrial minerals segment, our Consolidated Financial Statements
reflect the industrial minerals segment as a discontinued operation.
On March 27, 2001, we completed a sale of Kentucky-Tennessee Clay
Company, K-T Feldspar Corporation, K-T Clay de Mexico, S.A. de C.V. and certain
other minor industrial minerals companies (collectively the K-T Group),
transferring all of our interest in each of the companies subject to the
agreement. We completed a sales transaction for the Mountain West Products
division of MWCA in March 2000. We completed a sale of the landscape operations
of the Colorado Aggregate division of MWCA in June 2000. On March 4, 2002, we
completed a sale of the pet operations of the Colorado Aggregate division of
MWCA. Our management is currently evaluating its available options with regard
to the remaining minor portion of the industrial minerals segment.
-32-
NONOPERATING PROPERTIES
HOLLISTER DEVELOPMENT BLOCK
In August 2002, we, through our wholly owned subsidiary, Hecla Ventures
Corporation, entered into an earn-in agreement with Rodeo Creek Gold, Inc., a
wholly owned subsidiary of Great Basin Gold Ltd. (Great Basin), concerning
exploration, development and production on an area of Great Basin's Ivanhoe
high-grade gold property, which is referred to as the Hollister Development
Block and is located on the Carlin Trend in Nevada. The agreement provides us
with an option to earn a 50% working interest in the Hollister Development Block
in return for funding a two-stage, advanced exploration and development program
leading to commercial production. We estimate the cost to achieve our 50%
interest in the Hollister Development Block to be approximately $21.8 million.
Upon earn-in, we will operate the mine. For additional information relating to
the Hollister Development Block, see Note 4 of Notes to Consolidated Financial
Statements. The Hollister Development Block is defined by a 6,000-foot by
7,000-foot project boundary (964 acres) within a large claim block held by Great
Basin. The area was a producer of mercury around the turn of the century, and
later a producer of gold. The most recent operation was the Hollister mine,
consisting of a pair of open-pits and an associated heap-leach facility,
operated from 1990 through 1996. Located on the northwestern extension of the
Carlin Trend, the nearest active mining operations are the Dee mine, located 8
miles to the southeast, and the Ken Snyder mine, located 12 miles to the
northwest. The nearest major population centers are the towns of Battle
Mountain, approximately 38 miles southwest, and Elko, approximately 47 miles to
the southeast.
The underground exploration project will consist of approximately 6,500
feet of decline, cross-cuts and diamond drill stations, a minimum of
approximately 2,500 feet of exploration and bulk sampling on different veins
within the system, and approximately 40,000 feet of diamond drilling from
underground locations. The exploration project will take place out of the
existing East Hollister pit, thereby restricting surface impacts to areas
previously disturbed.
Plans for 2003 include applications for all operating permits,
construction of the surface support facilities and a drive of the initial
500-foot decline.
BLOCK B
In March 2002, we acquired the Block B exploration and mining lease
near El Callao in the Venezuelan State of Bolivar from CVG-Minerven (a
Venezuelan government-owned gold mining company) through March 2023. Block B is
a seven-square-mile property position in the prolific El Callao gold mining
district. The area's mining history dates back to the 1800s and contains many
historic mines including the Chile, Laguna and Panama mines, which collectively
produced over 1.6 million ounces of gold between 1921 and 1946.
Pursuant to the lease agreement, we paid CVG-Minerven $500,000 in
September 2002. In March 2003, an additional payment of $1.25 million will be
required, with a final payment of $1.0 million due in September 2003. We will
also pay CVG-Minerven a royalty of 2% to 3% (depending on the gold price) on
production from Block B.
-33-
The El Callao area is accessed by the International Highway from Puerto
Ordaz, on the south side of the River Orinoco, on a maintained, asphalt highway
that runs through to Santa Elena on the Brazilian border. Overall good
infrastructure exists and a 115 kw electricity supply feeds the area dominantly
inhabited by small-scale underground miners. The population of El Callao is
approximately 15,000 people.
Geologically, the gold is found in shear-zone hosted quartz veins and
stockworks hosted by Archean to Proterozoic greenstones composed of andesitic to
basaltic lavas. Gold occurs as free gold in quartz and is also commonly
associated with coarse-grained pyrite.
Exploration has begun in the Chile vein system known to host high-grade
gold mineralization. The Chile mine itself was an important gold producer that
produced more than 550,000 ounces of gold at an average grade of over one ounce
per ton. Since the mine shutdown in the 1940s, two phases of exploration
drilling were undertaken, one in the 1960s and a more recent drill testing in
1998 that encountered high grades west of the old mine.
Based upon this information, we have planned a detailed exploration
drilling campaign of two phases, Phase I, a 35-hole program for 9,100 meters to
confirm the existing information, and Phase II, a 15-hole program for 3,900
meters to in-fill and expand on the results of the Phase I program. Total
budgeted expenditure for these phases of exploration drilling will be
approximately $1.9 million. As of December 31, 2002, 17 holes of Phase I have
been drilled for a completed total of 3,932 meters of diamond drilling.
Depending on the results of the drilling, we will commence a feasibility study
for the development of a ramp.
THE ROSEBUD MINE
The Rosebud gold mine, in which we have a 50% interest, is located in
the Rosebud Mining District, in Pershing County, Nevada. The Rosebud property
consists of a 100% interest in three patented lode-mining claims and 125
unpatented lode-mining claims. The Rosebud mine may be reached from Winnemucca,
Nevada, by traveling west a distance of approximately 58 miles on an all-weather
gravel road.
In June 2000, we announced, together with Newmont Gold Company, which
holds the remaining 50% interest in the mine, the planned closure of the Rosebud
mine when it was recognized that production would cease during the third
quarter. Mining activity was completed in July 2000, and milling activity was
completed in August of 2000.
The Rosebud property has been reclaimed per the closure plan approved
by the Nevada Department of Environmental Protection. Revegetation on the
property will be monitored for the next three to five years, after which the
property will completely revert back to the public domain under the U.S. Bureau
of Land Management.
-34-
THE GROUSE CREEK MINE
The Grouse Creek gold mine is located in central Idaho, 27 miles
southwest of the town of Challis in the Yankee Fork Mining District. Mining at
Grouse Creek began in late 1994 and ended in April 1997 due to
higher-than-expected operating costs and less-than-expected operating margins,
primarily because the ore occurred in thinner, less continuous structures than
had been originally expected.
We recorded a write-down of the mine's carrying value totaling $97.0
million in 1995. We recorded further adjustments in 1996 for future severance,
holding, reclamation and closure costs totaling $22.5 million, and adjustments
to the carrying value of property, plant and equipment, and inventories totaling
$5.3 million.
Following completion of mining in the Sunbeam pit in April 1997, we
placed the Grouse Creek mine on a care-and-maintenance status. During the
care-and-maintenance period, reclamation was undertaken to prevent degradation
of the property. During 1997, the milling facilities were mothballed and
earthwork completed to contain and control surface waters. In 1998, an
engineered cap was constructed on the waste rock storage facility and
modifications were made to the water treatment facility. In 1999 and 2000,
activities included further work on the waste rock storage facility cover and
continued work controlling surface waters.
We increased the reclamation accrual by $23.0 million in 1999 due to
anticipated changes to the closure plan, including increased dewatering
requirements and other expenditures. The changes to the reclamation plan at
Grouse Creek were necessitated principally by the need to dewater the tailings
impoundment rather than reclaim it as a wetland as originally planned.
In May 2000, we notified state and federal agencies that the Grouse
Creek property would proceed to a permanent suspension of operations. We signed
an agreement with the State of Idaho and a voluntary administrative order on
consent with the U.S. Forest Service and U.S. Environmental Protection Agency in
which we agreed to dewater the tailings impoundment, complete a water balance
report and monitoring plan for the site and complete certain studies necessary
for closure of the tailings impoundment. A work plan for final reclamation and
closure of the tailings impoundment is to be submitted by us no later than one
year prior to estimated completion of the tailings impoundment dewatering.
We increased the reclamation accrual by $10.2 million in 2000 based
upon updated cost estimates in accordance with AICPA Statement of Position 96-1
"Environmental Remediation Liabilities," due to the requirements of the
administrative order on consent. During 2001, our activities focused on further
containment of surface and subsurface water along with development of a
dewatering plan for the tailings impoundment. The reclamation and closure cost
accrual for the Grouse Creek mine totaled $27.4 million as of December 31, 2002,
although it is possible that the estimate may change in the future due to the
assumptions and estimates inherent in the accrual.
-35-
THE REPUBLIC MINE
The Republic gold mine is located in the Republic Mining District near
Republic, Washington. In February 1995, we completed operations at the Republic
mine and have been conducting reclamation work in connection with the mine and
mill closure. In August 1995, we entered into an agreement with Newmont to
explore and develop the Golden Eagle deposit on the Republic mine property. Echo
Bay acquired Newmont's interest in 2000 and has been conducting a limited
exploration program on the project.
At December 31, 2002, the accrued reclamation and closure costs balance
totaled $2.4 million, although it is possible that the estimate may change in
the future due to the assumptions and estimates inherent in the accrual.
Reclamation and closure efforts continued in 2002.
The remaining net book value of the Republic mine property and its
associated plant and equipment was approximately $0.6 million as of December 31,
2002.
-36-
Item 3. Legal Proceedings
For a discussion on our legal proceedings, see Note 8 of Notes to
Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2002.
Executive Officers of the Registrant
Reference is made to the information set forth in Part III, Item 10 of
this Form 10-K, which is incorporated by reference into this Part I.
-37-
Part II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
(a) (i) Shares of our common stock are traded on the New York Stock
Exchange, Inc.
(ii) The intraday price range of our common stock on the New York
Stock Exchange for the past two years was as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002 - High $ 1.99 $ 5.90 $ 5.20 $ 5.45
- Low $ 0.90 $ 1.90 $ 2.20 $ 2.96
2001 - High $ 1.00 $ 1.70 $ 1.26 $ 1.27
- Low $ 0.50 $ 0.66 $ 0.78 $ 0.77
(b) As of December 31, 2002, there were 8,584 shareholders of record
of the Common Stock.
(c) We have not declared or paid any cash dividends on our capital
stock or other securities for several years and do not anticipate
paying any cash dividends in the foreseeable future. We are
currently restricted from paying dividends on our common stock or
repurchasing common stock until such time as we have paid the
cumulative dividends on our Series B preferred stock. In
addition, we have entered into loan documents that constrain our
ability to pay dividends on our common stock or repurchase our
common stock. At December 31, 2002, the cumulative dividend for
the preferred stock was $6.6 million.
(d) In August 2001, we sold 5,749,883 authorized but unissued shares
of our common stock to Copper Mountain Trust Company, trustee for
the Hecla Mining Company Retirement Plan and the Lucky Friday
Pension Plan (the benefit plans). These shares were issued
pursuant to a private placement stock purchase agreement and not
registered under the Securities Act of 1933. The shares were
listed on the New York Stock Exchange.
In January 2003, we filed a Registration Statement with the
Securities and Exchange Commission covering 3,394,883 shares of
our common stock, including 1,394,883 common shares held by the
benefit plans. Also, in January 2003, we completed a public
offering that included the registration and sale of 2.0 million
shares owned directly by the benefit plans. Net proceeds realized
from the sale totaled approximately $8.0 million for the benefit
plans.
On August 2, 2002, through our wholly owned subsidiary Hecla
Ventures Corporation, we entered into an earn-in agreement with
Rodeo Creek Gold, Inc., a wholly owned
-38-
subsidiary of Great Basin Gold Ltd. (Great Basin). Pursuant to
the agreement, Great Basin was issued a warrant to purchase
2,000,000 shares of our common stock as of the date of execution
of the Earn-In Agreement. The warrant is exercisable on or before
August 1, 2004, at $3.73 per share, but has not yet been
exercised. The beneficial owner of the warrant to purchase our
common stock is Great Basin. In the event that we elect to
conduct certain development activities, Great Basin will receive
an additional warrant to purchase 1,000,000 shares of common
stock, at the future current market value, and, upon completion
of development activities, Great Basin will receive a final
warrant to purchase 1,000,000 shares of our common stock at the
future current market value.
On June 13, 2002, we offered holders of our Series B preferred
stock the opportunity to exchange each of their preferred shares
for seven shares of our common stock. As a result of the
completed exchange offer, 1,546,598 shares, or 67.2%, of the
total number of preferred shares previously outstanding (2.3
million), were validly tendered and exchanged into 10,826,186
shares of common stock. The shares exchanged were not registered
with the Securities and Exchange Commission under the Securities
Act of 1933 in reliance on the exemption provided by Section
3(a)(9).
Previously undeclared and unpaid preferred stock dividends of
$11.2 million were eliminated and the $8.0 million annual
cumulative preferred dividends that have historically been
included in income (loss) applicable to common shareholders will
be reduced to approximately $2.6 million beginning in 2003.
During the third quarter of 2002, we incurred a noncash dividend
charge of approximately $17.6 million, which represents the
difference between the value of the common stock issued in the
exchange offer and the value of the shares that were issuable
under the stated conversion terms of the preferred stock.
(e) The following table provides information as of December 31, 2002,
regarding our compensation plans (including individual
compensation arrangements) under which equity securities are
authorized for issuance:
Number of Securities To Weighted-Average Number of Securities
Be Issued Upon Exercise Exercise Price Remaining Available For
of Outstanding Options, of Outstanding Options, Future Issuance Under
Warrants and Rights Warrants and Rights Equity Compensation Plans
----------------------- ----------------------- -------------------------
Equity Compensation Plans Approved
by Security Holders:
1995 Stock Incentive Plan 2,801,670 $ 3.99 2,192,581
Stock Plan for Nonemployee
Directors 96,837 N/A 849,589
Key Employee Deferred Compensation
Plan 6,740 $ 3.58 5,993,260
Equity Compensation Plans Not Approved
by Security Holders -- -- --
----------------------- ----------------------- -------------------------
Total 2,905,247 $ 3.86 9,035,430
======================= ======================= =========================
See Notes 9 and 10 of Notes to Consolidated Financial Statements for
information regarding the above plans.
-39-
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated
financial data for each of the years ended December 31, 1998 through 2002, and
is derived from our audited financial statements. The data set forth below
should be read in conjunction with, and is qualified in its entirety by
reference to our Consolidated Financial Statements.
Selected Financial Data
(dollars in thousands except for per share amounts)
Years Ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999(1) 1998
------------ ------------ ------------ ------------ ------------
Sales of products $ 105,700 $ 85,247 $ 75,850 $ 73,703 $ 75,108
============ ============ ============ ============ ============
Income (loss) from continuing
operations $ 10,863 $ (9,582) $ (84,847) $ (43,391) $ (4,674)
Income (loss) from discontinued
operations(2) (2,224) 11,922 1,529 4,786 4,374
Net income (loss) 8,639 2,340 (83,965) (39,990) (300)
Preferred stock dividends(3) (23,253) (8,050) (8,050) (8,050) (8,050)
Loss applicable to
common shareholders(4) $ (14,614) $ (5,710) $ (92,015) $ (48,040) $ (8,350)
============ ============ ============ ============ ============
Loss from continuing operations
per common share $ (0.15) $ (0.25) $ (1.39) $ (0.83) $ (0.23)
============ ============ ============ ============ ============
Basic and diluted loss per
common share $ (0.18) $ (0.08) $ (1.38) $ (0.77) $ (0.15)
============ ============ ============ ============ ============
Total assets $ 160,141 $ 153,116 $ 194,836 $ 268,357 $ 252,062
============ ============ ============ ============ ============
Accrued reclamation and closure costs $ 49,723 $ 52,481 $ 58,710 $ 49,325 $ 29,753
============ ============ ============ ============ ============
Noncurrent portion of debt $ 4,657 $ 11,948 $ 10,041 $ 55,095 $ 42,923
============ ============ ============ ============ ============
Cash dividends paid per common
share $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Cash dividends paid per preferred
share(3) $ -- $ -- $ 1.75 $ 3.50 $ 3.50
============ ============ ============ ============ ============
Common shares issued 86,187,468 73,068,796 66,859,752 66,844,575 55,166,728
Shareholders of record 8,584 8,926 9,273 9,714 10,162
Employees 720 701 1,195 1,277 1,184
(1) On January 1, 1999, we changed our method of accounting for start-up
costs in accordance with AICPA Statement of Position 98-5 "Reporting on
the Costs of Start-up Activities." The impact of this change in
accounting principle related to unamortized start-up costs associated
with our 29.73% interest in the Greens Creek mine and resulted in a
$1.4 million charge for the year ended December 31, 1999.
(2) During 2000, in furtherance of our determination to focus our
operations on silver and gold mining and to raise cash to reduce debt
and provide working capital, our board of directors made the decision
to sell our industrial minerals segment. As such, the industrial
minerals segment has been recorded as a discontinued operation as of
and for each of the five years in the period ended December 31, 2002.
As of December 31, 2001 and 2000, only, the balance sheets have been
reclassified to reflect the net assets of the industrial minerals
segment as a discontinued operation.
(3) As of December 31, 2002, we have not declared or paid $6.6 million of
Series B preferred stock dividends. However, since the dividends are
cumulative, they continue to be reported in determining the income
(loss) applicable to common stockholders, but
-40-
are excluded in the amount reported as cash dividends paid per
preferred share. We completed an offer to acquire all of our currently
outstanding Series B preferred stock in exchange for newly issued
shares of our common stock on July 25, 2002. A total of 1,546,598
shares, or 67.2%, of the total number of Series B preferred shares
outstanding were validly tendered and exchanged into 10,826,186 shares
of our common stock. During the third quarter of 2002, we incurred a
non-cash dividend of approximately $17.6 million related to the
completed exchange offering. The $17.6 million dividend represents the
difference between the value of the common stock issued in the exchange
offer and the value of the shares that were issuable under the stated
conversion terms of the Series B preferred stock. The non-cash dividend